Adobe Beats Second Quarter Expectations with Rising Creative Cloud Subscriptions

Andrew Klips |

AdobeAdobe Systems Inc. (ADBE) reported results from its fiscal second quarter of 2013 on Tuesday evening that beat analysts as subscribers to its Creative Cloud services helped offset declines in other product sales and rising expenses.

For the quarter ended May 31, the largest maker of graphic design software recorded revenue of $1.01 billion, down from $1.12 billion in the year prior quarter. Profits for the quarter totaled $76.5 million, or 15 cents per share, compared to $223.9 million, or 45 cents per share, in last year’s quarter. Adjusted earnings, which exclude stock-based compensation, restructuring costs and other one-time items, were $183.85 million, or 36 cents per share, versus $299.63 million, or 60 cents per share, in the year prior quarter.

Wall Street generally bases its expectations on adjusted earnings, calling for the latest quarter to produce profits of 34 cents per share on revenue of $1.0 billion.

Previously, Adobe had guided earnings in the range of 29 cents to 35 cents on revenue between $975 million and $1.01 billion.

The second quarter ended with 700,000 paid Creative Cloud subscriptions, up by 221,000 from the number of users at the end of the first quarter. Creative Cloud, which gives subscribers access to the robust graphic design tools of Adobe, including popular programs like Photoshop, Dreamweaver, Illustrator and more, is the future of Adobe. The programs used to be available through the packaged purchase of Adobe’s Creative Suite that was launched in 2003 and produced six iterations over a decade. Last month, Adobe officially deserted Creative Suite to focus exclusively on delivering the programs via Creative Cloud, a software-as-a-service business model.

While subscription sales improved by 60 percent to $254.5 million, product sales – still the biggest contributor to corporate coffers – slid 26 percent from $871.02 million in last year’s second quarter to $644.9 million this year.

Operating expenses were up in all components, rising to $763.96 million from $688.38 million. R&D expenses increased 12.3 percent to $203.1 million and sales and marketing expenses were up 4 percent to $402.2 million.

Operating margin contracted to 11 percent from 27.1 percent last year.

“Adoption of Creative Cloud continued to accelerate and we drove strong Adobe Marketing Cloud bookings growth in Q2,” said Mark Garrett, executive vice president and chief financial officer at Adobe.

Shares of ADBE were flat in Tuesday trading ahead of the earnings report, but found some legs in extended trading by topping earnings and delivering strong growth in its Creative Cloud efforts. Shares are coming out ahead early in Wednesday action, rising 7 percent to $46.40. Shares are up about 24 percent so far in 2013.

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