Adobe’s One Million Creative Cloud Users Cover Earnings Miss, Send Shares to Record High

Andrew Klips  |

Adobe Systems Inc. (ADBE) released its third quarter earnings after the closing bell on Tuesday, showing that revenue and profit declined again, even at a faster pace than analysts expected, but he stock price got a lift from the news that the company’s Creative Cloud subscription service grew to more than one million paying members.

For the quarter ended August 30, the tech company reported revenue of $995.1 million, down from $1.08 billion in the year prior quarter. Earnings tallied $83 million, or 16 cents per share, compared to $201.36 million, or 40 cents per share, in last year’s quarter. On an adjusted basis, the company earned $164.38 million, or 32 cents per share, versus $291.19 million, or 58 cents per share, in Q3 2012.

Wall Street was expecting adjusted earnings per share of 34 cents on revenue of $1.01 billion.

Gross profit for Adobe, a company well known for its Photoshop and Acrobat software, slid from $960.96 million in the third quarter last year to $848.04 million. 

Total cost of revenue was up $27.5 million to $147.08 million. Expenses broadly rose, with research and development, sales and marketing and general and administrative costs increasing.

The weak report was overlooked as investors stared at the company’s Creative Cloud service. Adobe has bet big on the service, ceasing development of new versions of its wildly popular Creative Suite software under a perpetual license strategy, instead choosing an online format where subscribers pay at least $50 per month to use the popular programs.

Adobe said earlier this year that it has a goal of 1.25 million Creative Cloud subscribers for 2013 and 4 million subscribers by the end of 2015.

The recent quarter ended with Adobe having 1.031 million Creative Cloud subscribers, up 331,000 from the end of the second quarter. Analysts were guessing that Adobe added 327,00 subscribers in the quarter. In the second quarter, 221,000 subscribers were added. Creative annualized recurring revenue improved to $546 million and total digital annualized recurring revenue climbed to $655 million.

“We exceeded one million subscriptions during Q3, demonstrating that the transition to Creative Cloud is happening sooner than expected,” said Shantanu Narayen, president and chief executive at Adobe, in a statement this afternoon.

EVP and chief financial officer Mark Garret said the customers are “overwhelmingly choosing subscriptions instead of perpetual model licenses.”

Overall, support of Adobe shifting business models early this year has been pretty strong with investors and analysts understanding that sales and profits are going to sink some as the transition to a more predictable revenue model takes hold. On Monday, shares hit an all-time high of $48.71. The stock closed flat on Tuesday, but has shot ahead by more than 5 percent in extended trading to print as high as $50.99. Through Tuesday’s close, shares were up about 28 percent in 2013.

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