Traders of Adobe System Inc. (ADBE) stock couldn’t make up their minds at first when the software maker delivered a drop in Q4 profits and a softer-then-expected outlook for the current quarter on Thursday, but decided to focus on Friday on the jump in subscribers to its Creative Cloud service, sending the stock price to an all-time high.
ADBE Shares Dip, Then Take Off on Earnings Report
Shares dipped about 5 percent in extended trading on Thursday after the report that showed Adobe generated $1.04 billion in fourth quarter revenue, down 9.6 percent from $1.15 billion in last year’s quarter. Net income sunk to $65.32 million, or 13 cents per share, versus $222.3 million, or 44 cents per share in Q4 last year. Adjusted earnings, which exclude one-time items and are more closely watched by analysts, were $164.6 million, or 32 cents per share, compared to $307.9 million, or 61 cents per share, in the year prior quarter.
Analysts had expected EPS of 32 cents per share on revenue of $1.04 billion.
Creative Cloud Floats ADBE Stock to New Heights
Adobe has been transitioning from a licensing model and physical sales of its software to exclusively offering it on a subscription basis, called “Creative Cloud,” which gives access to wildly popular programs such as Photoshop, Dreamweaver and Adobe Illustrator. The business shift felt harsh criticisms by analysts at first, but Adobe is making it happen (including collecting a monthly fee from this writer), although some are still quick to note that the model is yet unproven. The subscription-base model generally lessens revenue on the front-end because payments are spread out over a period of time, but it does create more predictable revenue stream with reocurring fees and renewals.
Any complaints that have come from faithful Creative Suite users about the new payment model have gone largely ignored by Adobe, who has said that it is not switching back. Versions of the old Creative Suite package could cost in excess of $2,500, but the license was perpetual. In the new design, users pay about $50 per month or can get a discount to pay for a full-year. Adobe is also running other specials to try and lure in new users as well as Creative Suite consumers that have yet to join Creative Cloud.
Investor Patience with ADBE During Shift to Creative Cloud Model Appears to be Paying Off
In that fold, investors have been friendlier in their view of declining revenue and profit during the migration from its legacy model and more focused on how many customers are signing-up for the service. The transition began about one year ago and is expected to essentially be completed at this time in 2014. At that point, there will be a more “apples-to-apples” comparison in sales and profits.
In the fourth quarter, Adobe said it added 402,000 subscribers for Creative Cloud, up from the 331,000 that it added in the third quarter. For all of the fiscal year ended November 29, Creative Cloud subscriptions rose to 1.44 million, topping the company’s expectations for the year of 1.25 million subscribers. Adobe aims to double the current number in the next year and hit four million subscribers within two years.
“We are leading the software industry in transitioning our business to the Cloud, which is enabling us to target higher top-line growth and greater recurring revenue,” said Mark Garrett, executive vice president and chief financial officer at Adobe, in a statement.
Revenue Guidance Disappoints
For the first quarter of fiscal 2014, Adobe is pegging revenue betwen $950 million and $1 billion. On an adjusted earnings per share basis, the company is targeting a range of $0.22 to $0.28. That’s short of Wall Street expectations of 34 cents per share in profits on sales of $1.02 billion.
For all of fiscal 2014, Adobe sees revenue as flat with fiscal 2013 and adjusted earnings of $1.10 per share. Further down the road, Adobe predicts earnings per share will rise to $2 in 2015 and $3 per share in 2016. Both figures were less than consensus expectations of $2.28 and $3.31, respectively.
The initial slide in shares in after hours trading Thursday was reversed by the time late-session activity ended and the stock roared ahead in Friday activity, gapping upward at the opening bell and finishing near session highs at $60.89 for gains of 12.8 percent and a new record for the closing stock price of ADBE.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer