Adobe Systems Incorporated (ADBE), Intuit Inc. (INTU): This Cloud Play Keeps on Delivering

Adobe managed to increase the ARR to $233 million (ahead if its $215 million expectations), and the indications are that cloud adoption is working very well. If there is a small cause for concern it is that the average selling price was flat on the new subscribers.

Adobe’s aim is to try to get average revenue per user (ARPU) up to around $50 per month from the figure of around $41 that I estimate it is on now. Similarly there is some uncertainty as to whether Adobe will get back to the kinds of margins that it generated in the past, although this is not necessarily a problem if it can increase total end users by 10%.

The Cloud Franchise?

The poster boy of the ‘franchise’ is Intuit Inc. (NASDAQ:INTU), and the evidence is that the model works. Intuit Inc. (NASDAQ:INTU) was an early mover into the cloud, and it has managed to increase revenues, margins and cash flow conversion. I’ve discussed the company in more detail here. Its core payroll business is growing in high single digits, while its small business group solutions are growing in the mid teens; the opportunity to cross-sell its solutions is enhanced by being in the cloud.

Autodesk, Inc. (NASDAQ:ADSK) is also moving to the cloud, although its model has some differences. It is bundling its solutions into suites rather than selling them in standalone flagship solutions. In addition, it is not moving towards the subscription based model just yet, so this is more about a pure shift to the cloud than perpetual to subscription. Autodesk is very interesting (I covered it here), and on evaluation grounds the stock looks cheap, but you will have to factor in extra cyclical risk and emerging market risk. The shift to the cloud may be a secular growth story. Autodesk, however, is not the sort of stock to hold if global manufacturing turns down.

Where Next for Adobe?

The company is achieving its aims and managing the transition to the cloud very well. Despite the caution on the management’s side in terms of guidance, I think it is entirely possible that it can get back to the kind of operational metrics that it had before the switch.

In other words, Adobe Systems Incorporated (NASDAQ:ADBE) converted 30% of its revenue into free cash flow from 2009-11, and if it does so again in future then the stock still looks cheap to me. With revenues of $4.1 billion and $4.5 billion forecast for the next two years, this could mean around $1.2 billion and $1.35 billion in underlying free cash flow over the next two years. That is not bad for a business on an enterprise value of around $18.6 billion as I write. I will hold with a $48 target pending that it keeps hitting its targets and the economy holds up.

The article This Cloud Play Keeps on Delivering originally appeared on Fool.com and is written by Lee Samaha.

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