The software world is quickly moving to a subscription model. Adobe Systems Incorporated (NASDAQ:ADBE) is one of the companies that has recently taken its software offers into the cloud. The move was successful, and the company’s second-quarter earnings back this statement.
Move to the cloud
The cloud is a hot topic nowadays. Everyone is talking about it, but not everyone is using it profitably. Adobe Systems Incorporated (NASDAQ:ADBE) has moved its Creative Suite products to a subscription-based model. A similar move was made by Microsoft Corporation (NASDAQ:MSFT), when it introduced its Office 365.
What are the benefits of this model for the companies?
1). They get a stable stream of cash during the product cycle. They were used to getting a cash boost after the initial launch of a product, which was followed by lower sales as the product matured.
2). They gather more money from a customer during the life of the product.
3). It is a way to fight piracy.
In turn, customers get a product that is always up to date. Also, they do not have to pay a large sum of money up front. Instead, they pay small amounts during the product’s use, which is great for small businesses and individual workers, who are often tight on budgets.
Are these benefits supported by real-life results? Yes. Paid Creative Cloud subscriptions increased by 221,000 quarter over quarter.
Microsoft Corporation (NASDAQ:MSFT) is also reaping benefits from going into the cloud with its Office 365. The company states that it has 140,000 Office 365 channel partners and is adding more than 5,000 per week. Microsoft estimates that 0.7%-1.2% of its Office customer base has been converted to 365 since it has launched the product in January.
Marketing solutions
Adobe Systems Incorporated (NASDAQ:ADBE) is also expanding its Marketing Cloud solutions. Marketing Cloud bookings rose 25% quarter over quarter. Marketing from the cloud is gaining steam, with new companies like Marketo entering the tempting market. Adobe sees synergy between its Creative Cloud and Marketing Cloud solutions. It sees the customer who creates and spreads the content in Adobe’s ecosystem. The fact that customers get used to products plays on the Adobe Systems Incorporated (NASDAQ:ADBE)’s side, so the company benefits from cross-selling.
Marketo, which has not had a single profitable quarter in its entire existence, has to grow very fast or it will encounter serious problems. The company might want to be an acquisition target. Given the recent deal between salesforce.com, inc. (NYSE:CRM) and ExactTarget Inc (NYSE:ET), this can be a desirable opportunity.
Valuation
Adobe is trading at 25.4 forward P/E and 5 times sales. The company is well positioned to grab profit from going into the cloud. Microsoft, which has had a great year, rising 28%, trades at 11 forward P/E and 4 times sales. Microsoft still offers non-cloud Office products, but you can expect the company to make moves to shift its customer base to subscription model. Microsoft, which pays a 2.73% dividend, is attractively valued despite the recent rise in price. Given the huge Microsoft customer base, the software giant is extremely well positioned to profit from the move into the cloud.
