Software giant Adobe Systems Incorporated (NASDAQ:ADBE) had been in the midst of a pretty significant transition for almost a year. The company has endeavored to move away from its traditional boxed software business that is sold in retail stores to a subscription-based model where customers can download the software from Adobe’s online store or the cloud.
Recently, the company announced that the transition is over. Effective May 1, Adobe will stop selling the shrink-wrapped/CD-based version of its popular Creative Suite software and move exclusively to online distribution. This is not a surprise, however. Aside from the fact that rivals such as Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) have conducted similar changeovers, Adobe’s “test run,” which has produced half a million paid subscribers, has performed much better than expected. Adobe was ready, and it showed in the company’s first-quarter report.
Great start to the fiscal year
Last week, not only did the company report stronger-than-expected first-quarter results, but management rewarded patient investors by raising full-year adjusted earnings guidance to $1.45 per share from $1.40 – topping Street estimates of $1.41. This is while also reiterating its full-year revenue forecast of $4.1 billion.
First-quarter revenue fell 4% year-over-year to $1 billion. The decline was due to the business model transition. Regardless, revenue still managed to beat Street estimates for the second consecutive quarter. This time, analysts were expecting revenue to arrive at $985 million. Adobe Systems Incorporated (NASDAQ:ADBE) said the beat was helped by higher subscriptions, which more than doubled last year’s revenue, arriving at $224.3 million.
The bottom line was also strong, despite the drop in profits, which fell to $65.1 million, or $0.13 per share. However, when excluding items and other charges, Adobe actually earned $0.35 per share, beating analysts’ estimates by $0.04. This quarter’s earnings were driven by higher conversion rate of customers that moved over to the subscription platform. Amid all of the good news, there were also some uncertainties.
Too good for its own good?
These were certainly impressive results, especially considering how corporate changeovers are never easy. It’s also encouraging that management decided to raise guidance, which suggests that the company has worked out all of the kinks in this model and sees no meaningful signs of slowing down. But has Adobe Systems Incorporated (NASDAQ:ADBE) gotten too aggressive?
For instance, following the company’s fourth-quarter results, CEO Shantanu Narayen said, “We beat our Creative Cloud subscription goals and established Adobe Marketing Cloud as the leader in the exploding category of Digital Marketing during fiscal 2012. In fiscal 2013 we intend to accelerate our pace of innovation, and drive integration between Creative Cloud and Adobe Marketing Cloud.”
That statement was then followed by one from Mark Garrett, Adobe’s executive vice president and chief financial officer, who said that 2013 would prove to be a “stronger and more predictable” year for the company in terms of recurring revenue with higher long-term growth. So far, both execs have been right. Adobe Systems Incorporated (NASDAQ:ADBE) has, in fact, accelerated the pace of innovation and as Garrett predicted, Q1 results arrived stronger. However, there are some concerns.
