Adobe Systems Inc posted an impressive first-quarter results that beat the analysts estimates. It reported a revenue of $1.68 billion that amounted to an adjusted earnings per share (EPS) of $0.94. This was higher than what the analysts expected, which was a revenue of $1.65 billion and an EPS of $0.87. In fact, this revenue represents a 22 percent increase.
Much of this increase can be attributed to the astounding success of Adobe’s Creative Cloud Platform, which is one of Adobe’s core media franchises. Total revenue from this line of business was $942 million, representing an increase of 29 percent. Also, this arm of business was responsible for 56 percent of Adobe’s total revenue.
This giant share of Creative Cloud Platform, in many ways, reflects the strategic shift made by the company over the last few years. A change in its business model, which is to move to a subscription-based revenue stream, has augured well for the company. Prior to this strategy, the company had focused much on the sale of its software package licenses.
So, why this shift boosted the company’s revenue? Earlier, a software license meant that users bought it once and used it across different systems until they ran out of its use. In other words, this was a one-time purchase only. On the other hand, a subscription model is a recurring stream of revenue, as users have to pay monthly or yearly for using the same package.
On the face of it, you may think the difference won’t be much because the company is getting a bulk amount while selling a software license as opposed to monthly billing. In addition, monthly billing leads to accrued income whereas an outright license sale can bring in current revenue.
Well, there are a few aspects you’re missing here. First off, when a user wants to use the same product across a number of computers, he or she will have to buy separate subscriptions because in most cases, one subscription is valid for one computer only In the case of an outright buy, the same cost was split across two or more computers, depending on the license terms of Adobe.
The second and the more important aspect is the elimination of piracy. Like many software companies, Adobe was also losing a substantial amount of money through software piracy where the same software was copied, tampered and resold in the black market. With a subscription-model, there is no such problem as anyone who wants to use the software has to subscribe for it. A simple and neat choice, that also makes management easy.
As a result of this change, Adobe was able to bring in more cash flow into its fold. Reports show that this company’s cash flow from operations increased by 47 percent to $730.37 million. The net income rose to $398.45 million or 80 cents per share. A year earlier, it was $254.31 million or 50 cents per share.
Due to this big result, the shares of Adobe was up by four percent during after-hours trading. Currently, it is trading at $127.25.
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