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Adobe expects third-quarter Creative Cloud subscriber adds to exceed second-quarter

Shantanu Narayen, president and chief executive officer of Adobe Systems Inc., speaks during the Reuters Global Technology, Media and Teleco
Shantanu Narayen, president and chief executive officer of Adobe Systems Inc., speaks during the Reuters Global Technology, Media and Teleco

By Sruthi Ramakrishnan

(Reuters) - Adobe Systems Inc, known for its Photoshop and Acrobat software, reported a higher-than-expected adjusted second-quarter profit and said demand rose for Creative Cloud, the subscription-based version of its flagship software package.

The company said it expects the number of paid subscribers for Creative Cloud in the current quarter to top the 221,000 subscribers who signed up in the second quarter, increasing the total to 700,000. The company added 153,000 subscribers in the first quarter.

Adobe is the latest traditional software company to make a big bet on the cloud-based subscription model pioneered by companies such as Salesforce.com Inc, NetSuite Inc and Google Inc.

Subscription models bring in less money upfront as payment is spread over the entire period of use unlike traditional packaged software, but typically ensure more predictable recurring revenue.

Shares of Adobe rose 4.4 percent in after-market trading. They closed at $43.36 on the Nasdaq on Tuesday.

Promotions to drive adoption of Creative Cloud may affect average revenue per user (ARPU) in the short term, but will add to annualized recurring revenue (ARR) in the long term, Chief Financial Officer Mark Garrett said on a conference call with analysts.

"If I can get to a better ARR number with more subscriber numbers at a slightly lower ARPU, I would gladly make that tradeoff because it gets more people on the platform, it gives us more critical mass," he said to Reuters.

Adobe has been shifting to web-based subscription service Creative Cloud from a licensing model since last year.

Customers are responding to the attraction of the Creative Cloud offering and the convenience of subscriptions which are reflected in the results and stock movement, B. Riley & Co analyst Daniel Cummins said.

Edward Jones technology analyst Josh Olson termed the guidance "pretty impressive".

"They are essentially setting some pretty high standards in terms of what they need to do for Q3 here, to surpass what was an already impressive Q2 in terms of subscription adds," he said.

Adobe forecast current-quarter adjusted earnings of 29 cents to 35 cents per share on revenue of $975 million to $1.03 billion.

Analysts on average are expecting earnings of 35 cents per share on revenue of $1.01 billion, according to Thomson Reuters I/B/E/S.

Adobe said in May that upgrades for Creative Cloud, which includes Photoshop, Illustrator and Flash, would be available only through online subscriptions. The company also said it would not develop upgrades for Creative Suite, the license-based version of Creative Cloud.

Adobe said on Tuesday that net income for the second quarter fell to $76.5 million, or 15 cents per share, from $223.9 million, or 45 cents per share, a year earlier.

Excluding items, earnings were 36 cents per share.

Revenue fell 10 percent to $1.01 billion.

Analysts on average had expected earnings of 33 cents per share on revenue of $1.01 billion.

The company maintained its full-year outlook for adjusted earnings of about $1.45 per share on revenue of about $4.1 billion.

(Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Sriraj Kalluvila and Carol Bishopric)

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