Adobe beats profit expectations, mulls subscription changes

The company's Creative Cloud subscriber base grew to 700,000 in the second quarter, but Adobe is considering other options to woo those who don't like the monthly payment plan.

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Adobe Creative Cloud graphic
Adobe Systems is trying to move its customers to its Creative Cloud subscription. Adobe Systems

Adobe Systems beat analysts' profitability expectations by 3 cents per share in the second fiscal quarter, ratcheted its Creative Cloud subscriber total up 221,000 to 700,000, and is considering new measures to mollify those who don't like the subscriptions, the company said Tuesday.

For the company's fiscal second quarter, which ended May 31, the company reported net income of 36 cents per share on a non-GAAP basis that excludes various charges, a notch better than the 33 cents average expectation of analysts surveyed by Thomson Reuters. Using generally accepted accounting principles, the company's net income was 15 cents per share. Net income was $76.5 million on a GAAP basis and $182.9 million on a non-GAAP basis, Adobe said.

The company's revenue decreased 11 percent year over year, from $1.12 billion to $1.01 billion, which was in line with analyst expectations and Adobe's guidance. In after-hours trading, Adobe shares jumped 4.5 percent, or $1.98, to $45.34.

Adobe is in the throes of a difficult transition to subscriptions instead of selling its software through perpetual licenses -- one-time fees, with Adobe coaxing customers to pay for upgrades later. Its Creative Cloud subscription costs $50 per month for a full-year commitment and grants access to the full suite of Adobe software such as Photoshop, After Effects, Illustrator, and new tools for Web publishing; perpetual licenses only are available now for the old Creative Suite 6 products.

The change angered many customers, though, and Adobe is considering changes, Chief Executive Shantanu Narayen said in a prepared statement. Those changes appear not to include a return to perpetual licenses, though.

"While we will continue to offer CS6 on a perpetual basis, the feedback from our community is important, and we are evaluating additional options that will help them with the transition," Narayen said. "Our goal is to over-deliver on customer expectations, which we believe will make the entire community ultimately embrace Creative Cloud."

The Creative Cloud today consists chiefly of traditional software that runs on a personal computer. But there are online elements, too, including publishing services, the Behance social network, and online file synchronization and sharing.

This week also marked the arrival of significant changes to its digital media software -- changes that now are available only through the Creative Cloud subscription. Adobe plans to keep selling an older version, the members of Creative Suite 6, "indefinitely," but it's clear the era of selling perpetual licenses is in Adobe's past.

Adobe's move generated a backlash among those who say the Creative Cloud is effectively a price increase and don't like how they'll lose the ability to edit files unless they keep paying. But Adobe has made it clear subscriptions are here to stay.

The company's subscription revenue has been replacing product revenue. Compared to the year-earlier quarter, subscription revenue increased from $160 million to $255 million while product revenue dropped from $871 million to $655 million. Subscriptions provide a much steadier revenue stream, less subject to the bursts of spending that come with product upgrade cycles, and one reason Adobe likes them is that it can deliver new features when they're done rather than waiting for a mammoth new release of many software packages.

Cash flow from operations was $299.1 million for the quarter, increasing Adobe's cash and short-term investments to $3.87 billion from $3.66 billion the quarter earlier.

Updated at 12:34 a.m. PT to correct the revenue for the third quarter of fiscal 2012, which was $1.12 billion.