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Adobe stock hits all-time high on subscription shift

Shifting from the Creative Suite license business to Creative Cloud subscriptions made plenty of customers angry, but it made plenty of investors happy.

Stephen Shankland principal writer
Stephen Shankland has been a reporter at CNET since 1998 and writes about processors, digital photography, AI, quantum computing, computer science, materials science, supercomputers, drones, browsers, 3D printing, USB, and new computing technology in general. He has a soft spot in his heart for standards groups and I/O interfaces. His first big scoop was about radioactive cat poop.
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Stephen Shankland
3 min read
There now are 1.439 million Adobe Creative Cloud subscribers.
There now are 1.439 million Adobe Creative Cloud subscribers. Adobe Systems

Adobe Systems' transition to software subscriptions will be essentially complete by this time next year -- and investors are happy about it.

The company's stock rose $5.36, or 10 percent, to $59.35 in trading early Friday after the company reported financial results for its fourth fiscal quarter on Thursday.

"The company continued to beat its goals and consensus' expectations for net subscriber additions and annualized recurring revenue (ARR), the metrics that investors are using to measure the progress of the transition from a perpetual license to subscription revenue model," FBR analyst Samad Samana said in a research note Friday.

Adobe said 1.44 million people now are getting Photoshop, Illustrator, and the company's other creative design software under the Creative Cloud subscription program. That beat the company's year-end goal for the program, 1.25 million. Adobe also said it expects to have 3 million subscribers a year from now and to surpass another official goal, 4 million subscribers by two years from now.

Plenty of customers are angry about subscriptions in particular the idea that their software will stop working if they stop paying their $50 per month for the full Creative Cloud subscription. That's not a problem for people who buy perpetual licenses to software, the sales method that Adobe is phasing out.

But customers are making the shift, either because they like the frequent modest updates to the software, pricing that can be cheaper for heavy users who upgrade frequently, the lack of a major up-front payment -- or the fact that Adobe has stopped updating its older Creative Suite 6 product. Despite complaints, Adobe said it's not turning back from the subscription plan.

The transition to subscriptions and away from selling Creative Suite software through traditional perpetual licenses is going faster than Adobe expected. "We now expect fiscal year 2014 will be the last year of any meaningful Creative perpetual revenue," Chief Financial Officer Mark Garrett said on the company's conference call Thursday.

The company reported net income of $65.3 million, or 13 cents per share, on revenue of $1.04 billion for the three-month period ended November 29. For its first quarter of fiscal 2014, it projects revenue between $950 million and $1 billion.

The quicker transition to subscriptions has a shorter-term downside: because customers pay smaller fees steadily over a long period of time instead of a large sum at the beginning of a purchase, revenues drop when the subscriptions begin. That's true of Adobe, and it's complicated by the fact that it offered promotions to encourage people to make the change.

For example, earlier Creative Suite customers can spend $30 a month instead of $50 for their first year for the full CC subscription to all Adobe's software, and the company also has a limited-term $10-per-month Photoshop Photography Program option that gives access to Photoshop, Lightroom, cloud storage, and access to the Behance professional network.

But as promotions expire, Adobe expects the figure to increase. For its creative software, the annually recurring revenue (ARR) increased $219 million from the third quarter to the fourth quarter to reach $768 million. Adding the company's digital publishing offerings brings Adobe's total digital digital media ARR to $1.85 billion.

The company raised its compound annual growth rate forecast for digital media from 15 percent to 20 percent for fiscal 2014 to 2016.

"2013 was an outstanding year," Adobe Chief Executive Shantanu Narayen said in a statement.

So, although the subscription opponents dislike Adobe's change, they'd better not expect Adobe to change its behavior.