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Was Adobe's 5-Year High a Flash in the Pan?

Tomorrow, Adobe Systems (NASDAQ: ADBE  ) will release its latest quarterly results. Lately, investors have faced two very different visions of the software company, with backward-looking results pointing to steep contractions in revenue and earnings but the share price suggesting optimism about the company's future.

For many casual investors, Adobe's most commonly used products might seem like pure loss leaders, as many users don't pay for its ubiquitous PDF reader. But although some recent moves with its higher-value software packages are hurting revenue in the short run, they could pay off for the company quite nicely over time. Let's take an early look at what's been happening with Adobe Systems over the past quarter and what we're likely to see in its report.

Stats on Adobe Systems

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$1.01 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Can Adobe Systems keep its earnings up?
Analysts have been guardedly optimistic about Adobe's earnings over the past few months, keeping their views on the May quarter unchanged but raising their full-year fiscal 2013 estimates by $0.03 per share. The stock has kept moving higher, rising 3% since mid-March but giving up more substantial gains over the past few weeks.

The big strategic move that Adobe completed during the quarter was its decision to abandon its permanent-software-license model as of May 1, instead choosing to offer cloud-based subscriptions for its creative suite of software. The company has been making a transition toward the subscription-based model for about a year, and so far, the results have been impressive, with the company last quarter saying it expected 1.25 million paid subscribers by the end of the year. In the short run, revenue was bound to decline as users who were previously paying for software that would last for years instead make much shorter-term commitments, but the benefit for Adobe is that those users will be making those smaller payments repeatedly every time they renew their subscriptions.

But Adobe has also taken steps to bolster its presence in the social and mobile spaces. The company bought app-developer Thumb Labs last month, adding on to its purchase of social-media platform Behance back in December. Then, just a few weeks ago, Adobe bought Ideacodes, a creative consulting agency that should be able to assist Adobe in making its mobile shift. If the moves accomplish Adobe's purpose of enhancing collaboration among the creative customers on which the company relies, then they could represent a big win for Adobe.

Still, the bigger question for Adobe is whether it can keep up its quality in web-content management despite rising levels of competition. Industry analyst Forrester highlighted Adobe's platform as having broad application, but it also noted the efforts that Oracle, Hewlett-Packard (NYSE: HPQ  ) , and IBM (NYSE: IBM  ) have made in trying to make their digital experiences more appealing. In particular, HP has hinged its turnaround on moving away from commoditized businesses like PCs toward higher-margin software and services, hoping to use its extensive customer base to cross-sell services. Yet both IBM and Oracle have also been moving in the same direction, with IBM particularly having improved its web-content management offerings in order to broaden their appeal not just to the largest corporate customers but also to mid-sized companies as part of IBM's overall goal of building a broader customer base.

In Adobe's quarterly report, watch for updates on subscription numbers for its Creative Suite software. That should give you the best sense of whether the company is on track to renew its growth after its transition to a subscription model is complete.

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