Adobe System Inc's Creative Cloud Can Take the Stock Higher

Adobe's Creative Cloud has faced some criticism, but its performance is strong nonetheless.

Jun 1, 2014 at 8:00AM

Adobe Systems (NASDAQ:ADBE) has been in the news for negative reasons of late. The company's Creative Cloud, which provides access to web-based subscription services for programs such as Photoshop, Illustrator, and Flash, was down for a day. Although Adobe has restored the service, this hiccup has forced it to offer compensations to customers.

This adds to the criticisms that Adobe's Creative Cloud has faced after the company decided to switch to a subscription model last year. The likes of Nuance Communications (NASDAQ:NUAN) stepped in and tried to poach dissatisfied customers. However, Adobe's Creative Cloud has continued performing well despite the challenges and helped it post solid results in the first quarter.

Creative Cloud remains strong
For its first quarter in 2015, Adobe achieved $1 billion in revenue, driven by growth in Creative Cloud subscriptions, digital media, and Adobe Marketing Cloud bookings. It added 405,000 paid users for Creative Cloud subscriptions, which now exceed 1.8 million. 

Adobe has added more than 500 new features and capabilities to its Creative Cloud suite of products, including updates for Photoshop, Illustrator, and InDesign that were received well. The company's Lightroom bundle is also gaining traction. 

Focus on features and customer engagement
Adobe is counting on the positive reception of its products and growth in subscriptions going forward. It has set itself the target of achieving 30% bookings growth this year. Adobe has also built relationships with companies such as General Motors and Disney in its digital publishing business. It is looking to deliver better value to publishers by integrating the Digital Publishing Suite and the Adobe Experience Manager.

This integration will enable publishers to benefit from content-rich apps such as digital magazines. The feature will also enable a faster and more efficient publishing process.

Adobe is busy integrating its six Adobe Marketing Cloud solutions. In January, it announced the integration of Adobe Campaign and the Adobe Experience Manager. This will help marketers to use a single digital asset management repository and integrate data from anonymous visitors. As a result, marketers will be able to identify customers to create a personalized customer experience.

Adobe's customers such as GMC, Kohl's, MGM, NBC Universal, and Under Armour are licensing multiple Adobe Marketing Cloud solutions. NBC Sports used Adobe Primetime as a platform to deliver the Sochi Olympics to desktops, tablets, and other mobile devices. This allowed millions of viewers to access the event live on demand. Adobe Primetime's analytics, authentication, ad delivery, and media playback capabilities helped NBC to stream video across different screens.

In addition, Adobe organized a Digital Marketing Summit in Salt Lake City in March, with more than 5,500 attendees. According to Adobe, this summit is an opportunity to engage with current and prospective clients, along with a growing list of global partners. 

Adobe's Document Services segment is also growing at a good pace. Its EchoSign electronic signature solution is seeing good traction in the market with the likes of Citrix, Electronic Arts, Kia, NEC Financial Services, and UC Berkeley using the e-signature platform. The continued adoption of its EchoSign has helped Adobe attain annualized recurring revenue of $164 million in Document Services in the first quarter. Going forward, Adobe expects the strong demand for its Acrobat ETLAs and EchoSign to continue. 

A concern
Adobe needs to ensure that its services don't suffer from outages. As mentioned above, the company will be compensating its customers for a day's outage that was experienced in May. Such events result in unnecessary expenses, and also tarnish the reliability of Adobe's products. This might also lead competitors such as Nuance to take away some market share from Adobe.

Last year, Nuance tried hard to poach customers from Adobe when the Creative Cloud model was being criticized. As reported on CNET, a Nuance executive said:

We actually have a campaign in play on education as a result of Adobe backlash. Several higher-education institutions came to us complaining about the move to a perpetual license and asked if we would work with them. When we saw what was happening we put a campaign out to the market in case there were more.

Since then, Nuance has been strengthening its product suite by launching PDF Uncompromised. Adobe will have to avoid such PR disasters going forward in order to keep subscription growth rates strong.

The bottom line
Adobe is progressing in the right direction. Its Creative Cloud is doing well as the number of subscribers are increasing. The company has answered its critics quite emphatically with a stock price gain of more than 50% in the last year. Going forward, Adobe looks well-positioned to deliver even better returns to investors considering the moves that it is making.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems, General Motors, Nuance Communications, Under Armour, and Walt Disney. The Motley Fool owns shares of Nuance Communications, Under Armour, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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