Why Adobe Systems Should Finally Stand Up to Oracle and Salesforce

Adobe Systems (ADBE +2.70%) will release its quarterly report on Thursday, and shareholders have been quite satisfied with the software giant's transition over the past year. Although earnings have been under pressure as Adobe went from selling software outright to a subscription-based licensing model, this quarter will be the last to see comparisons against its old model. That should make it clearer how much progress Adobe has made compared to Oracle (ORCL 1.57%), Salesforce.com (CRM +2.88%), and other cloud-based software giants.

Adobe Systems is well-known for its graphic design, analytic marketing, and creativity-enabling software products, ranging from the ubiquitous Acrobat Reader to higher-end products for professionals. But with Adobe embracing the cloud, the company hopes to reap the recurring-revenue benefits that Salesforce and Oracle have benefited from for years. Now that the awkward transition phase is coming to an end, will Adobe finally start growing again? 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

Source: Yahoo! Finance.

Will Adobe earnings finally get back on track?
In recent months, analysts have pulled back on their views on Adobe earnings, cutting almost $0.10 per share from their November-quarter estimates, and slightly more than $0.10 per share on their full-year fiscal 2014 projections. The stock has kept climbing, though, with an 18% rise since early September.

Adobe certainly proved its mettle with its August-quarter results, which sent the stock soaring. Even though the contraction in the company's earnings proved even worse than investors had expected, Adobe managed to top the 1 million subscription mark since the beginning of its transition phase, with 331,000 new subscriptions just in the past quarter. Recurring revenue topped the 40% mark for the company, highlighting how important a dependable stream of income could become for Adobe in the long run.

Adobe's results so far only confirm the major strategic shift the company made in embracing the subscription-based model. Salesforce was one of the first movers to embrace the software as a service model, and Oracle and other megacap tech companies have seen the value of moving to the cloud, not just to collect more predictable revenue streams, but to make their products more available and useful for their customers. Admittedly, Adobe's Creative Cloud subscription-based revenue model means forgoing upfront windfalls from high-ticket sales, but they also make it more natural for customers to upgrade. That keeps Adobe from facing the risk that customers will simply ignore new releases and hang onto outdated versions of software, in some cases entirely skipping upgrade cycles and costing it revenue.

Still, Adobe's quarter didn't go without some hitches. In October, the company was the victim of a cyber attack, and Adobe said that 2.9 million customers might have had their credit card information exposed as a result. That attack turned out to be even larger than initially thought, with Adobe updating its estimate to 38 million customer accounts last month, and with a third-party security firm finding data that could belong to more than 150 million Adobe-related accounts. As more companies embrace cloud-based solutions, security will continue to be of utmost concern, and Adobe will have to work hard to protect its customers' private information going forward.

In the Adobe earnings report, watch to see how the company handles its cyber-attack fiasco. Until Adobe gets the problem behind it, it could represent a big black mark against an otherwise successful transition, and distract from Adobe's long-term growth potential.

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