Shares of Adobe Systems (NASDAQ:ADBE) closed out the week with healthy gains of nearly 13% after reporting earnings. Even though guidance for the current quarter came in slightly shy of Street forecasts, investors were still pleased nonetheless. The transition to a subscription model is beating expectations, with Adobe gaining over 400,000 Creative Cloud subscribers sequentially to end the quarter with more than 1.4 million subscribers.
Many software companies have been shifting toward subscription models; even Microsoft is doing likewise with Office 365. Subscription sales offer better visibility for the business, while generating recurring revenue. There was some early user backlash from Adobe's decision last year, as some creative professionals didn't want to pay every month. Adobe has shown that its transition is moving along quite nicely, though. In fact, it could even gain new customers since the upfront costs are much lower. A year ago, subscription revenue was just 17% of sales, but that figure has now risen to more than a third of total revenue.
In this segment of Tech Teardown, Erin Kennedy discusses Adobe's great quarter with Evan Niu, CFA, our tech and telecom bureau chief.
Neither Erin Kennedy nor Evan Niu, CFA has a position in any stocks mentioned. The Motley Fool recommends Adobe Systems and owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.