Adobe Systems Inc. Earnings: Can the Cloud Boost Creative Products?

On Tuesday, Adobe Systems (ADBE 0.40%) will release its quarterly report, and investors have generally been upbeat about the creative software specialist's prospects for the future. Adobe's shift toward a subscription-based model for its software products hasn't gone without hitches, but shareholders still see the benefits of the shift, and a partnership with NVIDIA (NVDA 4.35%) has helped Adobe build on its strong reputation even as a controversial alleged pact with Apple (AAPL 0.51%) and a host of other developers has proven embarrassing for the company.

For years, Adobe Systems used a licensing-based model to drive its overall revenue, selling expensive software suites and reaping one-time sales as a result. Shifting to a subscription-based model involves an initial hit to revenue and earnings, as the cost of first-year subscriptions is much lower than that of an outright license. Over time, though, Adobe hopes that the total amount of money it will bring in will exceed what a typical user would spend in following typical upgrade cycles. 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.

Source: Adobe Systems.

Stats on Adobe Systems

Source: Yahoo! Finance.

Is it time for Adobe earnings to start growing again? 
Analysts have gotten more optimistic about Adobe earnings in recent months, boosting their May-quarter estimates by 10% and raising full-year projections by a nickel per share. The stock has held its own, trading at levels essentially unchanged since mid-March.

Adobe Systems made investors happy with its February-quarter results, in which the company managed to hold sales declines to just 0.8%. The company reported that customers have been quick to move toward its cloud-based software offerings, with more than half of its revenue coming from its Creative Cloud and Marketing Cloud services. Adjusted earnings and cash flow fell, but as Adobe moves fully into its subscription-based model, its financial results should smooth out and regain an overall growth trajectory.

Source: Adobe Systems.

Adobe Systems has been smart about using collaborative partnerships to help further its own technology, with a close relationship with NVIDIA proving particularly useful. By having engineers from both companies work together, Adobe has been able to build cloud-based sharing solutions that allow creative teams from multiple locations to work on the same projects without worrying about having multiple inconsistent versions of the same files. NVIDIA benefits by having its graphics processing units incorporated into features of Adobe's Creative Cloud and other products, while Adobe can offer top-notch capabilities that make the most of the hardware that its customers buy alongside Adobe's software.

Still, Adobe Systems suffered a potential black eye among its workforce. Along with Apple, Google, and Intel, Adobe was sued three years ago by software engineers seeking class action status for their allegations that the companies colluded to avoid going after each other's employees. The class action alleges that engineer wages were therefore artificially suppressed, and in March, a federal appeals court upheld the class action status and allowed the suit to move forward. In response, Adobe joined with Apple and its peers in paying $324.5 million to settle the employees' claims. The proposed settlement is up for preliminary approval later this week.

In the Adobe earnings report, watch to see how well the company's work at integrating its Marketing Cloud offerings is progressing. The huge increase in features for the Creative Cloud should give Adobe an ongoing stranglehold over that part of its business, while appealing to a broader range of enterprises with its marketing products could be a bigger source of Adobe's growth going forward.

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