Though last week's post-earnings decline in shares of Adobe Systems Incorporated (NASDAQ: ADBE) might have caught investors by surprise, it shouldn't be taken as a sign of a struggling business. Adobe's lighter-than-expected guidance for its current fiscal second quarter appears to have driven the market's response. Never mind the fact that Adobe's first-quarter results handily exceeded not only Wall Street's models, but also the high-end of its own expectations.
But you don't need to take it from me. Adobe management also offered some useful perspective to analysts and investors during their most recent quarterly conference call. Here are five important points they made:
1. The influence of mobile on Creative Cloud is growing
While the desktop applications continue to be the foundation of Creative Cloud, 50% of Creatives are using mobile devices in their creative process. Over 30 million mobile apps have been downloaded, including capture apps like Adobe Brush and Shape, as well as desktop companion apps for Photoshop CC and Illustrator CC. Over 5 million new free subscribers were acquired through our Creative Cloud mobile apps since MAX in October. -- Adobe CEO Shantanu Narayen
For reference, Adobe MAX is the company's annual conference through which it promotes the latest Adobe software releases to people it calls "creatives" -- that is, the core clientele who rely on its software to make a living, from creative leaders to designers, broadcast and video professionals, business strategists, and photographers.
It's no surprise this year's conference focused so much on the growing influence of mobile apps. For Adobe, that included capture apps like Adobe Brush and Shape, and desktop companion apps to work with both Photoshop and Illustrator. These apps not only make Adobe's core paid products even stickier for consumers, but also serve to build a captive pool of millions of prospective paying customers.
2. Creative Cloud subscriber growth declined sequentially -- and that's OK
In our creative business, we exited Q1 with 3,971,000 Creative Cloud subscriptions. Net new Creative Cloud subscriptions increased by 517,000 in Q1, consistent with our expectations given Q1 seasonality. Retention of Creative Cloud subscriptions, including renewals after promotional pricing expiration, continues to track ahead of our initial projections. -- Adobe CFO Mark Garrett
To put this in context, last quarter Adobe added 644,000 net new creative Cloud subscribers, representing yet another healthy sequential acceleration in growth compared to 502,000, 464,000, and 405,000 new subscribers in the fiscal third, second, and first quarters of last year, respectively. But while it may seem discouraging, Adobe broke that sequential growth streak with its most recent quarter; it's exactly what management had told investors to expect three months ago due to normal seasonality.
Garrett confirmed later in the call they expect sequential subscription growth to resume for both Creative Cloud and Digital Media ARR for each of the remaining quarters this fiscal year.
3. The influence of perpetual licenses is (finally) small
Toward the end of last year, we've kind of gotten to the point where the perpetual number is pretty small. I mean, it's going to bounce around a little bit based on customer preference. But it's not a material number anymore, and it's not going to swing the revenue that much anymore. So we feel good about the fact that it has transitioned into a more ratable model now. -- Mark Garrett
Remember, Adobe's migration to a cloud-based subscription model meant more of its revenue would be recognized over the duration of the subscription, rather than the chunkier, up-front sales Adobe's perpetual licenses required. As a result, as Adobe continued its transition, revenue growth appeared to be stuck in neutral. But now that Adobe's perpetual license base is relatively insignificant, Adobe can enjoy more predictable revenue and cash flows, while investors can look forward to measuring Adobe's future performance from a more consistent base.
4. The potential for Fotolia is huge
Stock content is a part of an incremental $4 billion of addressable market for Adobe. 93% of stock content sellers and 85% of stock content buyers use our tools. Work is under way to integrate Fotolia into Creative Cloud, providing current and future Creative Cloud members with the ability to access and purchase over 35 million images and videos within the Creative Cloud experience. We will also continue to operate Fotolia as a stand-alone stock service, accessible to anyone. With seamless integration, we believe we can increase Creative Cloud ARPU over time, as well as grow Adobe's share of the stock content market. -- Shantanu Narayen
Adobe first announced its intention to acquire privately held stock photo specialist Fotolia this past December, then closed on the acquisition in late January 2015. At the time, Adobe senior VP David Wadhwani teased, "We're now hard at work to radically simplify the buying and selling of stock content."
What better place to integrate a massive market of stock content than into arguably the most pervasive product used by the people consuming it? It's good to see Adobe management putting some more specific financial figures to this market opportunity.
5. Partners are key to Adobe Marketing Cloud's success
Partners play a significant role in our go-to-market strategy and the ecosystem of companies who recommend, sell, and deliver Adobe Marketing Cloud solutions continues to grow. -- Shantanu Narayen
Though this one is short and sweet, its implications are broad reaching. On March 10, 2015, for example, Adobe announced a new partnership with IBM under which the tech giant will build specialized consulting capabilities for Adobe Marketing Cloud. The same day, it also expanded its partnership with Accenture, with the joint launch of Accenture Customer Engagement, another cloud-based marketing solution that features digital marketing services from Accenture Interactive essentially wrapped around Adobe Marketing Cloud.
In the end, by leveraging the unique leadership position in the massive enterprise space of both IBM and Accenture, Adobe should be able to accelerate the adoption of its Marketing Cloud offerings. If that happens, and assuming Adobe follows through on expected growth of its core Creative Cloud subscription base, I think Adobe investors will be more than happy that they held on through this pullback.
