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Will consumers buy software the way they buy their magazines? Adobe's latest quarterly results suggests they will.
Software-as-a-Service (SaaS) is not a new concept for corporate buyers, especially cash-strapped small and medium-sized enterprises, as the success of Salesforce.com demonstrates. But individuals and businesses with just a handful of employees can now take advantage as well, with Microsoft offering Office, and Adobe serving its package of Photoshop and other design software (called "Creative Cloud"), for a monthly fee.
The old model was selling a "perpetual licence." Users bought boxed software and used it forever, or until they wanted to upgrade (or were compelled to do so). With a subscription, the user pays less up front – Adobe is charging $50 (U.S.) a month versus $750 for the box – and has immediate access to updates. For Adobe, a stable revenue stream replaces the boom-and-bust cycle of new product releases.
In the short term, the arithmetic around switching models is difficult. As users switched from licences to subscriptions, Adobe's first quarter revenue came in at $1-billion, ahead of expectations, but still down 4 per cent from last year. And earnings per share, according to analyst consensus, will not reach 2012 levels until 2015. But the market is focused more on operating statistics around the transition.
Creative Cloud now has almost 500,000 subscribers, up nearly 50 per cent from the fourth quarter. The company expects to reach 1.25 million subscribers by year end. This implies $700-million in annualized recurring revenue. Not bad; but Adobe, with $4-billion in sales, still leans heavily on perpetual licences and its digital marketing business. With the stock up 30 per cent over the past year, investors looking for more upside will need to make sure they look beyond the clouds.