Ronnie05's Blog

In Midst of Transition- Adobe Systems (Part I)


In the age of Cloud,Mobility,Social Media and altering business models,Companies that simply try to preserve the status quo will fail – Inspired

Adobe is the midst of transition would inspire many a case studies. A company that epitomized Shrink Wrapped High Quality Software is working on complete re-doing of its business and revenue models with an eye on the future. Historically, Adobe has been a productivity suite company with its software being centred around enterprises, film-makers, webmasters and content creators and it has done well till recent times. Not wishing to be caught on the wrong foot holding on to status quo, Adobe has readied and implemented a radical change in its business model- It has embraced the cloud based distribution and digital marketing and is phasing out the CD based version of “pay beforehand $1400-$2400” software distribution to Software in the cloud, monthly subscription service. This sachet service works three ways – It steadies revenue per month, it reduces piracy (Adobe was losing a reported $1bn to piracy of its software) and it also increases penetration (The move to subscriptions is a clever and thoughtful way to lower the price point). This model works on a $20-$50 subscription model – and this would bring 325K subs by end of 2012 as per Adobe. Lready Adobe has a million free memberships on its Cloud.The current onboarding rate is 11K per week. Overall average revenue per user is 20% higher compared with the old product. That number will rise even further, the company says, because it is much more likely to sell support services, website hosting, or server management to cloud customers. Already Adobe is augmenting its cloud product by addition of features and functionalities such as Creative Cloud for teams, making it easy (collaborate effort); Adobe Muse (For creation of Mobile websites); Creative Cloud Connection for desktop synching and collaborative sharing;Creative Cloud Training; and demonstrating the unlimited access to the Digital Publishing technology used by major publishers to create interactive content for the smartphones and tablets.

Adobe

Sure this audacious moved spooked the stock which lost steam in 2011 but it is back in action and has traced a healthy recovery. The stock is way behind its historic highs of $47.9- however at $35.5 it is trading 47% above its 2011 trough of $24.17. Even while the stock is underperforming as per analyst’s expectations- the 3Q, 2012 profits have reversed a trend of 3 quarters of dipping profits. In the most recent quarter, profit increased by 3.2% year-over-year. Looking back further, profit dropped 2.4% in the second quarter, 21.1% in the first quarter and 35.4% in the fourth quarter of the last fiscal year. The turnaround seems to be working for Adobe and we would get to know more about this in time. As for the shift from boxed software to subscriptions: It is far from over. In fact, it is the company’s greatest source of uncertainty.

This Post is continued in Part II

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