Adobe Systems reported a strong fourth quarter last month. Revenue and earnings beat analyst estimates, and the company blew past its target for subscribers to its Creative Cloud service. The company is betting big on a subscription-based business model, completely phasing out perpetual software licenses, and the tough part of the transition appears to be over. Looking beyond the numbers, there were a few things said by management during the company's most recent conference call that help flesh out Adobe's results.
Broadening the customer base
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One of the major barriers to using Adobe software has always been the high price. A stand-alone version of Photoshop, for example, costs hundreds of dollars, and the company's full creative suite runs into the thousands of dollars. Moving to a subscription model greatly reduces this barrier to entry, and as a result, not only are current Adobe customers moving to the Creative Cloud, but customers who've never before paid for an Adobe product are jumping on board as well.
Photoshop can now be had for $10 per month, a far more attractive price than hundreds of dollars up front, and those who would have either used an alternative product, or a pirated version of Photoshop, are now more likely to become Adobe customers. This helped Adobe blow past its previous target for subscribers, expanding the reach of its creative software in the process.
More than a software company
In 2012, Adobe acquired start-up Behance, essentially a LinkedIn for artists, for about $150 million. Behance allows artists to create an online portfolio of their work without the burden of maintaining their own website, giving those looking to hire talent an easy way to find what they're looking for.
Behance has been integrated with Creative Cloud, but Adobe isn't done improving the service. In October, Adobe launched a new tool called Creative Talent Search, which allows those looking to hire talent to search based on portfolios instead of keywords. When a candidate's portfolio is found, the tool can find similar portfolios automatically, potentially saving quite a bit of time. Connecting creative talent to jobs could become a significant business for Adobe in the future.
Creating a one-stop shop
Adobe announced the $800 million acquisition of Fotolia, a stock photography and video marketplace, on the same day that it announced its earnings. Fotolia will be integrated into Creative Cloud, providing subscribers easy access to millions of pieces of content, as well as a way to monetize content.
While the price tag is certainly steep, Fotolia allows Adobe to continue to make Creative Cloud much more than just a set of tools. Adobe is creating a sort-of one-stop shop for creative talent, from tools to stock images to portfolio discovery, and all of these additions add further value to the service.
Big deals in marketing
The second major part of Adobe's business is digital marketing, and the company scored some major deals during the fourth quarter. Adobe had previously set a 30% annual growth target, but the company handily beat that target during the fourth quarter thanks to record Marketing Cloud bookings.
Marketing Cloud recorded revenue of $330 million in the fourth quarter, putting the annual run rate at well over $1 billion. Digital marketing represents a major growth opportunity for Adobe: While it already dominates the market for creative software, digital marketing is still a young industry with plenty of potential, and offering both creative tools and marketing tools under one roof gives Adobe a unique advantage.
Adobe is expecting rapid growth
Adobe's transition to a subscription-based business model involved a couple of years of falling revenue and profits, but the worst appears to be over. Adobe is calling for 20% annual revenue growth through fiscal year 2016, and it expects EPS to reach $1.20 next year.
Adobe's stock is certainly priced for growth. At around $72 per share, the P/E ratio using this number is roughly 60, although this ratio drops considerably if non-generally accepted-accounting-principles figures are used. Non-GAAP EPS is expected to reach $2.05 in fiscal year 2015.
Adobe's shift to subscriptions seems to be paying off, but the market may be getting a little ahead of itself.
The article 5 Things Adobe Systems' Management Wants You to Know originally appeared on Fool.com.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems, FedEx, Ford, LinkedIn, and MasterCard. The Motley Fool owns shares of Ford, LinkedIn, and MasterCard. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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