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Topic: Growth Stocks

Adobe aims for a profit rebound from cloud computing subscriptions

Adobe aims for a profit rebound from cloud computing subscriptions

ADOBE SYSTEMS (Nasdaq symbol ADBE; www.adobe.com) makes software that lets computer users create, edit and share documents in the popular PDF format. As well, graphic designers use its software to create print publications and web pages.

In the three months ended August 30, 2013, Adobe’s revenue fell 7.9%, to $995.1 million from $1.1 billion. That missed the consensus estimate of $1.01 billion.

Excluding one-time items, Adobe’s earnings fell 43.5% in the latest quarter, to $164.4 million, or $0.32 a share, from $291.2 million, or $0.58 a share, a year earlier. That’s because the company’s costs rose sharply as it shifts from selling its software as a subscription service, instead of a one-time purchase. The latest earnings missed the consensus estimate of $0.34 a share.

Tech stocks: Adobe switches to subscription model to provide steadier revenue

Adobe is doing a good job of selling its Creative Cloud package of photo-editing and desktop-publishing programs under the new subscription service model. It now has over 1.03 million subscribers, and aims to have 1.25 million by the end of this year.

As a result, its subscription revenue jumped 53.4% from a year earlier, and now accounts for 22% of its overall revenue. Adobe still gets 67% of its revenue from direct software sales. Services and support supply the remaining 11%.

Over the longer term, moving to a subscription model should give Adobe steadier revenue streams, and let it quickly introduce upgrades and new products.

At the same time, many of Adobe’s customers are in cyclical businesses like publishing and advertising, which adds to its risk. Adobe does not pay a dividend.

In the latest edition of Stock Pickers Digest, we look at how soon Adobe will likely be able to reverse its recent decline in revenue and earnings as it completes the transition to its Creative Cloud subscription model. We conclude with our clear buy-hold-sell advice on the stock.

(Note: If you are a current subscriber to Stock Pickers Digest, please click here to view Pat’s recommendation. Be sure to log in first.)

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Most computer users are likely to be familiar with Adobe Systems. Does familiarity give you confidence in the stock—do you invest in tech stocks with established names? Or do you like finding tech stocks that that have a unique niche or innovative product? Have you had more winners than losers with tech stocks?

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