Adobe’s Digital Media segment, which includes its creative products as well as document services products (e.g., Acrobat Reader), accounts for roughly 70% of total revenue.
As the transition to the software as a service model got underway, Adobe’s recurring revenue started to skyrocket. In the first quarter of 2012, recurring revenue was non-existent. By the first quarter of 2012, it accounted for nearly 11% of revenue.
In addition, the number of subscribers is expected to more than double by the end of fiscal 2013. Total annualized recurring revenue is projected to be $800 million by the end of fiscal 2013 — or about 17% of total revenue.
A transition with precedence
Adobe Systems Incorporated (NASDAQ:ADBE) is not the first company to see the promise in moving to the cloud. Intuit Inc. (NASDAQ:INTU) was an early adopter of cloud technology. When it switched over its popular QuickBooks and TurboTax software from in-the-box to on the cloud, sales and recurring revenue soared after an initial decline in revenue. Most users evidently prefer to pay a monthly fee than to pay the huge upfront cost. Intuit took a huge risk by being an early adopter of cloud technology, but the gamble paid off. Now that the concept has proved successful, Adobe can simply take the Intuit model and apply it to its own software with substantially fewer unknowns than when Intuit made the switch. As a result, investors should expect Adobe’s success to be similar to that of Intuit Inc. (NASDAQ:INTU).
The shift to cloud computing will likely position Adobe for long-term success as the entire sector moves to support the technology. For instance, EMC (NYSE:EMC) — the leader in network storage capacity — is undergoing a shift toward cloud computing in order to keep up with its more nimble competitors. However, EMC Corporation (NYSE:EMC) may ultimately lose out in the cloud computing race; as the technology becomes even less expensive and more accessible, more companies will be able to maintain their own cloud infrastructure. But, while network infrastructure companies like EMC lose out from cheaper cloud technology, users of the technology — such as Adobe and Intuit — win.
Bottom line
Not only is Adobe Systems Incorporated (NASDAQ:ADBE) positioning itself for growth by switching to a more flexible distribution model, it is also gaining a significant recurring revenue stream that will serve it well when times get tough. Expect shareholders to be rewarded as the transition reaches completion over the next few months.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems and Apple. The Motley Fool owns shares of Apple and Microsoft.
