Microsoft Corporation (MSFT)’s Surprising Future

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Microsoft CorporationSoftware companies are starting to sell subscription-based licenses, rather than copies of their programs. Longtime graphic-design heavyweight   is betting its future on a subscription-based business model, and Microsoft Corporation (NASDAQ:MSFT) may be the next major company to switch.
According to TechCrunch, Adobe has introduced Creative Cloud, its subscription service for getting all of its tools for designers, photographers, videographers, web developers, and audio professionals. The head of Creative Cloud stated that this service will be the only way to get access to Adobe’s tools.

Adobe seems to be following a trend of subscription-based services exemplified by Netflix, Inc. (NASDAQ:NFLX). Netflix, Inc. (NASDAQ:NFLX) can be used on any device, from a Google Android-based platform to Apple Inc. (NASDAQ:AAPL)’s iOS to Microsoft Corporation (NASDAQ:MSFT)’s Windows 8. This lets its users reach its services without worrying that they’re using the wrong kind of gadget or software.

At the time, investors and even analysts had a hard time comprehending why Netflix, Inc. (NASDAQ:NFLX) would move away from its rock-solid DVD rental business to pursue on-demand streaming. But now, the answers seem clear as day. Subscription-based software and services that live on the Internet — or in “the cloud,” as it’s known — are taking over the world. AT&T projects the cloud will be a $210 billion industry, with 74% of business applications web-based, by 2017.

Like Netflix, Inc. (NASDAQ:NFLX), Adobe’s new model maximizes the benefit of being a multi-platform solution. Creative Cloud can be used on both the Mac and Windows, meaning that Adobe Systems Incorporated (NASDAQ:ADBE) has made it easier for companies to adopt its software suite, regardless of the operating system employees use. Future growth opportunities may involve an Android version of Creative Cloud Solutions.

Adobe’s investment thesis remains strong

Adobe Systems Incorporated (NASDAQ:ADBE)’s adoption of a subscription-based business model has met with some reasonable success. In its 2013 first-quarter earnings release, Adobe reported a decline in product revenues from $808.52 million to $675.79 million, as customers switched from buying software to subscribing to it. But the company was able to grow its revenues from subscription to $224.26 million from $146.23 million year over year.

All in all, Adobe Systems Incorporated (NASDAQ:ADBE) saw merely a 3.64% decline decline in total revenue year over year, implying that the adoption of a subscription based business model had only a slightly negative effect on sales.

At first glance, analysts’ consensus that Adobe will report a 38.70% decline in earnings this year looks alarming. But the drop actually owes to the way Adobe Systems Incorporated (NASDAQ:ADBE) accounts for the money it brings in. It gets to record money from software sales immediately, but must spread out subscription revenue over a longer period of time.

That approach has its advantages; Adobe forgoes a short-term boost, but gets greater growth over the long haul. Rather than waiting three to five years between major software releases to bring in a tide of new money from customers, the company can enjoy a steady stream of subscription income every single month. Indeed, analysts predict that Adobe Systems Incorporated (NASDAQ:ADBE)’s earnings will actually grow 22.2% next year, and 10.50% on a compounded basis over the next five years.

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