Adobe's business model and focus is shifting significantly to software as a service and the transition, which will play out over multiple quarters, could hurt.
Ahead of its analyst day, Adobe outlined a series of broad shifts.
Of those three items, Adobe's shift to a cloud model is the biggest issue. The shift away from mobile Flash is notable, but as long as Adobe can sell the authoring tools to make apps it'll be fine. The shift to a cloud model has more risk. Adobe said fiscal year 2012 will feature revenue growth in the 4 percent to 6 percent range when analysts were expecting 10 percent. The slower growth will occur as Adobe shifts to a recurring revenue scheme. In fact, Adobe went from projecting fiscal 2012 revenue of $5 billion in a stretch goal to something more like $4.33 billion to $4.41 billion. Wall Street was expecting $4.52 billion for fiscal 2012.
Why the slower growth? Subscriptions will cannibalize license revenue.
Deutsche Bank analyst Tom Ernst said in a research note:
It has been our experience that transition from license to subscription revenue is not an easy one. We have witnessed Intuit successfully navigate through such a change, but this was an exception rather than the rule. Typically, the transition creates the optical problem of significantly slower growth on the income statement, while cash flow leads, but still is depressed for much of the average purchase cycle, in this case a couple of years.
Adobe's plan is to take its lumps in 2012 and then grow at a double-digit clip in future years. Analysts were mixed on Adobe's prospects:
Jefferies analyst Ross MacMillan said:
We continue to believe that the Creative Suite franchise has a growth opportunity based around: i) re-tooling of the portfolio around open standards such as HTML5; ii) new subscription services, such as the Adobe Creative Cloud; and iii) the potential to capture more developer mind (and ultimately dollar) share with tools such as PhoneGap. We also believe that more focused investment around Omniture and other assets in the Digital Marketing category can drive growth. Adobe anticipates that beyond FY12 it can achieve double digit growth with an increasing percentage of recurring revenue. The company still has much to prove, but we are optimistic on the opportunity.
We believe the shift to more of a recurring revenue model may result in a fundamentally more attractive and manageable business for Adobe but remain on the sidelines on this stock as these shifts are often difficult and take longer than expected.
Morgan Stanley analyst Adam Holt said Adobe is likely to lose enterprise revenue as it moves to a subscription model. Adobe's moves make sense in the long run, but the transition is likely to be tricky.
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