Adobe turns in record revenues, uses subscription model to take on the pirates

Adobe’s one-time gamble to move to a subscription-only model continues to pay off with the firm reporting its third consecutive quarter of record revenues yesterday.

For the third quarter, Adobe turned over $1.46 billion in revenue, up year-on-year from $1.22 billion, and reported $272 million in net income. Revenue from the company's digital media business rose 28.6% year-on-year to $990 million. Breaking down the firm’s individual cloud earnings, Adobe reported: 

• Creative Cloud revenue was $803 million, up 39% year-on-year.
• Document Cloud revenue was $187 million.
• Marketing Cloud brought in $404 million for the quarter, up 10% year-on-year.

CEO Shantanu Narayen said that Adobe managed a record 23 trillion data transactions in the third quarter:

Our customers in every major category of business are utilizing our machine learning algorithms to predict customer behavior and drive their business…In August, Adobe Marketing Cloud once again played a key role in the digital broadcast of the Olympic Games. NBC Sports used Adobe Primetime to power the digital delivery of the 2016 Rio Olympics, the largest digital Olympic Games in history.

He added:

We continue to be the undisputed leader of the Marketing Cloud. It’s a category that we created. I think from a unique differentiation, what we provide in terms of both the core content and analytics and all of the personalization software that we are delivering, we continue to execute against that opportunity. People are still talking about digital disruption and how do they help create more personalized experiences for customers and we are right in the center of that particular tailwind.

On Creative Cloud, the shift to a subscription model has seen an uptick in business, said Narayan, not least by making piracy of software more difficult:

If you look at the numbers right now of where we are with Creative Cloud, it’s clear that we have seen significant acceleration. Without a doubt, a large part of that acceleration is people who want Creative Cloud and are no longer pirating Creative products, but are actually as a result of the low price and the value that we are delivering using the entire subscription based offerings. So what we have done from a technical perspective already, we have actually ensured that people who download the trials, that once the trial expires they don’t have access to the products. We have also shut down places, online websites where people could buy a repackaged box. So there is no question that we have already addressed piracy in a meaningful way.

This battle with pirates will continue this year, he added:

There are still a number of countries where we actually only sell CS6 and we are going to start to offer CC in all of those markets. For the first time we have the ability to offer differential pricing. So this is playing out exactly as we expected. Let’s get the markets that are most developed, let’s address casual pirates, let’s hit the enterprise and then let’s now expand that into emerging markets where there was more piracy and now we have the ability to counter that, both through pricing as well as through technology.

Meanwhile Document Cloud passed a significant milestone during the quarter, he added, as  individual Acrobat subscription units exceeded perpetual units for the first time, while on Adobe.com, over 90% of Acrobat customers chose the subscription offering:

We have tens of millions of people who have bought Acrobat over the lifetime of the Acrobat product. And for the first time as we mentioned again in our prepared remarks, the number of subscription units of Acrobat actually exceeded the perpetual units. So, we are pleased with how that transition is going. The playbook is exactly the same. It’s about how do we migrate Acrobat customers to Acrobat DC. It’s about adding new services like Sign. It’s about enhancing new services that we can add to the business.

Platform play

One of Adobe’s strengths is to its platform pitch, argued Narayen, which maps onto wider shifts in the macro-business environment:

If the first era was all about back office automation and the second era was about what happened with productivity or front office, we really are motivated by this notion that it’s going to be the experience business. And if you are trying to create the experience business, the only way to transform your company is by adopting an entire platform rather than piece-meal trying to buy individual products and trying to fit that together.

Virtually every new logo that we get is a multi-solution deal because what they want is a complete offering that enables them to do that transformation. Given the breadth of existing customer base, certainly we are up selling all of them to multiple solutions. But whether it’s a new logo acquisition or whether it’s renewals, most of the deals are now multi-solution deals and much larger revenue to Adobe and value to the customer.

Looking ahead, there are some new milestones laid down by Narayen, particularly around Marketing Cloud: 

Our vision for the Marketing Cloud is exactly the same, which is we are building a data platform that enables all of our products to work seamlessly together. We have made a lot of progress in that space. And the benefit for customers is certainly as they think about a campaign, as they think about customer segments it naturally flows from the analytics product to the target product to the campaign product.

In the enterprise space, we certainly see that our Marketing Cloud, while it’s a leader, we have aspirations for that not to be an island unto itself, but really to be the hub that interconnects all of the enterprise software. Investing in these core data platforms to enable our customers to derive value and for us to continue to build a technology moat that will serve us well for many years, is very much part of the strategy. And last but not least, customer expectations right now across the globe are that content flows seamlessly from our Creative Cloud into our Marketing Cloud and so we do that.

And with Oracle and Salesforce both pitching AI as major trends, Narayen said that Adobe also has skin in this game:

There is a lot of conversation right now about machine learning and AI. It’s something that we have invested in for years. I mean, we wouldn’t be building the magic that we build in Creative Cloud or Creative Suite without very deep technology in terms of machine learning. The reality is when we think about Marketing Cloud, it’s not about data collection, it’s all about how we are driving insight and predictive, which is another form of machine learning. That’s what’s really fuelled our Marketing Cloud business.

My take

A gamble that was worth taking.