Adobe's gambit pays off as subscription revenue accounts for 78% of total

Profile picture for user slauchlan By Stuart Lauchlan December 18, 2016
Five years ago only 11% of Adobe's revenue came from subscriptions; today it's 78%. CEO Shantanu Narayen has reason to be pleased with how 2016 turned out.

Shantanu Narayen

It’s become a familiar meme to state that Adobe’s cloud subscription gambit has paid off, but then again it’s good to end 2016 on a note of positivity.

Certainly there was positivity a-plenty at Adobe and on Wall Street when the company turned in $1.61 billion in revenue for its fourth quarter, trouncing analyst expectations. For the full year, revenue was $5.85 billion, up from $4.8 billion last year.

But perhaps the single biggest validation of the firm’s shift to a subscription only model lies in the fact that at year end, subscriptions represented 78% of Adobe’s total revenue, compared with just 11% five years ago.

Stats like that allow CEO Shantanu Narayen to boast that the firm is on track to achieve its goal of becoming the digital media leader:

With a $64 billion total addressable market by 2019, our opportunity has never been greater. Our mission to change the world through digital experiences has never been more relevant and our strategy, our technology and our people set us up for continued success.

At the heart of this success is Creative Cloud, which chalked up full-year revenue of $3.2 billion, a 38% year-on-year growth rate. Narayen says the important thing to note here is that the Creative Cloud business is as much about new customers as it is about migrating the core on-premise user base.

To that end he outlines three initiaitives to foster market expansion:

The first one is Creative Cloud Photography Plan. We used to have Lightroom and Photoshop Elements. We are increasingly seeing those consumers adopt Creative Cloud Photography Plan. That continues to do really well in terms of the new customer acquisition that we have.

[The] second category [is] products like Adobe Spark. We are seeing more and more people who have a story to tell wanting to use Adobe Spark. In this year, you will see that also start to get integrated and folded into the Creative Cloud, much like mobile apps are. They represent a big customer acquisition and adoption and migration opportunity.

And the third, I have continued to impress upon education. Education as a segment does really well in Creative Cloud. It’s our next-generation or whether it’s K-12 students or higher ed, as they get exposed to our products, clearly as they enter university or the marketplace, they are using our products, all of which we look at as positive trends for the future.

Marketing moves

Meanwhile Marketing Cloud revenue for the year was $1.63 billion, up 20% year-on-year. Marketing Cloud is likely to get a boost next year on the back of a recently announced alliance with Microsoft. Narayen explains:

Adobe will make Microsoft Azure, the preferred platform for our cloud services, providing customers with a trusted, enterprise grade global platform and that we will integrate our Adobe Marketing Cloud technology with Microsoft’s Dynamics 365 Enterprise and Power BI. Microsoft announced it will make Adobe Marketing Cloud the preferred marketing service for its enterprise customers and its extensive partner and developer ecosystem.

2017 will see more weight behind Adobe’s digital advertising clout following the acquisition of TubeMogul which enhances its video capabilities:

It’s more heft in our Ad Tech platform, which is a key part of as we are targeting the CMO or the Chief Revenue Officer or the Chief Digital Officer at an enterprise and adding to what we have in display, search and social, so that’s good. We do have now more end-to-end capabilities, all the way from video delivery to monetization for our publisher as well as our advertiser customers.

Big picture - it just enables us to be more of a trusted platform for the Chief Marketing Officers and Chief Revenue Officers. And to enable both personalization in terms of delivery and better segmentation in deriving value from all of the data that they have.

New this year was the the Adobe Digital Price Index, cited across media and analyst firms on Black Friday and Cyber Monday. The Index looks at how inflation and consumer goods prices are tracked and measured. Narayen says its findings are build on the firm’s capturing of 33.5 trillion data transactions in the final quarter of the year:

Adobe measures 80% of all online transactions from the top 100 U.S. retailers and $7.50 out of every $10 spent online with the top 500 U.S. retailers go through Adobe Marketing Cloud. This tremendous volume of data puts Adobe in the unique position to deliver highly accurate, census based online sales totals, pricing and product availability trends each holiday season.

From a tech perspective, one of the themes of the year has been AI and machine-learning, which Narayen says is a long-standing beat for Adobe:

Adobe’s success has been a result of our ability to predict the future. While others are jumping on the machine learning and AI bandwagon, these capabilities have been the foundation of our innovation for decades. Our engineers and scientists are squarely focused on harnessing the massive volume of content and data assets captured in our cloud solutions to tackle today’s complex experience challenges.

He points to Adobe Sensei, a new framework and set of intelligent services for dramatically improving the design and delivery of digital experiences:

Adobe Sensei’s services address the critical demands of our creative document and marketing customers from image matching across millions of images to understanding the meaning and sentiment of digital documents to finally targeting important audience segments. Dozens of these intelligent services have been deployed in our products to-date and we are increasingly significant our investment.

As for that lingering element of the revenue model that isn’t yet subscription-driven, Narayen is phelgmatic:

I do want to clarify that we think the cloud remains the long-term right offering for our customers…The fact that we have an on-premise solution, we continue to think it’s a competitive advantage. And globally, it’s hard to predict which option customers might prefer on a quarter-by-quarter basis. But I want to reiterate, it’s all, from our point of view, good revenue.

My take

A gamble that paid off. Adobe's well-placed to gain even further ground in 2017.