Abandoning the Creative Suite: Will It Have an Impact on Adobe’s Stock Price?

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Adobe Systems (NASDAQ: ADBE) abandoned its Creative Suite perpetually-licensed software entirely, replacing it with the all new Creative Cloud. This represents a major shift in its strategy from the packaged-software business model to a software-as-a-service (SaaS) model. The Creative Suite had been Adobe’s flagship product and a primary revenue generating stream during past several years.

The Creative Suite was offered as packaged software, which included one-time license fee, where as Creative Cloud is a subscription service that requires users to pay a monthly fee in order to continue using it.

During the past few quarters, Adobe has lost its leading web designers and developer. In addition, the company is struggling to maintain its position in the market due to increased competition. Adobe's lack of innovation has resulted in several users embracing open-source software alternatives. I believe that Adobe's adoption of the Creative Cloud is a desperate attempt to report profitability and maintain some level of trust with its shareholders. Going forward, its success or failure will heavily depend on whether the product adds value and offers something to new and radical to its users.

According to the valuation offered by Trefis, the Creative Suite contributed around 51% to Adobe’s total revenues. It also estimated that the Creative Suite held a 55% value in Adobe’s overall stock price.

So why the new Creative Cloud?

The design standard version of the Creative Suite was priced at around $1648 for a single user who agreed to use the service for three years. According to estimates made by Trefis, the primary offerings of the Creative Cloud are expected to cost a single user around $1,800 for three years. For the extra $152, users are expected to gain access to additional applications and various online services such as a 20 GB online storage.

Adobe expects this transition to earn recurring revenues of around $750 million a year. Once the popularity of the new Creative Cloud grows and the adoption rate increases, the company expects its revenues to increase even further.

Can Creative Cloud bolster Adobe’s stock price?

Adobe’s revenues and earnings have historically relied on new version releases of its products. Its revenue in particular grew every two to three years right after new Creative Suite upgrades were launched. Adobe’s revenues consistently lost momentum as the Creative Suite got older, however.

With the new subscription fee structure, Adobe expects to maintain consistency in its revenues over the software’s life. Although, Adobe must address one of the biggest challenges for any software application provider: software piracy. Despite the cloud-based nature of the service, Creative Suite's applications were available for download on multiple file sharing sites right after its launch.

According to research published by BSA, the commercial value of software theft exploded to $63 billion during 2011. This problem has further escalated since then, predominantly due to rapidly growing piracy in developing markets such as India.

Adobe’s Creative Cloud requires users to renew their licenses every month in order to continue availing its services, which is expected to reduce the impact of piracy on Adobe’s revenues. I therefore expect Adobe’s revenue generation in the future to be relatively consistent, especially in the developing markets where piracy had plagued its revenues for years.

Competitive landscape of the SaaS industry

Symantec (NASDAQ: SYMC)) is a great target for investors seeking to diversify by investing in a SaaS company. The company generates the highest percentage of its revenues (around 36%) through its storage services, followed by Norton Antivirus Software at around 30%.

Its security software for business contributes approximately 21% to the overall revenues, while the remaining revenues are split between online security certificates, authentication services and consulting & software as a service.

It is a rare tech company that pays-out dividends to its shareholders. The company reported total revenues and earnings before interest, taxes, depreciation and amortization of $6.8 billion, up from $2.9 billion during the previous fiscal year. As per the valuation offered by Trefis, its storage services hold maximum value at around 42.4% in its present stock price. With a long-term horizon, Symantec is a great investment target.

Red Hat (NYSE: RHT), which celebrated its twenty years last month, is an open-source software company. In last month's quarterly report, the company's revenues reported a 15% increase while SaaS subscriptions grew 16%. The total revenue for the quarter was $363 million, while revenues from subscriptions amounted to $316 million.

The company has increased its R&D spending heavily by investing in the open hybrid cloud. This was done in order to deliver new and radical technologies such as the Red Hat Enterprise Linux Open Stack Platform and Red Hat's Open Shift platform as a service.

The company seems primed for robust growth in the future, which is evident from the consistent increase reported in its net income during the last few quarters.

So what should investors do?

Adobe has received immense criticism for its Creative Cloud since its launch. The company did accept the criticism and considered making necessary modifications in order to offer stronger competition against open source solutions.

It is essential for Adobe's management to realize that if the company expects to consistently report growth in the future, it needs to add value through new offerings to all types of users. The growth of free and open-source solutions remains a serious concern for Adobe.

The subscription service could hurt Adobe’s financial growth in the near term, as it generates smaller revenues on a monthly basis instead of a huge sum right at the start of a product launch.

 Adobe's stock price will primarily depend on the success or failure of its Creative Cloud in the long run. Adobe's Creative Cloud will hold approximately 50% value in its stock price. If acceptance of the Creative Cloud does not increase with time, I see Adobe's stock price taking a huge plunge.

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Kiran Gulati has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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