Adobe Is Winning the Shift to the Cloud

RJ is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Technology-services provider Adobe (NASDAQ: ADBE) reported strong fourth-quarter results. Revenue for Adobe’s fourth quarter was roughly flat year-over-year at $1.15 billion, but slightly above consensus expectations. Earnings per share, excluding certain items, fell 9% year-over-year to $0.61, also better than consensus estimates.

Unlike other companies that are being damaged by lower-cost cloud competition, Adobe is transforming its business for the new competitive landscape. Creative Cloud, Adobe’s cloud product suite, increased its growth rate to 10,000 new subscribers per week from its third quarter run-rate of 8,000 new subscribers per week. The company added a total of 132,000 net new subscribers during the quarter, and this figure doesn’t even include the impact of enterprise term license agreements. Total subscription revenue surged 51% year-over-year to $194 million and should continue to grow at a strong clip going forward.

We also like the potential for increased customer stickiness from the new product suite. We think the firm’s commitment to providing ongoing support and updates for the Creative Cloud product could create a more attractive offering compared to regular products. This new product could also decrease the negative impact from counterfeiting. Adobe’s Digital Marketing Cloud revenue grew at a hefty pace of 32%, up to $220 million during the fourth quarter.

Adobe's cloud offerings can only improve as we see internet speeds accelerate throughout the United States. Google Fiber (NASDAQ: GOOG) is a project that could be a game-changer in the internet realm. The test city is Kansas City, where the company rolled out its internet fiber optics network.  Speeds top 1GB per second (or 100x faster than the average American's internet connection), and the company offers tiered pricing up to $120 per month. Initial feedback looks positive, and we think Google will slowly build out networks nationwide if demand surges in Kansas City.

Going forward, the company provided revenue guidance of $950 million to $1 billion for the first quarter of 2013, slightly below the consensus estimate, but not materially negative, in our view. Non-GAAP earnings are also expected to be much lower than consensus estimates, with the company forecasting earnings of $0.26-$0.32 per share during the first quarter. Yet, it’s important to note that the declining earnings are a function of a change in accounting rather than a material change in the business potential. For fiscal year 2013, the firm expects non-GAAP earnings of $1.40 per share, decreased by $1.20 per share from the impact of the accounting change. On a comparable basis, this implies earnings growth of 11%, which is solid given the current tech backdrop.

We expect to see a simliar shift in Microsoft (NASDAQ: MSFT) over the long-term with the advent of Open Office and the introduction of the Office suite to Apple's iOS operating system. Microsoft will also sell Office 2013 exclusively as a subscription service. However, open source competitors like Google Docs could prevent an Office cloud subscription model from dominating the multiple platform landscape.

Overall, we like Adobe’s move to the cloud subscription model, and we think the company’s 2013 guidance was decent. Still, we believe shares are fairly valued at current levels, and the firm scores just a 3 on the Valuentum Buying Index (our stock-selection methodology) at the time of this writing, suggesting the company isn’t attractive enough to include in the portfolio of our Best Ideas Newsletter at this time.

Valuentum holds shares of Microsoft and Google in its actively managed portfolios. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Adobe Systems, Google, and Microsoft. 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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