Creative software maker Adobe was supposed to clear $1 billion in sales in its latest quarter. Instead, it missed by nearly 8 percent. The culprit: the transition to cloud sales and recurring revenue model.
Adobe has gotten on the cloud bandwagon in a big way, pushing its channel partners and customers to abandon perpetual licenses and embrace subscription-based pricing for its applications. Through the Creative Cloud program, Adobe and its partners are selling software on a recurring revenue model, matching the prevailing trend in the software market.
The good news for Adobe: More than 1 million users, a 47 percent quarterly jump, have signed up for Creative Cloud and its other Web-based services. The increase shows the appeal of subscription model to users who can access applications at a lower costs.
While a sales miss is often seen as a problem, analysts say the increase in subscribers and decrease in revenue and profit is an indication the transition to the cloud model is going well. The notion is cloud transitions will almost always result in lower revenues as subscriptions take time to accrete value and cash for the supplier.
The challenge facing all companies embracing the cloud is that sales are not one to one. A dollar spent on a conventional perpetual software license isn’t replaced by a whole dollar when an app moves to the cloud. The nature of fractional subscription payments means the full realization of revenue only happens over time and through volume sales.
The time and accretion factor is the reason analysts are bullish on Adobe’s transition. More subscribers means revenues will continue to compile and, eventually, exceed previous quarterly revenue. Conversely, hard delivery and support costs will decrease, which will help improve profitability.
This cycle is being played out across the channel in managed and cloud services. The magic of the subscription or recurring revenue model is predictable and ever increasing provided more customers are continually added, as seen in the Adobe earnings.
Unfortunately for many smaller solution providers in the channel, time is luxury and in short supply. The good news, as Adobe shows, is there are rewards ahead for those that can navigate the cash-flow gap of this transition cycle.