Creative Cloud is the key to Adobe’s business model transition

Adobe (ADBE) offers its subscribers access to Adobe software like Photoshop and Illustrator for ~$50 per month through Creative Cloud (or CC). The subscription includes the software, selected services for file sharing and publishing, and access to Apple (AAPL) iOS and Google (GOOG) (GOOGL) Android apps, including Lightroom Mobile.

Creative Cloud has been at the center of Adobe’s business transition from traditional software licensing to subscription business. Although this transition has alienated some customers that preferred software to keep working forever once licensed, the expanding subscriber base shows the company has been able to steadily add subscribers.

Why Creative Cloud is the key to Adobe’s success

Subscription-based business provides stability, as it means revenue generation is predictable instead of being tied to occasional software updates. Also, it lets Adobe deliver software and service updates continuously instead of holding them back for major upgrades.

Adobe’s growth not only benefits Adobe investors but also ETFs like the Powershares QQQ Trust ETF (QQQ) and the Technology Select Sector SPDR Fund (XLK), which have high exposure to Adobe.

CC will play a key role in driving Adobe’s revenue growth

Creative Cloud, a flagship suite of products, experiences rapid updates and developments. As the chart above shows, these updates and developments have been very well received, as we can see by continuous growth in cloud subscriptions.

In 4Q14, the company added 644,000 new subscribers. However, Adobe didn’t mention how many of these subscribers opted for annual contracts. In 3Q14, ~96% of the Creative Cloud subscribers signed up for annual contracts. The growth in licensing is due to enterprise term licensing agreements that usually have tenure of three years, which implies that CC will continue to drive revenue in the near future.

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