Software developer Adobe (ADBE) kicked off its 2013 fiscal year with solid first quarter results driven by strong Creative Cloud membership growth. Revenue declined 4% year-over-year to $1 billion, which was expected as the company transitions to a subscription model. Revenue marginally exceeded consensus estimates. Earnings per share fell nearly 40% to $0.35 on a non-GAAP basis, a few cents above consensus expectations. Like revenue, net income was expected to fall, but we are a bit disappointed by $0.17 per share in stock-based compensation.
More important for tech companies like Adobe, is free cash flow, which was strong at $261 million and essentially equal to the year ago period. We remain impressed by the company's ability to transition to its subscription cloud service, as subscribers increased 47% sequentially to 479 thousand paid members. Recurring revenue jumped 52% sequentially to $233 million. Consequently, deferred revenue jumped $80.5 million to $700 million. In the first quarter alone, Adobe rolled out several new updates for Creative Cloud, stating on the conference call:
"Product updates for Creative Cloud members during Q1 included: a new Photoshop release, which includes enhancements such as Smart Object support, new 3D features, improved CSS support, workflow improvements and support for the Apple Retina display; and innovations in our HTML tooling, which includes updates to our Edge products and services and updates to Muse that allow its users to create websites tailored for mobile and tablet experiences."
The updates highlight what we really like about the new cloud experience; easier real-time updates, support across multiple platforms, and (possibly) a stickier product. This is similar to the strategy we're seeing at Microsoft (MSFT), as it transitions Office to a subscriber-based model. Not only will it likely lead to higher overall revenue, but it could help prevent counterfeiting.
On the cost side, research & development jumped 18% year-over-year to $209 million, while marketing spending increased 11% year-over-year to $398 million. We didn't hear much of an explanation about, but we believe it was related to the firm developing new products on the mobile end, while spending more to create awareness around the Creative Cloud product suite.
Going forward, the firm anticipates fiscal year earnings per share of $1.45 on revenue of $4.1 billion, both relatively close to consensus estimates. We're impressed by the fantastic growth in the Creative Cloud, and we are excited about Adobe's new revenue model. Still, we aren't interested in shares at this time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.