Adobe Buys KKR-Backed Fotolia for $800M in Cash, as Creative Cloud Subscriptions Fuel Revenue
Adobe Systems Inc. reported fiscal fourth- quarter revenue that topped estimates as the software maker pushes deeper into delivering programs via the Web to expand its business, an effort bolstered by a deal to buy stock-photography provider Fotolia LLC for about $800 million.
Sales in the period ended Nov. 28 were $1.07 billion, and profit before certain items was 36 cents a share, Adobe said in a Dec. 11 statement. Analysts on average projected revenue of $1.06 billion and profit of 30 cents.
Customers for Adobe’s Creative Cloud, an online product for editing photos and creating illustrations, grew by 644,000 accounts, exceeding the average projection by three analysts for 534,000, according to data compiled by Bloomberg. The all-cash Fotolia deal is aimed at enhancing Creative Cloud and is Adobe’s third-biggest acquisition in the past decade.
“This is going to make Adobe’s already strong position in digital publishing even stronger,” said Josh Olson, an analyst at Edward Jones & Co., who has a hold rating on the stock. “Digital-photo content is only going to improve any competitive advantage they already have in this space.”
The shares of Adobe jumped as much as 8.1 percent in extended trading. The stock declined less than 1 percent to $69.74 at the close in New York, leaving it up 16 percent this year, compared with a 10 percent gain in the Standard & Poor’s 500 Index.
Fourth-quarter net income was $73.3 million, or 14 cents a share, compared with $65.3 million, or 13 cents, a year earlier.
Adobe has been shifting its business away from one-time purchases of software to subscriptions for cloud-based tools. Chief Executive Officer Shantanu Narayen is betting that the new business model will deliver stable growth, with sales on track to climb this year after a decline in 2013 during the transition.
“I think from a financial perspective, we’re now through the transition,” Mark Garrett, Adobe’s chief financial officer, said in an interview. “From moving the customer base over and getting more and more subscribers signed up, it’s early innings.”
Adobe was one of the first established technology companies to redesign its entire business to sell products via the Internet. After three years, the transition appears to have worked, and other software makers such as Oracle Corp. and Microsoft Corp. have since followed. Garrett said 66 percent of Adobe’s revenue is now recurring.
“When I joined the company in 2007 we had 5 percent recurring revenue,” the CFO said.
Adobe forecasts 5.9 million subscribers for Creative Cloud by the end of next year, up from 3.5 million at the end of the fourth quarter, Garrett said.
For the first fiscal quarter, which ends in February, sales will be $1.05 billion to $1.1 billion, and profit will be 34 cents to 40 cents a share, Adobe said. Analysts’ average estimates were for revenue of $1.1 billion and profit of 39 cents a share, according to data compiled by Bloomberg.
For fiscal 2015, Adobe issued a forecast for profit, excluding items, of $2.05 a share, compared with analysts’ average estimates for $2.07.
Fotolia, owned by Kohlberg Kravis Roberts & Co., TA Associates and management, was founded in 2004 and has offices in New York, Paris, and Berlin. The New York-based stock-photo service has websites in 14 languages and operates in 23 countries. KKR will make about two times the $150 million it invested for 50 percent of Fotolia in 2012, a person with knowledge of the matter said. TA Associates Management invested in the company in 2009.
Kristi Huller, a spokeswoman for KKR, declined to comment on the firm’s profit.
Adobe will knit Fotolia into Creative Cloud, and customers will be able to view and purchase more than 34 million images and videos, the company said. The deal is expected to close in the second half of fiscal 2015, Adobe said.
Fotolia will put Adobe in competition with stock- photography providers such as Corbis Corp., Getty Images Inc. and Shutterstock Inc., Garrett said. The acquisition will have no meaningful effect on Adobe’s adjusted earnings in 2015 and will be accretive in the following year, CEO Narayan said on a conference call.
The acquisition, Adobe’s third-biggest after the purchase of Omniture Inc. in 2009 for $1.55 billion and Macromedia Inc. for $3.15 billion in 2005, should spur growth, said Al Hilwa, an analyst at IDC.
“I see the Fotolia acquisition in terms of the ability to add services to the existing base or even attract other photography audiences,” Hilwa said.
--With assistance from Devin Banerjee in New York.