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Adobe Shines as Cloud Model Delivers

Tickers in this article: ADBE

NEW YORK (TheStreet) -- Adobe Systems was the biggest gaining stock in the S&P 500 Wednesday as the company demonstrated that its strategy of shifting to the cloud with a subscription pricing model is working better than planned.

Shares were surging more than 6% to $51.22 after the company reported a sequential increase of 331,000 in paid Creative Cloud subscriptions to more than 1 million during its fiscal third-quarter, boosting subscription revenue by 73% to $299.4 million from a year ago.

CEO Shantanu Narayen said that the company's transition to the Creative Cloud subscription model from the traditional perpetual licensing business model was happening faster than expected. "Our customers are overwhelmingly choosing subscriptions," he said in a statement. The company expects Creative Cloud subscriptions to hit 4 million by the end of 2015. The Creative Cloud was launched in May 2012.

The new cloud-based subscription model has been luring in a flood of price-sensitive customers who might have otherwise opted for cheaper or free alternatives to Adobe's software. The maker of creative-suite products such as Photoshop and InDesign is now offering a monthly pricing model that allows new users to access the Creative Cloud for as low as $50 a month compared with the previous, more prohibitive four-digit pricing for a perpetual license. The fee is even lower for existing users and students.

Norman Young, a technology analyst at Morningstar, said that while some customers might balk at paying monthly fees for software they'd originally purchased years ago, Adobe's subscription pricing model will improve its competitive position.

"The model offers Adobe a more predictable recurring revenue stream, an increase in the addressable market, increased customer stickiness, and more manageable upgrade cycles," Young said in a report.

Investors were shrugging off the company's lower-than-expected fiscal-third quarter earnings per share and total revenue figures.

-- Written by Andrea Tse in New York

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