Adobe 2012 Annual Report Download - page 39

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technical, legal or other costs. For example, with our introduction of on-demand or cloud-based services and subscription-based
licensing models, such as Creative Cloud, we are entering markets that are not yet fully mature. Market acceptance of such services
is affected by a variety of factors, including security, reliability, performance, social/community engagement, customer concerns
with entrusting a third party to store and manage their data, public concerns regarding privacy and the enactment of laws or
regulations that restrict our ability to provide such services to customers in the U.S. or internationally.
Additionally, customer requirements for open standards or open-source products could impact adoption or use of some of
our products or services. To the extent we incorrectly predict customer requirements for such products or services, or if there is a
delay in market acceptance of such products or services, our business could be harmed.
From time to time we open source certain of our technology initiatives, provide broader open access to our technology,
license certain of our technology on a royalty-free basis, and release selected technology for industry standardization. These
changes may have negative revenue implications and make it easier for our competitors to produce products or services similar
to ours. If we are unable to respond to these competitive threats, our business could be harmed.
We are also devoting significant resources to the development of technologies and service offerings in markets where our
operating history is not extensive, including cloud-based computing and non-PC device markets. These new offerings and markets
require a considerable investment of technical, financial, compliance and sales resources, and a scalable organization. Many of
our competitors may have advantages over us due to their larger presence, larger developer network, deeper experience in the
cloud-based computing and non-PC device markets, and greater sales, consulting and marketing resources. If we are unable to
successfully establish these new offerings in light of the competitive environment, our results of operations could be negatively
impacted.
The increased emphasis on a cloud strategy may give rise to risks that could harm our business.
To accelerate the growth of our business, we launched our subscription-based Creative Cloud offering in fiscal 2012. As a
result, we expect to derive an increasing portion of our revenues in the future from subscriptions to our creative tools and cloud-
based offerings. This subscription model prices and delivers our products in a way that differs from the historical pricing and
delivery methods of our creative tools. These changes reflect a shift from perpetual license sales and distribution of our software
in favor of providing our customers the right to access certain of our software in a hosted environment or use downloaded software
for a specified subscription period. As our customers’ purchases trend away from perpetual licenses toward subscriptions, we are
experiencing and will continue to experience a deferral of revenues and cash received from customers. This cloud strategy requires
continued investment in product development and cloud operations, and may give rise to a number of risks, including the following:
• if new or current customers desire only perpetual licenses, our subscription sales may lag behind expectations;
• the increased emphasis on a cloud strategy may raise concerns among our installed perpetual license customer base;
• we may be unsuccessful in maintaining our target pricing, new seat adoption and projected renewal rates, or we may
select a target price that is not optimal and could negatively affect our sales or earnings;
• our revenues are expected to decline over the short term and may decline over the long term as a result of this strategy;
• our shift to a subscription licensing model may result in confusion among our customers, partners, resellers and investors;
• our relationships with existing partners that resell perpetual license products may be damaged; and
• we may incur costs at a higher than forecasted rate as we expand our cloud operations.
Revenue from our product and service offerings may be difficult to predict.
As previously discussed, we are devoting significant resources to the development of product and service offerings as well
as new distribution models where our operating history is not extensive. As our traditional perpetual license business shifts toward
our subscription licensing model, our perpetual license revenue may decline more quickly than anticipated. Under a subscription
model, downturns or upturns in sales may not be immediately reflected in our reported financial results. Subscription pricing
allows customers to use our products at a lower initial cost when compared to the sale of a perpetual license. Although the
subscription model is designed to increase the number of customers who purchase our products and services and create a recurring
revenue stream that is more predictable, it creates certain risks related to the timing of revenue recognition and reduced cash flows.
As a result, a portion of the subscription-based revenue we report each quarter results from the recognition of deferred
revenue relating to subscription agreements entered into during previous quarters. A decline in new or renewed subscriptions in
any period may not be immediately reflected in our reported financial results for that period, but may result in a decline in our
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