Objective Corporation Limited (ASX:OCL) today provided a trading update on its unaudited financial results for the first half of the 2019 financial year. Revenue is expected to be down 12.3% on the previous corresponding period.
One contributing factor to the decline was the contribution of a significant project in the first half of 2018 that wasn't present in 1H19 results.
But Objective is also undergoing a fundamental shift in its revenue model.
Shift to a subscription model
Objective also fairly pointed out its ongoing transition to a subscription revenue model as a headwind to its top line. Recurring revenue now represents of 71% of revenue, as opposed to 57% a year ago.
It is common for revenue to take a short-term hit when a business switches to a subscription model as large upfront payments are replaced with smaller, regular payments.
However, subscription models can boost customer lifetime value (LTV) and may be the better choice in the long-run, depending on the type of business.
So what are the benefits of a subscription revenue model? First and foremost, it's better aligned with customer preferences and avoids large up-front costs which may be prohibitive to some customers. Being able to purchase software and solutions flexibly is a significant value driver.
Additionally, a subscription model provides far more predictable revenues. This is attractive for all stakeholders, as cash flows are less risky.
There is a huge shift towards these subscription models in the software industry, and businesses that don't adapt are likely to be left behind. Although it may have contributed to Objective Corporation's decline in revenue this half-year, it's important not to ignore the long-term view.
The Adobe example
There are plenty of examples of successful implementation of subscription models, but the classic case is that of Adobe Inc . Think Photoshop, Acrobat, Illustrator, etc.
Back in 2013, Adobe was faced with lumpy revenues that spiked every 18 months or so upon release of new product versions. Between launches, revenues were largely unpredictable. In a move that was rather ahead of its time, Adobe made the leap to a subscription model.
The year Adobe made the switch, revenue fell by 8%. The following year was flat.
But in the long-term, the transition was a sweeping success. Revenue is up 120% in five years. Adobe has benefited enormously from not only a more stable revenue stream, but from a whole plethora of new customers who were previously turned off by a high upfront cost.
This isn't to say that every business will benefit from a subscription model like Adobe has, but it's important to be aware of the motivations behind such a move.
