On Tuesday, Adobe posted its third quarter financials for the fiscal year 2016, revealing record quarterly revenue and strong subscription growth, proving that its gamble to move to a cloud-based subscription model has paid off. Highlights for the quarter ending Sept. 2, 2016 include:

• Quarterly revenue was $1.46 billion, representing 20 percent growth year-over-year.
• Quarterly subscription revenue was $1.17 billion, representing 40.9 percent growth year over year.
• Subscription revenue for the quarter represents 79.8 percent of total revenue. The remainder is comprised of product sales, services and support.
• Strong Creative Cloud and Document Cloud adoption drove Digital Media Annualized Recurring Revenue (ARR) to $3.70 billion, a $285 million increase over Q2.
• Adobe Marketing Cloud had record revenue of $404 million.
• Digital Media revenue was a record $990 million.
• Creative revenue grew 39 percent, year-over-year, to $803 million, as the company helped users migrate from Creative Suite to Creative Cloud.
• Operating income grew 50 percent and net income grew 55 percent, year-over-year, on a GAAP basis.
• Diluted earnings per share, on a GAAP basis, were $0.54.
• Adobe repurchased approximately 3.5 million shares during the quarter, returning $344 million in cash to stockholders.

“These strong results are a reflection of our market leadership and momentum we have with Creative Cloud, Adobe Document Cloud and Adobe Marketing Cloud,” said Adobe CEO Shantanu Narayen in an earnings call. “We are enabling the world’s leading brands to develop design and data-driven digital experiences for their customers across every channel. Our unique value proposition continues to distance Adobe from our competitors.”

In operational highlights, in August, Adobe Marketing Cloud played a key role in the digital broadcast of the Rio Olympic Games. NBC Sports used Adobe Primetime to power the digital delivery of the games. Individual Acrobat subscription units exceeded perpetual units for the first time in Q3.

Another key accomplishment is Adobe’s ability to address software piracy. This has been helped by offering Creative Cloud products as subscription based products.

“If you look at the numbers right now of where we are with Creative Cloud, it’s clear that we have seen significant acceleration. Without a doubt, a large part of that acceleration is people who want Creative Cloud and are no longer pirating Creative products, but are actually as a result of the low price and the value that we are delivering using the entire subscription based offerings,” said Narayan. “So what we have done from a technical perspective already, we have actually ensured that people who download the trials, that once the trial expires, they don’t have access to the products.”

Financial Outlook: In the fourth quarter, Adobe estimates revenue between $1.55 billion and $1.6 billion. The company expects to add slightly more than $300 million of net new Digital Media ARR during Q4, helping the company to reach its target of $4 billion of ARR by year end. They anticipate 30 percent year-over-year growth in the Marketing Cloud, and a share count between 503 million and 505 million shares. Adobe anticipates GAAP earnings per share of $0.60 to $0.66 per share.

“Our year-to-date results and targets for Q4 keep us on track to meet or exceed all of the financial targets we provided at the outset of the year,” said Mark Garrett, executive vice president and CFO. “We look forward to finishing the year strong…”

Insider Take:

In late 2012, Adobe moved its flagship product – Creative Suite – from a perpetual license to a subscription only model. At the time, this was a huge change and a big risk for Adobe, but it is paying off. Not only is customer adoption and migration solid, but the company is solving the software piracy issue by offering affordable pricing via subscription. With such significant growth in ARR, Adobe has a bright future ahead, as its migration continues and its products evolve. This is an exciting example of how the subscription economy can benefit companies as well as their customers. Everybody wins.