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Adobe (NASDAQ:ADBE) Reports Q1 Above Expectations But Quarterly Guidance Underwhelms


Adam Hejl /
2022/03/22 4:14 pm EDT
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Creative software maker Adobe (NASDAQ:ADBE) reported results ahead of analyst expectations in Q1 FY2022 quarter, with revenue up 9.14% year on year to $4.26 billion. However, guidance for the next quarter was less impressive, coming in at $4.34 billion at the midpoint, being 1.46% below analyst estimates. Adobe made a GAAP profit of $1.266 billion, improving on its profit of $1.261 billion, in the same quarter last year.

Is now the time to buy Adobe? Access our full analysis of the earnings results here, it's free.

Adobe (ADBE) Q1 FY2022 Highlights:

  • Revenue: $4.26 billion vs analyst estimates of $4.23 billion (small beat)
  • EPS (non-GAAP): $3.37 vs analyst estimates of $3.34 (small beat)
  • Revenue guidance for Q2 2022 is $4.34 billion at the midpoint, below analyst estimates of $4.4 billion
  • Free cash flow of $1.66 billion, down 15.1% from previous quarter
  • Gross Margin (GAAP): 87.9%, in line with same quarter last year

“Adobe achieved record Q1 revenue as Creative Cloud, Document Cloud and Experience Cloud continue to be pivotal in driving the digital economy,” said Shantanu Narayen, chairman and CEO, Adobe.

One of the most well-known Silicon Valley software companies around, Adobe (NASDAQ:ADBE) is a leading provider of software as service in the digital design and document management space.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games or interactive movies.

Sales Growth

As you can see below, Adobe's revenue growth has been solid over the last year, growing from quarterly revenue of $3.9 billion, to $4.26 billion.

Adobe Total Revenue

Adobe's quarterly revenue was only up 9.14% year on year, which would likely disappoint many shareholders. But the growth did slow down a little compared to last quarter, as Adobe increased revenue by $152 million in Q1, compared to $175 million revenue add in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Adobe is expecting revenue to grow 13.1% year on year to $4.34 billion, slowing down from the 22.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 15.3% over the next twelve months.

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Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Adobe's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 87.9% in Q1.

Adobe Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.87 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Adobe to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Adobe is doing a good job controlling costs and is not under pressure from competition to lower prices.

Key Takeaways from Adobe's Q1 Results

With a market capitalization of $213 billion, more than $4.7 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite weak. Overall, this quarter's results could have been better. The company is down 4.45% on the results and currently trades at $446 per share.

Adobe may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.