Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analysts' expectations in Q3 FY2023, with revenue up 10.3% year on year to $4.89 billion. The company also expects next quarter's revenue to be around $5 billion, slightly below analysts' estimates. Turning to EPS, Adobe made a non-GAAP profit of $4.09 per share, improving from its profit of $3.40 per share in the same quarter last year.
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Adobe (ADBE) Q3 FY2023 Highlights:
- Revenue: $4.89 billion vs analyst estimates of $4.87 billion (small beat)
- EPS (non-GAAP): $4.09 vs analyst estimates of $3.98 (2.81% beat)
- Revenue Guidance for Q4 2023 is $5 billion at the midpoint, roughly in line with what analysts were expecting
- EPS (non-GAAP) Guidance for Q4 2023 is $4.13 at the midpoint, above analyst estimates of $4.06
- Free Cash Flow of $1.78 billion, down 11.7% from the previous quarter
- Gross Margin (GAAP): 88.1%, in line with the same quarter last year
“We are unleashing a new era of AI-enhanced creativity around the world with innovations across our product portfolio,” said Shantanu Narayen, chair and CEO, Adobe. “The recent launches of Firefly, Express, Creative Cloud and GenStudio make Adobe magic available to millions of users.”
“Adobe delivered world-class margins and earnings in Q3, while making significant investments in our technology platforms,” said Dan Durn, executive vice president and CFO, Adobe. “Our innovation engine, global reach and strong operational rigor position us to capture the massive opportunities ahead.”
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, 3D tours or interactive movies.
As you can see below, Adobe's revenue growth has been unremarkable over the last two years, growing from $3.94 billion in Q3 FY2021 to $4.89 billion this quarter.
This quarter, Adobe's quarterly revenue was once again up 10.3% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $74 million in Q3 compared to $161 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Adobe is expecting revenue to grow 10.5% year on year to $5 billion, in line with the 10.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.9% over the next 12 months before the earnings results announcement.
Our recent pick has been a big winner, and the stock is up more than 2,000% since the IPO a decade ago. If you didn’t buy then, you have another chance today. The business is much less risky now than it was in the years after going public. The company is a clear market leader in a huge, growing $200 billion market. Its $7 billion of revenue only scratches the surface. Its products are mission critical. Virtually no customers ever left the company. See it here.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 88.1% in Q3.
That means that for every $1 in revenue the company had $0.88 left to spend on developing new products, sales and marketing, and general administrative overhead. Adobe's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Adobe is controlling its costs and not under pressure from its competitors to lower prices.
Key Takeaways from Adobe's Q3 Results
With a market capitalization of $252 billion, a $7.52 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Adobe has the resources needed to pursue a high-growth business strategy.
Total digital media ARR (annual recurring revenue) and reported revenue were roughly in line with expectations, but it was good to see Adobe beat analysts' EPS expectations this quarter on stronger profitability. We were also glad that next quarter's much-watched Digital Media net new ARR and earnings guidance exceeded Wall Street's estimates. On the other hand, free cash flow in the quarter missed and next quarter's revenue guidance was just in line. Overall, this quarter's results seemed solid with no surprises. The stock is flat after reporting and currently trades at $550.99 per share.
So should you invest in Adobe right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here.
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The author has no position in any of the stocks mentioned in this report.