Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 10% year on year to $4.52 billion. On the other hand, guidance for the full year missed analyst expectations with revenues guided to $19.2 billion at the midpoint, or 1.35% below analyst estimates. Adobe made a GAAP profit of $1.17 billion, down on its profit of $1.23 billion, in the same quarter last year.
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Adobe (ADBE) Q4 FY2022 Highlights:
- Revenue: $4.52 billion vs analyst estimates of $4.52 billion (small miss)
- EPS (non-GAAP): $3.60 vs analyst estimates of $3.50 (2.76% beat)
- Revenue guidance for Q1 2023 is $4.62 billion at the midpoint, below analyst estimates of $4.63 billion
- Management's revenue guidance for upcoming financial year 2023 is $19.2 billion at the midpoint, missing analyst estimates by 1.35% and predicting 9.05% growth (vs 11.5% in FY2022)
- Free cash flow of $2.23 billion, up 41.4% from previous quarter
- Gross Margin (GAAP): 87.4%, in line with same quarter last year
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.
Sales Growth
As you can see below, Adobe's revenue growth has been mediocre over the last two years, growing from quarterly revenue of $3.42 billion in Q4 FY2020, to $4.52 billion.
This quarter, Adobe's quarterly revenue was once again up 10% year on year. We can see that the company increased revenue by $92 million quarter on quarter. That's a solid improvement on the $47 million increase in Q3 2022, so shareholders should appreciate the acceleration of growth.
Guidance for the next quarter indicates Adobe is expecting revenue to grow 8.39% year on year to $4.62 billion, in line with the 9.14% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $19.2 billion at the midpoint, growing 9.05% compared to 11.5% increase in FY2022.
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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 87.4% in Q4.
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 Q4 Results
With a market capitalization of $153 billion, more than $6.09 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.
It was good to see Adobe outperform Wall St’s earnings expectations this quarter and produce strong free cash flow. On the other hand, Adobe's revenue guidance for the full year missed analysts' expectations. Overall, this quarter's results were in line. The company is up 5.1% on the results and currently trades at $345.5 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.