Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 9.22% year on year to $4.66 billion. The company expects that next quarter's revenue would be around $4.77 billion, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Adobe made a GAAP profit of $1.25 billion, down on its profit of $1.27 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 FY2023 Highlights:
- Revenue: $4.66 billion vs analyst estimates of $4.62 billion (small beat)
- EPS (non-GAAP): $3.80 vs analyst estimates of $3.68 (3.25% beat)
- Revenue guidance for Q2 2023 is $4.77 billion at the midpoint, roughly in line with what analysts were expecting
- Free cash flow of $1.59 billion, down 28.7% from previous quarter
- Gross Margin (GAAP): 87.8%, 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 $3.91 billion in Q1 FY2021, to $4.66 billion.
Adobe's quarterly revenue was only up 9.22% year on year, which might disappoint some shareholders. We can see that the company increased revenue by $130 million quarter on quarter re-accelerating up on $92 million in Q4 2022.
Guidance for the next quarter indicates Adobe is expecting revenue to grow 8.64% year on year to $4.77 billion, slowing down from the 14.4% 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 9.66% over the next twelve months.
In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.
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 87.8% in Q1.
That means that for every $1 in revenue the company had $0.88 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
Sporting a market capitalization of $153 billion, more than $5.65 billion in cash and with positive free cash flow over the last twelve months, we're confident that Adobe has the resources it needs to pursue a high growth business strategy.
It was good to see Adobe outperform Wall St’s revenue and earnings expectations this quarter. Digital new media ARR and digital media revenue, important topline metrics that market focuses on, were also ahead. These features stood out as positives. On the other hand, next quarter's revenue guidance was only in-line. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is up 3.56% on the results and currently trades at $346.12 per share.
Should you invest in Adobe 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.