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.
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.
Adobe was originally founded in 1982 and famously Steve Jobs soon after attempted to acquire it for $5 million. The founders refused and instead negotiated an investment and a five year licencing deal with Apple (AAPL), which made them the first company in the history of Silicon Value to turn profit in its first year and started their impressive journey.
The company is famous for inventing the PDF format and its photo-editing and publishing software products like Photoshop or Illustrator which have become household names and leading industry standards. Over time Adobe leveraged the key role their products played in the lives of their customers and built a cloud ecosystem of products and services around them.
Today the company has a very strong portfolio of products, through its Creative Cloud offering it provides tools for digital design and publishing, such as Adobe Premiere that is used for professional movie production. The Document Cloud enables customers to create electronic documents and manage their lifecycle, offering the ability to sign legally binding documents electronically through Adobe Sign. Lately Adobe has been expanding into offering software for hosting content online and providing customers with the ability to monetize their readers via advertising.
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.
Competitors addressing the digital design and document management segments include Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Oracle (NYSE:ORCL), salesforce.com (NYSE:CRM), SAP (NYSE:SAP), and DocuSign (NASDAQ:DOCU).
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.
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.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Adobe's free cash flow came in at $1.59 billion in Q1, roughly the same as last year.
Adobe has generated $7.32 billion in free cash flow over the last twelve months, an impressive 40.7% of revenues. This robust FCF margin is a result of Adobe asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
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.
Is Now The Time?
When considering Adobe, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Adobe is not a bad business. However, its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives.
The market is certainly expecting long term growth from Adobe given its price to sales ratio based on the next twelve months is 7.8x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Adobe doesn't trade at a completely unreasonable price point.
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