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Adobe (ADBE) Research Report: Q2 CY2024 Update


Full Report / June 13, 2024

Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analysts' expectations in Q2 CY2024, with revenue up 10.2% year on year to $5.31 billion. On the other hand, the company expects next quarter's revenue to be around $5.36 billion, slightly below analysts' estimates. It made a non-GAAP profit of $4.48 per share, improving from its profit of $2.82 per share in the same quarter last year.

Adobe (ADBE) Q2 CY2024 Highlights:

  • Revenue: $5.31 billion vs analyst estimates of $5.29 billion (small beat)
  • EPS (non-GAAP): $4.48 vs analyst estimates of $4.39 (2% beat)
  • Revenue Guidance for Q3 CY2024 is $5.36 billion at the midpoint, below analyst estimates of $5.40 billion
  • EPS (non-GAAP) Guidance for Q3 CY2024 is $4.53 at the midpoint, above analyst estimates of $4.47
  • Gross Margin (GAAP): 88.7%, in line with the same quarter last year
  • Free Cash Flow of $1.90 billion, up 67% from the previous quarter
  • Net New Digital Media ARR: $487 million, above analyst estimates of $434 million
  • Billings: $4.89 billion at quarter end, up 3.5% year on year
  • Market Capitalization: $206 billion

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.

Design Software

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).

Sales Growth

As you can see below, Adobe's revenue growth has been unremarkable over the last three years, growing from $3.84 billion in Q2 2021 to $5.31 billion this quarter.

Adobe Total Revenue

This quarter, Adobe's quarterly revenue was once again up 10.2% year on year. Looking at the last two quarters, we can see that Adobe's revenue increased by $127 million in Q2 while it grew $134 million in Q1 CY2024. This steady quarter-on-quarter growth shows that the company can more or less maintain its growth trajectory.

Next quarter's guidance suggests that Adobe is expecting revenue to grow 9.5% year on year to $5.36 billion, in line with the 10.3% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.7% over the next 12 months before the earnings results announcement.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 88.7% in Q2.

Adobe Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.89 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.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Adobe's free cash flow came in at $1.90 billion in Q2, down 5.9% year on year.

Adobe Free Cash Flow

Adobe has generated $6.37 billion in free cash flow over the last 12 months, an eye-popping 31.2% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Adobe's Q2 Results

It was good to see Adobe beat analysts' revenue, RPO, and EPS expectations this quarter. These beats were driven by massive outperformance in its net new Digital Media ARR, which clocked in at $487 million (vs estimates of $434 million). Thanks to the strong results, Adobe upgraded its full-year net new Digital Media ARR and EPS guidance, sending the stock price higher. We note its revenue guidance for next quarter missed Wall Street's estimates, but that didn't matter too much because the market cares most about its digital media segment. Overall, this was a great quarter. The stock is up 12.6% after reporting and currently trades at $516.49 per share.

Is Now The Time?

When considering an investment in Adobe, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We think Adobe is a solid business. Although its revenue growth has been uninspiring over the last three years with analysts expecting growth to slow from here, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Given its price-to-sales ratio of 9.1x based on the next 12 months, the market is certainly expecting long-term growth from Adobe. There are definitely things to like about Adobe, and there's no doubt it's a bit of a market darling, at least for some. But when comparing the company against the broader tech landscape, it seems there's a lot of good news already priced in.

Wall Street analysts covering the company had a one-year price target of $600.36 right before these results (compared to the current share price of $516.49).

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