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Adobe (NASDAQ:ADBE) Reports Q4 In Line With Expectations But Stock Drops


Full Report / December 13, 2023

Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 11.6% year on year to $5.05 billion. On the other hand, the company expects next quarter's revenue to be around $5.13 billion, slightly below analysts' estimates. It made a non-GAAP profit of $4.27 per share, improving from its profit of $3.60 per share in the same quarter last year.

Key Takeaways from Adobe's Q4 Results

It was good to see Adobe top analysts' revenue, adjusted operating income, and EPS expectations this quarter. These beats were driven by outperformance in its digital media and digital experience segments. We were also glad next quarter's earnings guidance exceeded Wall Street's estimates. On the other hand, this quarter's free cash flow missed expectations, and its full-year FY24 revenue guidance was below estimates, with management providing a weaker outlook for digital media net new ARR and digital experience subscription revenue. Overall, this was a mixed quarter for Adobe thanks to its underwhelming guidance. The company is down 7.1% on the results and currently trades at $579.95 per share.

Adobe (ADBE) Q4 FY2023 Highlights:

  • Market Capitalization: $288.5 billion
  • Revenue: $5.05 billion vs analyst estimates of $5.02 billion (small beat)
  • EPS (non-GAAP): $4.27 vs analyst estimates of $4.14 (3.2% beat)
  • Revenue Guidance for Q1 2024 is $5.13 billion at the midpoint, below analyst estimates of $5.15 billion
  • EPS (non-GAAP) Guidance for Q1 2024 is $4.38 at the midpoint, above analyst estimates of $4.26
  • Management's revenue guidance for the upcoming financial year 2024 is $21.4 billion at the midpoint, missing analyst estimates by 1.5% and implying 10.3% growth (vs 10.2% in FY2023)
  • Free Cash Flow of $1.55 billion, down 13% from the previous quarter
  • Gross Margin (GAAP): 87.4%, in line with the 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.

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 two years, growing from $4.11 billion in Q4 FY2021 to $5.05 billion this quarter.

Adobe Total Revenue

This quarter, Adobe's quarterly revenue was once again up 11.6% year on year. We can see that Adobe's revenue increased by $158 million quarter on quarter, which is a solid improvement from the $74 million increase in Q3 2023. Shareholders should applaud the acceleration of growth.

Next quarter, Adobe is guiding for a 9.2% year-on-year revenue decline to $5.13 billion, a further deceleration from the 9.2% year-on-year decrease it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $21.4 billion at the midpoint, growing 10.3% year on year compared to the 10.2% increase in FY2023.

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 87.4% in Q4.

Adobe Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.87 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 $1.55 billion in Q4, down 30.6% year on year.

Adobe Free Cash Flow

Adobe has generated $6.94 billion in free cash flow over the last 12 months, an eye-popping 35.8% 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.

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 good business. Although its revenue growth has been very weak over the last two years with analysts expecting growth to slow from here, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Adobe's price-to-sales ratio based on the next 12 months of 13.2x indicates that the market is certainly optimistic about its growth prospects. There's definitely a lot of things to like about Adobe and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

Wall Street analysts covering the company had a one-year price target of $612.7 per share right before these results, implying that they saw upside in buying Adobe even in the short term.

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