No Surprises In Adobe's (NASDAQ:ADBE) Q4 Sales Numbers But Next Quarter Guidance Disappoints

Full Report / December 16, 2021
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Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analyst expectations in Q4 FY2021 quarter, with revenue up 20% year on year to $4.11 billion. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $4.23 billion at the midpoint, or 2.43% below analyst estimates. Adobe made a GAAP profit of $1.23 billion, down on its profit of $2.25 billion, in the same quarter last year.

Adobe (ADBE) Q4 FY2021 Highlights:

  • Revenue: $4.11 billion vs analyst estimates of $4.09 billion (small beat)
  • EPS (non-GAAP): $3.20 vs analyst estimates of $3.20
  • Revenue guidance for Q1 2022 is $4.23 billion at the midpoint, below analyst estimates of $4.34 billion
  • EPS (non-GAAP) guidance for Q1 2022 is $3.35 at the midpoint, below analyst estimates of $3.39
  • Management's revenue guidance for upcoming financial year 2022 is $17.9 billion at the midpoint, predicting 13.3% growth (vs 19% in FY2021)
  • Free cash flow of $1.96 billion, up 49% from previous quarter
  • Gross Margin (GAAP): 87.6%, 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.

As companies digitize business processes and internet users consume more digital content, the demand for digital experience tools is expected to remain strong.

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 strong over the last year, growing from quarterly revenue of $3.42 billion, to $4.11 billion.

Adobe Total Revenue

This quarter, Adobe's quarterly revenue was once again up a very solid 20% year on year. On top of that, revenue increased $175 million quarter on quarter, a very strong improvement on the $100 million increase in Q3 2021, which shows re-acceleration of growth, and is great to see.

Analysts covering the company are expecting the revenues to grow 14.7% over the next twelve months, although estimates are likely to change post earnings.


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 87.6% 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, 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 $292 billion, more than $5.79 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.

We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that Adobe's revenue guidance for the full year miss analyst's expectations. and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 7.54% on the results and currently trades at $583 per share as the market assesses the updates to the leadership team.

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. We think Adobe is a good business. However, its revenue growth has been a little slower, 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, and its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long term growth from Adobe given its price to sales ratio based on the next twelve months is 16.7x. There is 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.

The Wall St analysts covering the company had a one year price target of $716.6 per share right before these results, implying that they saw upside in buying Adobe even in the short term.

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