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Adobe (NASDAQ:ADBE) Reports Q3 In Line With Expectations, Next Quarter Growth Looks Optimistic


Full Report / September 21, 2021
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Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analyst expectations in Q3 FY2021 quarter, with revenue up 22% year on year to $3.93 billion. Adobe made a GAAP profit of $1.21 billion, improving on its profit of $955 million, in the same quarter last year.

Adobe (ADBE) Q3 FY2021 Highlights:

  • Revenue: $3.93 billion vs analyst estimates of $3.89 billion (0.99% beat)
  • EPS (non-GAAP): $3.11 vs analyst estimates of $3.02 (3.1% beat)
  • Revenue guidance for Q4 2021 is $4.07 billion at the midpoint, above analyst estimates of $4.04 billion
  • EPS (non-GAAP) guidance for Q4 2021 is $3.18 at the midpoint, above analyst estimates of $3.09
  • Free cash flow of $1.32 billion, down 30.2% from previous quarter
  • Gross Margin (GAAP): 88.1%, in line with previous quarter

One of the most well-known Silicon Valley software companies around, Adobe (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 $3.22 billion, to $3.93 billion.

Adobe Total Revenue

This quarter, Adobe's quarterly revenue was once again up a very solid 22% year on year. On top of that, revenue increased $100 million quarter on quarter, a strong improvement on the $70 million decrease in Q2 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 14.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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, licences, technical support and other necessary running expenses was at 88.1% in Q3.

Adobe Gross Margin (GAAP)

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 a pressure from competition to lower prices.

Key Takeaways from Adobe's Q3 Results

Sporting a market capitalization of $305 billion, more than $6.16 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.

We enjoyed the positive outlook Adobe provided for the next quarter’s earnings. And we were also excited to see it that it outperformed analysts' earnings expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is down -3.33% on the results and currently trades at $624.4 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. There are a number of reasons why we think Adobe is a great business. 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 18.0. Looking at the tech landscape today, Adobe's qualities stand out, and it is not hard for us to argue that the multiple is well deserved. We like the stock at this price.

The Wall St analysts covering the company had a one year price target of $659 per share right before these results, implying that they saw upside in buying Adobe even in the short term.

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