Adobe's (NASDAQ:ADBE) Q1 Earnings Results: Revenue In Line With Expectations But Stock Drops
Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analysts' expectations in Q1 FY2024, with revenue up 11.3% year on year to $5.18 billion. On the other hand, the company expects next quarter's revenue to be around $5.28 billion, slightly below analysts' estimates. It made a non-GAAP profit of $4.48 per share, improving from its profit of $3.80 per share in the same quarter last year.
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Adobe (ADBE) Q1 FY2024 Highlights:
Revenue: $5.18 billion vs analyst estimates of $5.15 billion (small beat)
EPS (non-GAAP): $4.48 vs analyst estimates of $4.38 (2.2% beat)
Revenue Guidance for Q2 2024 is $5.28 billion at the midpoint, below analyst estimates of $5.31 billion
EPS (non-GAAP) Guidance for Q2 2024 is $4.38 at the midpoint, roughly in line with what analysts were expecting
Gross Margin (GAAP): 88.6%, in line with the same quarter last year
Free Cash Flow of $1.14 billion, down 26.6% from the previous quarter
Market Capitalization: $259.6 billion
“Adobe drove record Q1 revenue demonstrating strong momentum across Creative Cloud, Document Cloud and Experience Cloud,” said Shantanu Narayen, chair and CEO, Adobe.
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.
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.
Sales Growth
As you can see below, Adobe's revenue growth has been mediocre over the last three years, growing from $3.91 billion in Q1 2021 to $5.18 billion this quarter.
This quarter, Adobe's quarterly revenue was once again up 11.3% year on year. However, its growth did slow down a little compared to last quarter as the company increased revenue by $134 million in Q1 compared to $158 million in Q4 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Adobe is expecting revenue to grow 9.5% year on year to $5.28 billion, in line with the 9.8% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.6% over the next 12 months before the earnings results announcement.
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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 $1.14 billion in Q1, down 28.6% year on year.
Adobe has generated $6.49 billion in free cash flow over the last 12 months, an eye-popping 32.5% 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 Q1 Results
We enjoyed seeing Adobe exceed analysts' billings expectations this quarter. We were also glad its net new digital media ARR of $432 million beat estimates of $415 million, enabling the company to top Wall Street's revenue and EPS projections. On the other hand, its revenue guidance for next quarter missed analysts' expectations as its net new digital media ARR guidance of $440 million fell short of analysts' $468 million forecast.
During the earnings release, Adobe also announced a new $25 billion share repurchase program.
Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The market was likely disappointed by its digital media segment guidance, however, and the stock is down 9.1% after reporting, trading at $520 per share.
So should you invest in Adobe right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
