Creative software maker Adobe (NASDAQ:ADBE) reported results in line with analysts’ expectations in Q3 CY2024, with revenue growing 10.6% year over year to $5.41 billion. On the other hand, its revenue forecast for the next quarter was less impressive, missing analysts’ estimates by 1.4%. It posted non-GAAP earnings of $4.65 per share, up from earnings of $4.09 per share in the year-ago quarter.
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Adobe (ADBE) Q3 CY2024 Highlights:
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Gain: $5.41 billion vs. analyst estimates of $5.37 billion (slight beat)
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Net New Digital Media ARR: $504 million vs. analyst estimates of $462 million (9.1% better)
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Adjusted operating result: $2.52 billion vs. analyst estimates of $2.46 billion (2.3% better)
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Earnings per share (non-GAAP): $4.65 vs. analyst estimates of $4.54 (2.5% better)
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Revenue Forecast for Q4 CY2024 is $5.53 billion at the midpoint, below analyst estimates of $5.60 billion
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Net New Digital Media ARR Guidance for Q4 CY2024 is $550 million at the midpoint, below analyst estimates of $561 million
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EPS (non-GAAP) forecast for Q4 CY2024 is $4.65 at the midpoint, roughly in line with what analysts expected
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Gross margin (GAAP): 89.8%, up from 88.1% in the same quarter last year
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Free cash flow margin: 36.3%, comparable to the previous quarter
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Invoices: $5.63 billion at the end of the quarter, up 12.7% year-over-year
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Market capitalization: $257.3 billion
Adobe (NASDAQ:ADBE) is one of Silicon Valley’s best-known software companies and a leading provider of software as a service to the digital design and document management industries.
Design software
The demand for rich, interactive 2D, 3D, VR, and AR experiences is growing. While the ubiquitous metaverse may still be more of a buzzword than something that actually exists, the tools to create these experiences, whether they’re games, 3D tours, or interactive films, are in high demand.
Sales growth
As you can see below, Adobe’s annual revenue growth of 11.5% over the past three years has been sluggish, with revenue this quarter reaching $5.41 billion.
This quarter, Adobe’s quarterly revenue was again 10.6% higher than last year. However, growth did slow compared to the previous quarter, as the company’s revenue grew by just $99 million in Q3 compared to $127 million in Q2 CY2024. While we’d like to see revenue grow by a larger amount each quarter, a one-time fluctuation usually isn’t a cause for concern.
The next-quarter forecast suggests that Adobe expects revenue to grow 9.4% year-over-year to $5.53 billion, a slowdown from the 11.6% year-over-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company had expected revenue to grow 11.2% over the next 12 months before the earnings announcement.
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Cash is king
If you’ve been following StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that ultimately, cash is king and that you can’t use accounting profits to pay the bills.
Adobe has demonstrated tremendous profitability, driven by its lucrative business model and cost-effective customer acquisition strategy, which has allowed the company to stay ahead of the competition by investing in new products rather than sales and marketing. The company’s free cash flow margin has been among the best in the software industry, averaging a whopping 31.3% over the past year.
Adobe’s free cash flow was $1.96 billion in Q3, a margin of 36.3%. Profitability for the quarter was in line with the prior-year period and above the one-year average.
Analysts predict that Adobe’s cash conversion will improve in the coming year. Their consensus estimates imply that the free cash flow margin will rise to 39.5% from 31.3% for the past 12 months, giving it more cash to invest.
Key Takeaways from Adobe’s Q3 Results
It was good to see Adobe beat analysts’ revenue and EPS expectations this quarter. We were also pleased to see gross margin improve. On the downside, revenue guidance for next quarter (particularly Net New Digital Media ARR, which the market watches closely) missed Wall Street estimates, sending the stock lower. Overall, this quarter could have been better. The stock fell 7.9% to $541 right after the report.
Adobe may have had a tough quarter, but does that actually create an opportunity to invest? When making that decision, it’s important to consider valuation, business quality, and what happened in the last quarter. We cover that in our actionable full research report, which you can read here, it’s free.
