Why Investors Shouldn’t Be Worried About Adobe’s Short-Term Outlook

Adobe‘s (NASDAQ: ADBE) the rate of income growth is accelerating. In the earnings report it released on Thursday, the software giant announced surprisingly strong sales gains to close its fiscal year. Management has issued a bullish outlook for fiscal 2022 while making sure to highlight some challenges ahead.

Despite these issues, Adobe predicts potentially phenomenal revenue growth over the next several years.

Image source: Getty Images.

Sales trends remain strong

Sales rose 21% to $ 4.11 billion in its fiscal fourth quarter, which ended Dec. 3. This result was enough to beat management’s expectations. It also means the business grew at a rate of 23% for the full year compared to the 15% increase in 2020.

Adobe’s privileged position in the global digital transformation trend is evident in its growth trends. Its software as a service revenue has grown to over $ 12 billion on an annual basis as more customers have subscribed to its consumer and enterprise products. Executives acknowledged that the steady stream of popular company innovations, like Creative Cloud software and Experience Cloud, have helped keep annual growth above 20%.

More wins on the profit side

The news was equally good further down the income statement. Cash flow hit a record $ 2 billion in the fourth quarter of the fiscal year, and gross margin reached $ 3.6 billion (88% of sales), from $ 3 billion a year earlier. Adobe’s gross profit margin remained stable, but profitability increased. The operating profit represents 37% of the turnover against 35% last year.

ADBE Operating Margin Graph (TTM)

ADBE operating margin data (TTM) by YCharts

Profits fell for the full year, but only because the company reaped a one-time tax benefit in 2020. Operating cash flow hit a record $ 7.23 billion in the past 12 years. past months, which equates to 48% of income.

“Adobe’s financial performance (…) has been exceptional,” CFO Dan Durn said in a press release, “with an acceleration in revenue resulting in more than $ 7 billion in cash flow. operating cash flow “.

The New Perspective

Adobe’s first crack in the forecast for fiscal 2022 warns of a slowdown ahead. Sales will increase by about 13% to $ 17.9 billion, management said, from the 23% increase last year. These gains will be tempered by comparisons with fiscal 2021, when demand soared, but also by accounting issues, including exchange rate fluctuations and the fact that its fiscal 2021 benefited from a week of sales. extra on the calendar. Management estimates that non-GAAP earnings will reach $ 13.70 per share, compared to $ 12.48 last year and $ 10.10 per share in fiscal 2020.

These forecasts imply strong and continuing momentum for Adobe, although perhaps not as aggressive a growth rate as some investors would like to see. The stock price fell immediately after the report, but remains significantly higher until 2021.

Adobe has promised to provide shareholders with more details on its long-term goals in an upcoming conference call and in a meeting with Wall Street analysts. But the company said it believes its total addressable market will grow over the next several years. Adobe has the potential to capture a significant share of a market that will be worth more than $ 200 billion by 2024, management said.

Gaining an edge in this race will be difficult – the market for consumer and business services software is crowded. But Adobe has a head start with its massive customer base and annual recurring revenue of over $ 12 billion. These benefits should serve him well in FY2022 as he takes another big step towards his longer-term goal of $ 20 billion in annual sales.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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