Q2 2022
The design and audio software maker Adobe reported a better-than-expected set of results for the fiscal second quarter of 2022. Shares fell after hours, however, after the company revised lower its guidance for the full year citing summer seasonality, the war in the Ukraine and foreign exchange headwinds (like Microsoft and Salesforce did) as reasons for doing so.
Adobe achieved record revenue of $4.39 billion, up 14% year-over-year (15% in constant currency). The Digital Media segment (Creative Cloud and Document Cloud products) notched $3.20 billion in revenue, up 15% year-over-year. The Digital Experience business, with Adobe’s Experience Cloud for marketing and commerce, added $1.10 billion in sales, up 17% year-over-year.
The company did announce price increases for select Creative Cloud subscriptions to fund the launch of new apps. However, due to Adobe focusing on adding new users, it did not institute larger or wholesale price increases.
What was particularly impressive was the greater than $2 billion in operating cash flows it generated, highlighting the strength of Adobe’s growing revenue streams and financial discipline. With $5 billion in cash, cash equivalents and short-term investments at the end of the period, CEO Shantanu Narayen said that while Adobe doesn’t need to add to its portfolio, they are looking for acquisition targets with asset prices having deflated.
· Adobe’s net income rose 6% year-over-year to $1.18 billion in the fiscal second quarter. For the full fiscal year, the software giant reduced its guidance for adjusted earnings per share to $13.50 on revenues of $17.65 billion – which was 1.2% lower than analysts were expecting.
We feel the current negative market reaction to be more about sentiment than fundamentals. Adobe is a great business with sticky users and steady cash flows. Despite there being freeware available that can replace many of Adobe’s products, designers and audio producers are trained in it’s use from a young age. Additionally, engagement between users (and teams) is much easier within Adobe’s ecosystem (and cloud offerings) than attempting to get different freeware’s to communicate harmoniously. This is a company we own in managed portfolios and the Cratos BCI Worldwide equity fund and one we would buy into weakness.