In the applied SaaS industry, there are two giants in the US stock market. One is the marketing SaaS giant Salesforce, and the other is the one this article will focus on $Adobe (ADBE.US)$ 。

In the field of creative software, Adobe has an absolute leading market share with well-known design tool products such as Photoshop and Premiere. However, after switching to subscription-based SaaS software, Adobe's performance also continued to grow, and its stock price also soared, rising more than tenfold over the past ten years.

On September 12, Adobe will release its latest financial report. Every time a company releases results, it probably also means a good deal or investment opportunity. Before that, investors need to figure out how to understand its financial statements.

For Adobe's earnings report, we can focus on three key points: revenue growth, profitability stability, and cash flow and shareholder returns.

1. Revenue growth

Adobe's business mainly includes the digital media sector and the digital experience sector. Among them, the digital media sector includes the creative cloud represented by Photoshop and Premiere's two biggest products, and the document cloud, which mainly focuses on PDF-related functions. This sector accounts for nearly 3/4 of Adobe's overall revenue and is the absolute main force of revenue. The digital experience sector, on the other hand, mainly focuses on cloud services related to business processes and marketing, accounting for nearly 1/4 of Adobe's overall revenue.

Although Adobe has many tool products for creative design, etc., and growth products for business processes, the charging model is similar, that is, it mainly generates revenue through customer subscriptions. In the 2024Q2 fiscal quarter, Adobe accounted for more than 95% of revenue from subscription services.

The revenue growth logic for subscription SaaS products is to maintain a high customer retention rate on the one hand, and expand new customers on the other. At the same time, if subscription prices continue to rise, it will boost revenue growth even more.

In terms of controlling user churn, Adobe has a strong product advantage. Adobe's creative software, such as Photoshop and Premiere, which dominates revenue, has a high learning threshold, and the cost of switching to other software is naturally higher. Therefore, they have strong user stickiness, and old customers hardly run away. Almost as many new customers can drive much growth. As a result, Adobe has maintained a record of 41 consecutive quarters of growth. When the SaaS industry developed well, its annual revenue grew by more than 20%, and in the years when the SaaS industry's growth rate slowed, its revenue growth rate also exceeded 10%.

So what will Adobe's future revenue growth trend be? We can look at three data.

The first data is Annualized Recurring Revenue (ARR), which measures user retention. Adobe does not disclose data such as the number of users and service prices, but through ARR, a comprehensive index, it can also directly reflect the revenue that the company can obtain from existing customer contracts and new customer contracts signed during the period.

We've seen Adobe's ARR continue to grow almost every quarter over the past quarter, which may also mean that the company's user retention situation is relatively healthy. In the future, we can continue to observe whether Adobe's ARR can maintain a steady growth trend.

The second data is the remaining performance obligation (RPO), that is, the amount that has signed a contract with the customer, but the revenue has not been executed or confirmed. This is equivalent to the company's revenue reserve ammunition. The more reserves, the more guaranteed revenue growth is naturally.

In the Q1 quarter of FY2024, Adobe's RPO was about 17.86 billion US dollars, an increase of about 17.3% year over year. We can continue to observe the growth of this indicator in the future.

The third data is revenue guidance. Management will publish revenue guidelines for the next fiscal quarter and the current fiscal year in each financial report. In the 2024Q2 quarterly report, management's revenue guidance for 2024Q3 was 5.33-5.38 billion US dollars, which is basically the same as market expectations. The 2024 revenue guidance was raised to 21.4-21.5 billion US dollars, slightly exceeding market expectations.

2. Stability of profitability

In addition to maintaining steady revenue growth, Adobe's profitability is also very stable. Specifically, we can observe three metrics.

In terms of gross margin, Adobe as a whole is at a high level, which has basically fluctuated between 85% and 88% in recent years.

Judging from the net profit margin, since Adobe's overall expenses, including R&D, sales, and management, are also relatively stable, its net profit margin level has not fluctuated much, and has remained around 30% in recent years.

Judging from the return on net assets (ROE), Adobe started in 2019 and is currently stable at around 30%.

Overall, Adobe maintains a high gross margin, net profit margin and RoE level, which probably also reflects the company's competitive advantage and the stability of the competitive landscape. In the future, we can continue to observe changes in Adobe's profitability. If there is a sharp decline, it may also mean that its competitive position has shaken.

3. Cash flow and shareholder returns

As a mature and stable software company, Adobe basically does not require large capital support. In addition, it has a strong voice in the industry, and its customers owe very little money, so Adobe's cash flow is very strong.

In each fiscal year since 2014, Adobe's cumulative free cash flow reached 41.49 billion, while the total net profit for the same period was less than 30 billion, far exceeding the net profit level.

In the face of abundant cash flow, Adobe is also capable of providing substantial shareholder rewards. In US stocks, many listed companies will return their shareholders through dividends and repurchases. Among them, dividends are the most direct way to give back to shareholders, while buybacks can increase the company's return on net assets and surplus per share, and inject additional liquidity into the market. It can be said that it is a huge gain, and it is also very popular with shareholders.

Adobe almost never pays dividends, but has spared no effort in repurchasing shares. Since 2013, Adobe's cumulative repurchase amount has reached about 26.15 billion US dollars, accounting for nearly 90% of the period's net profit, which can be said to be very generous. As for future results, we can continue to observe whether Adobe can continue its steady historical performance in terms of cash flow and shareholder returns.

Looking at this, you may have some new understanding of how to read Adobe's performance. It is worth mentioning that every time many star companies release results, it may mean a rare trading opportunity for different types of investors.

For example, if investors interpret past performance and combine the latest developments, they feel that a company's latest performance will send some positive signals and benefit short-term stock prices, investors may consider going long. The way to go long can consider buying active stocks or consider buying bullish options, etc.

Conversely, if investors feel that a company's latest performance will not be optimistic and will put pressure on short-term stock prices, investors may consider shorting. The way to short can be to consider short selling securities, or consider buying put options, etc.

Of course, if investors feel that the long and short direction of a company's performance is unclear, but the stock price may fluctuate greatly up or down after the results are announced, then investors may consider increasing the volatility of its stock price and considering a cross-cutting strategy of buying both bullish and bearish options to seize potential opportunities.

Finally, to summarize Adobe's performance, we can focus on its revenue growth, stability of profitability, and cash flow and shareholder returns.

In terms of revenue growth, we can observe whether Adobe can maintain a steady trend in history, focusing on three indicators: annualized recurring revenue, remaining performance obligations, and revenue guidance.

In terms of profitability, we can focus on observing the stability of indicators such as gross profit margin, net profit margin, and ROE to assess the sustainability of their competitive advantage.

In terms of cash flow and shareholder returns, Adobe has historically had abundant cash flow and generous share repurchases. We can observe whether it can continue its steady historical performance in the future.