In the application SaaS industry, there are two giants in the US stock market, one being the marketing SaaS giant Salesforce, and the other being Adobe, which will be the focus of this article.

In the creative software field, Adobe occupies an absolute leading market share with well-known design tools such as Photoshop and Premiere. After transitioning to a subscription-based SaaS software, Adobe's performance has continued to grow, and its stock price has soared, increasing more than tenfold over the past decade.

On December 11th, Adobe will release its latest earnings report. Each time the company releases performance data, it may also imply good trading or investment opportunities. Before that, investors need to understand how to interpret its performance.

When it comes to Adobe's earnings reports, we can focus on three key points: revenue growth, stability of profitability, 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 Creative Cloud represented by flagship products such as Photoshop and Premiere, and Document Cloud mainly focused on PDF-related features. This sector accounts for nearly three-quarters of Adobe's total revenue, making it the absolute main source of revenue. The digital experience sector focuses on cloud services related to business processes and marketing, accounting for nearly one-quarter of Adobe's total revenue.

Although Adobe has many tool products for creative design and products for business processes, their charging models are similar, mainly generating revenue through customer subscriptions. In the 2024 Q3 fiscal quarter, revenue from subscription services accounted for over 95%.

The revenue growth logic of subscription-based SaaS products involves maintaining a high customer retention rate and expanding new customers. Also, if subscription prices can continue to rise, it will further drive revenue growth.

In terms of controlling user churn rate, Adobe has a strong advantage in terms of products. Adobe's dominant revenue-generating products such as Photoshop and Premiere have a high learning curve, making the cost of switching to other software naturally higher. As a result, there is a strong user stickiness, where existing customers are unlikely to leave, and adding new customers can drive growth. Therefore, Adobe has maintained a growth record for 42 consecutive quarters. In the good development period of the SaaS industry, its annual revenue growth exceeds 20%, and in recent years when the growth rate of the SaaS industry has slowed down, its revenue growth rate has also exceeded 10%.

So, what will be the future revenue growth trend for Adobe? We can observe three indicators.

The first indicator is Annual Recurring Revenue (ARR), which is a measure of user retention. Although Adobe does not disclose data such as user numbers and service prices, through ARR, a comprehensive indicator, it can directly reflect the revenue that the company can obtain from existing customer contracts and new customer contracts signed within the period. This data can be viewed in the financial module on the individual stock page of Futubull.

We can see that Adobe's ARR has almost consistently grown in almost every quarter in the past, which may also indicate 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 indicator is Remaining Performance Obligations (RPO), which refers to the amount already contracted with customers but not yet executed and confirmed income. This is equivalent to the company's revenue reserve ammunition, the more reserves, the more guaranteed revenue growth.

In the third quarter of the 2024 fiscal year, Adobe's RPO is approximately $18.14 billion, a year-on-year growth of about 15.3%. In the future, we can continue to observe the growth of this indicator.

The third indicator is Revenue Guidance. Management will release revenue guidance for the next quarter and the current fiscal year in each earnings report. In the 2024 Q3 quarterly report, management provided revenue guidance for Q4 2024 at $5.5-5.55 billion, slightly lower than market expectations, which is also a key reason for its stock price to plummet in the short term after the earnings report release.

2. Stability of Profitability

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

In terms of gross margin, Adobe is generally at a high level, fluctuating between 85% and 88% in recent years.

Looking at the net profit margin, due to Adobe's overall costs including research and development, sales, and management being relatively stable, its net profit margin fluctuation is also not significant, staying around 30% in recent years.

From the return on equity (ROE) perspective, Adobe has stepped up from the foundation in 2019, currently stabilizing at around 30%.

Overall, Adobe maintains high levels of gross margin, net profit margin, and ROE, which may also reflect the stability of the company's competitive advantages and competitive landscape to a certain extent. Going forward, we can continue to observe changes in Adobe's profitability. If there is a significant decline, it may indicate a shake-up in its competitive position.

3. Cash flow and shareholder returns

As a mature and stable software enterprise, Adobe does not require significant capital support, and with strong industry influence, very little customer debt, its cash flow is very robust.

Since 2014, Adobe's cumulative free cash flow has reached 41.49 billion, while the total net profit during the same period is less than 30 billion, far exceeding the net profit level.

With ample cash flow, Adobe also has the ability to carry out substantial shareholder returns. In the U.S. stock market, many listed companies reward shareholders through dividends and buybacks. Among them, dividends are the most direct way to reward shareholders, while buybacks can increase the company's return on net assets and earnings per share, injecting additional liquidity into the market, making it a win-win situation, and very popular among shareholders.

Adobe rarely pays dividends, but spares no effort in share buybacks. Since 2013, Adobe's cumulative buyback amount has reached approximately $26.15 billion, accounting for nearly 90% of the period's net profit, which can be considered very generous. For future performance, we can continue to observe whether Adobe can maintain its historical strong performance in cash flow and shareholder rewards.

Seeing this, you may have some new insights on how to read Adobe's performance. It is worth mentioning that each time a star company announces its performance, it may represent a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

In conclusion, when it comes to Adobe's performance, we can focus on its revenue growth, the stability of its profitability, as well as its cash flow and shareholder returns.

In terms of revenue growth, we can observe whether Adobe can maintain its historically steady trend, focusing on three indicators: annual recurring revenues, remaining performance obligations, and revenue guidance.

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

In terms of cash flow and shareholder returns, adobe has historically had sufficient cash flow and has been more generous in share buybacks, we can observe whether it can continue its robust performance in the future.