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Software Scaling - Does it Matter?
Published Oct 24, 2020
Adobe Inc. ($ADBE) reported Q3 2020 earnings September 15th, which included record revenue and record operating cash flows. ADBE LTM revenues are $12.8 billion, while trailing free cash flow ("FCF") margin is 39.6%. Said differently, for every $1 of revenue, ADBE generates an incredible 40 cents of free cash flow (FCF Margin = FCF/Revenue).
While not a go-go, high-growth software name, there is an argument to be made ADBE is one of the more successful software companies in history. Indeed, the company has compounded revenue at 12.8% the last 28 years, while growing FCF faster, at 15.7%.
ADBE scaled its business with time, growing revenue faster than costs, resulting in expansion of its FCF margin. Where does a 39.6% FCF margin rank in the software industry? Outside Zoom $ZM, which has seen incredible revenue/billings growth and concurrent FCF Margin expansion related to COVID-19 and the ensuing work from home trend, ADBE leads the pack.

Compare ADBE with Salesforce ($CRM). Between 2004 (first full year of public financials) and 2007, CRM's average FCF margin was 21.9%. Today its 17.9%, indicating not only no scaling, but negative scaling. CRM has grown its revenue by 200 times since 2004, however, versus ADBE at an approximately 7 times increase.
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