Adobe (NASDAQ:ADBE) shares traded modestly lower in early Friday trade after the software company reported results for its third fiscal quarter.
While Adobe’s FQ3 earnings came in just ahead of the average analyst estimate, as well as revenue guidance, it seems that investors were more encouraged by this week’s announcement about new GenAI products and the attractive pricing.
Moreover, the management delayed the introduction of FY24 guidance to December, which could be another reason why shares were down by about 2% in early Friday trade.
Solid FQ3 Results and Conservative Guidance
Adobe reported an adjusted profit per share of $4.09, up from the $3.40 reported for the year-ago period and $3.98 that analysts were expecting. Revenue jumped 10% year-over-year to $4.89 billion, somewhere in line with the consensus of $4.87 million. Overall, the company managed to deliver EPS growth exceeding 20 percent YoY.
“Adobe delivered world-class margins and earnings in Q3, while making significant investments in our technology platforms,” said Dan Durn, executive vice president and CFO, Adobe. “Our innovation engine, global reach and strong operational rigor position us to capture the massive opportunities ahead.”
Adobe generated 12% more revenue from subscriptions – $4.63 billion – than in the same year-ago period. A further $96 million was generated from product sales, as well as $163 million from the Services and Other segment.
Digital Media business generated $3.59 billion, marking an 11% YoY growth. Creative sales for the quarter also rose 11% YoY to $2.91 billion. Digital Experience segment revenue was $1.23 billion.
Adobe also generated a cash flow of $1.87 billion and adjusted operating income of $2.26 billion. Remaining Performance Obligations (RPO) exiting the quarter were $15.72 billion, the company said. During FQ3, Adobe repurchased approximately 2.1 million shares.
Net new Digital Media annualized recurring revenue (ARR), an important financial metric for software companies, was $464 million in FQ3. Exiting the quarter, Digital Media ARR was $14.60 billion. Similarly, Creative ARR grew to $11.97 billion and Document Cloud ARR grew to $2.63 billion.
For this quarter, the company guided for revenue of $5 billion (up or down 25 million), in line with the analyst expectations. If realized, it would mark a 2.2% quarter-over-quarter increase. The company expects to generate $3.685 billion, $1.26 billion, and $1.12 billion from Digital Media, Digital Experience, and Digital experience subscriptions, respectively.
Adjusted earnings per share are expected to be $4.10-4.15, modestly above the $4.09 reported for the previous quarter, and above the $4.06 that analysts were expecting. Finally, Adobe sees Digital Media net new ARR at about $520 million, up from the $464 million reported for FQ3.
Solidifying its Strong AI Position
While Adobe shares reacted somewhat negatively to the company’s FQ3 report and the guidance that still doesn’t incorporate a meaningful boost from the AI products, investors did react positively to the company’s announced AI pricing.
The software company released several updates earlier this week, with the most important being the commercial release of Firefly, Adobe’s family of creative generative AI models. As of this week, Adobe Firefly is now natively integrated into Adobe Express and Photoshop and Illustrator in Adobe Creative Cloud.
“We are unleashing a new era of AI-enhanced creativity around the world with innovations across our product portfolio,” said Shantanu Narayen, chair and CEO, Adobe. “The recent launches of Firefly, Express, Creative Cloud and GenStudio make Adobe magic available to millions of users.”
With the commercial release, Adobe has introduced several noteworthy features and solutions. For example, the release includes a new Firefly web application, which serves as a creative playground for exploring AI-assisted creative expression.
Moreover, Adobe has introduced the Adobe GenStudio solution, designed to address the content supply chain needs of enterprises. This solution is aimed at optimizing and streamlining content creation and management processes within large organizations.
“Firefly’s breathtaking capabilities combined with the rich tooling of our Creative Cloud apps, Express, the Firefly web app and Adobe Experience Cloud, give creators unparalleled opportunities to work with generative AI in new, rich and productive ways,” said David Wadhwani, president, Digital Media Business at Adobe.
Adobe listed brands like Accenture, IHG Hotels & Resorts, Mattel, NASCAR, NVIDIA, ServiceNow, and Omnicom as companies it cooperates with to explore how Firefly can help their businesses.
After the recent updates, Adobe shares rose by 2% on Wednesday. Analysts also responded favorably to the company’s newly announced GenAI pricing strategy, which utilizes a multi-faceted pricing model.
Once subscribers have exhausted the plan-specific allocation of “fast” Generative Credits, they will still have the option to generate content at slower speeds. Adobe is also introducing a paid subscription plan for Firefly users, starting in November 2023, which will enable them to purchase additional “fast” Generative Credits.
This subscription pack offers users a way to access more Generative Credits and continue their creative work at a faster pace when needed. According to BMO’s survey, Adobe users are willing to pay a premium for Creative Cloud with generative AI capabilities.
As a result, analysts anticipate that the incorporation of generative AI into Creative Cloud should result in a net increase in the number of Creative Cloud users. BMO raised its price target on Adobe stock to $640 per share.
“We believe that Adobe’s strategy will include price increases of 10% to 15%, though lower at the consumer level, and adding new users in all categories. Further, we think Adobe will likely offer some form of freemium Firefly SKU to generate pipeline,” BMO analysts said in a report.
Adobe shares are up 64% year-to-date.
Summary
Adobe shares were exchanging hands candidly lower on Friday after the software company offered in-line revenue guidance for this quarter and pushed back the introduction of FY24 guidance to December. On the other hand, shares rose earlier this week after Adobe announced the commercial release of Firefly, which analysts expect will increase the number of Creative Cloud users.
About Tyler Corvin
Tyler Corvin is the senior trader behind The Trading Analyst’s options trading desk. For 15 years, Tyler worked as a senior derivatives trader to conduct pre-trade analysis, trade execution, hedging, improvements to pricing and risk management infrastructure with a peculiar focus on extensive data and statistical analysis. He was responsible for the management of risk, liquidity, and exposure. Now, he helps traders learn how to trade options by scanning for options signals and alerting The Trading Analyst community of options trades worthy of further examination.
