Adobe stock tumbles despite record Q3 revenue as outlook disappoints investors

Adobe this weekend released the Q3 FY24 financial results. Adobe achieved record revenue of $5.41 billion in its third quarter fiscal year 2024, which ended on August 30, 2024. The company reported this financial milestone on September 12, 2024, during its earnings call. Adobe's performance was driven by strong growth across its Creative Cloud, Document Cloud, and Experience Cloud offerings, as well as significant advancements in artificial intelligence (AI) integration throughout its product portfolio.

Adobe's Q3 fiscal 2024 results showcase the company's continued growth and profitability:

• Revenue: $5.41 billion, representing 11% year-over-year growth
• GAAP earnings per share: $3.76, up 23% year-over-year
• Non-GAAP earnings per share: $4.65, up 14% year-over-year
• Digital Media segment revenue: $4.00 billion, up 11% year-over-year
• Digital Experience segment revenue: $1.35 billion, up 10% year-over-year
• Net new Digital Media Annualized Recurring Revenue (ARR): $504 million
• Cash flows from operations: $2.02 billion

The company's performance in Q3 exceeded expectations, with Digital Media ARR showing unseasonably strong growth. Adobe added $504 million in net new Digital Media ARR, marking the first time in nearly four years that the company has grown net new ARR sequentially in the third quarter.

Despite the record revenue of $5.41 billion in its third quarter fiscal year 2024, which ended on August 30, 2024, the company's stock (ETR: ADB) dropped sharply by 6.38% in the days following the September 12, 2024 earnings announcement, suggesting that despite strong current performance, the market was concerned about future growth prospects.

Adobe's success in Q3 was largely attributed to its aggressive push in AI innovation across its product lineup. The company has integrated its Firefly AI technology into various applications, enhancing creative capabilities and productivity for users:

1. Firefly AI Integration:
   • Adobe has surpassed 12 billion Firefly-powered generations across its tools.
   • Firefly models have been released for Imaging, Vector, and Design, with a new Firefly Video model recently previewed.
2. Creative Cloud Enhancements:
   • Photoshop: New AI-powered features include upgrades to Generative Fill, Generative Image general availability, and new Selection Brush and Adjustment Brush Tools.
   • Illustrator: Improvements in vector generation, text-to-pattern enhancements, and the introduction of Generative Shape Fill.
   • Lightroom: The new Generative Remove feature allows users to non-destructively remove unwanted objects from photos with a single click.
3. Document Cloud Innovations:
   • AI Assistant in Adobe Acrobat and Reader now supports conversations across multiple documents and various document formats.
   • Integration of Adobe Firefly image generation into Edit PDF workflows.
   • Optimized AI Assistant for mobile, web, and desktop experiences, including voice-enabled conversations on Android.
4. Experience Cloud Developments:
   • General availability of Adobe Content Hub, enhancing Adobe Experience Manager (AEM) Assets.
   • Introduction of Adobe Workfront Planning for comprehensive marketing activity management.
   • Expansion of Adobe Experience Platform (AEP) with Adobe Journey Optimizer B2B Edition.
5. Adobe Express:
   • Significant growth in Adobe Express, with a 70% year-over-year increase in cumulative exports.
   • Onboarding of over 1,500 businesses and millions of students to the platform.

Strategic initiatives and market position

Adobe continues to strengthen its market position through various strategic initiatives:

1. Content Authenticity Initiative:
   • The initiative, founded by Adobe in 2019, now has over 3,300 members committed to enhancing trust and transparency with Content Credentials.
   • Major companies like Amazon, Google, Meta, and TikTok have committed to implementing Content Credentials.
2. Educational Partnerships:
   • Adobe is collaborating with California Governor Gavin Newsom on an initiative to boost digital and media literacy skills in K-12 schools and higher education institutions.
3. Enterprise Adoption:
   • Notable customer wins in Q3 include Amazon, Charles Schwab, Disney, Home Depot, KPMG, RedBull, Sutter Health, and the U.S. Treasury Department.
4. Content Supply Chain Solutions:
   • Adobe GenStudio is gaining traction among enterprises looking to address content supply chain challenges and deliver personalization at scale.

Market outlook and future guidance

For the fourth quarter of fiscal year 2024, Adobe provided the following guidance:

• Total revenue: $5.50 billion to $5.55 billion
• Digital Media segment revenue: $4.09 billion to $4.12 billion
• Digital Experience segment revenue: $1.36 billion to $1.38 billion
• GAAP earnings per share: $3.58 to $3.63
• Non-GAAP earnings per share: $4.63 to $4.68

While the Q4 guidance for net new Digital Media ARR is lower than some analysts expected, Adobe management emphasized that it represents the highest Q4 target the company has ever issued. They attribute the apparent discrepancy to factors such as the timing of Cyber Monday, which falls in Q1 of fiscal year 2025 this year, rather than Q4 of fiscal year 2024.

Industry recognition

Adobe's performance and innovations have garnered recognition from industry analysts:

• Named a leader in the Forrester Wave for B2B Revenue Marketing Platforms
• Recognized in three IDC Marketscape reports for Digital Asset Management and Headless Digital Commerce in both Enterprise and Mid-Market segments

Challenges and competition

Despite Adobe's strong performance, the company faces challenges and competition in the rapidly evolving AI and creative software markets:

1. Monetization of AI features: Adobe is carefully balancing the proliferation of AI usage with future monetization strategies, considering various models such as generative credits and premium AI plans.
2. Competitive landscape: The company must continue to innovate to maintain its lead in the face of increasing competition in the AI-powered creative and document management spaces.
3. Economic uncertainties: While Adobe has shown resilience, broader economic factors could impact enterprise spending and consumer demand for creative software.

Looking ahead

Adobe is poised to showcase its latest innovations at the upcoming Adobe MAX conference in Miami, where it expects to welcome more than 10,000 members of its global community in person and hundreds of thousands more online. The company remains confident in its ability to drive growth and maintain industry leadership, citing its culture, innovative product roadmap, global market opportunity, and trusted brand as key factors in its continued success.

As Adobe continues to integrate AI across its product portfolio and expand its offerings in areas like content supply chain management and personalization at scale, the company appears well-positioned to capitalize on the growing demand for advanced creative and digital experience solutions in an increasingly AI-driven world.

Key Facts

• Adobe reported record Q3 fiscal year 2024 revenue of $5.41 billion, up 11% year-over-year.
• GAAP EPS was $3.76, and non-GAAP EPS was $4.65, growing 23% and 14% year-over-year, respectively.
• Digital Media segment revenue reached $4.00 billion, with net new ARR of $504 million.
• Adobe surpassed 12 billion Firefly-powered generations across its tools.
• The company introduced new AI-powered features in Photoshop, Illustrator, and Lightroom.
• Adobe Express saw a 70% year-over-year growth in cumulative exports.
• The Content Authenticity Initiative now has over 3,300 members.
• Adobe provided Q4 fiscal year 2024 guidance, projecting total revenue between $5.50 billion and $5.55 billion.
• The company faces challenges in AI monetization and increasing competition in the creative software market.
• Adobe MAX conference is set to showcase the company's latest innovations in Miami.