According to Zhītōng caijīng APP, Adobe (ADBE.US), a technology giant offering popular creative software products such as Photoshop and Illustrator, released its latest financial report in the morning of June 14th Beijing time. Adobe's core performance indicators all exceeded expectations, and the company's management expects strong sales of its creative software products in the future, indicating that Adobe's most loyal customers and some new customers are actively using the company's newly launched embedded generative artificial intelligence and many creative software. Driven by strong financial results and performance prospects, Adobe's stock price skyrocketed more than 17% in post-market trading.

Adobe's total sales in the second quarter ended May 31 increased by approximately 10%, reaching 5.31 billion US dollars. The non-GAAP profit under the non-GAAP criteria, excluding some items, was US$4.48 per share. In contrast, Wall Street analysts' average forecast for total sales was US$5.29 billion, and their non-GAAP expected earnings per share were US$4.40. Adobe's second-quarter indicators exceeded expectations.

For the quarter ended May 31, sales of Adobe's digital media business unit, including flagship creative and document processing software, increased by approximately 11% year-on-year to $3.91 billion. Among them, the sales of this business unit, including marketing and analytics software, increased by 9% year-on-year to $1.33 billion. The company also stated that customers are renewing more expensive packages, including flagship creative software that incorporates Adobe's heavy updates more frequently using AI large models Firefly.

Since 2023, Adobe, the leader in creative software, has been intensifying efforts to build and optimize large AI models, mainly based on its massive image library for AI training and inference. It is also trying to gain application-end advantages over startup companies like OpenAI by integrating new generative AI technology into industry standard products like Photoshop and other Adobe flagship software products.

Adobe recently launched multiple new versions of its generative AI tool Firefly, which promises higher quality images and the ability to generate new media. Although Firefly's initial focus was on quickly generating image and text effects, its applications have gone beyond this. Firefly can be seen as a broad generative AI tool that supports a variety of creative tasks combined with Adobe's flagship software. Adobe has directly integrated the Firefly large model into its flagship software Photoshop, combining the speed and ease of use of generative AI modules with Firefly's powerful image editing capabilities and precision.

It is reported that Adobe's Document Cloud business unit sales performance is particularly strong. The company recently launched an AI assistant similar to ChatGPT in document processing software to help analyze and understand PDF documents and other key documents, and conveniently call various module functions through dialogue. The business unit added annual recurring sales of approximately $165 million in the quarter, higher than analysts' expected $122.7 million.

As for performance expectations, Adobe's net annual revenue scale for the new creative software business-a key indicator of digital media-is expected to reach $460 million in this quarter, higher than the average Wall Street analyst's expected approximately US$435.2 million.

Adobe's management expects total sales in the third quarter to be between US$5.33 billion and US$5.38 billion, which is basically in line with analysts' expectations. Non-GAAP adjusted earnings per share in the third quarter are expected to be between $4.50 and $4.55, higher than analysts' expected $4.48.

Adobe's management has also raised its non-GAAP adjusted earnings per share expectations for fiscal year 2024 to between $18.00 and $18.20, up from the estimated range of $17.6-$18.0 given in December, exceeding analysts' expected $18.02. The expected total sales for the whole year have also been raised to US$21.4 billion to US$21.5 billion, which is higher than the lower end of the range given by the company of US$21.3 billion to US$21.5 billion in December last year, and the latest sales forecast is higher than analysts' expected US$21.46 billion.

In the face of strong competitors such as Sora, Adobe's performance demonstrates strong resilience by riding the AI wave.

The software giant Adobe, which has taken advantage of the AI wave, is still in the earliest stage of monetizing the technology. However, the company may eventually find that its clients have turned to AI startups such as Midjourney and Stability AI, who are trying to disrupt the traditional image industry, and Sora, which may penetrate into most global users in the future, especially if Adobe does not act quickly enough. This may eventually bring huge downward pressure on the company's revenue and stock price.

Among them, Sora, which has the most influence on the creative software industry, opened to testers in February this year and became a global hit instantly. Some large companies have shown a keen interest in Sora, the latest AI video model launched by OpenAI, and have actively joined enterprise-side testing and operations before Sora is officially launched in the consumer market. This "Sora frenzy" has also caused Adobe's stock price to be very depressed for a period of time.

In the first quarter, Adobe abandoned its major plan to acquire Figma, a product design startup, for $20 billion, which disappointed investors. Although the collapse of the acquisition affected the net income indicators in the first quarter, Adobe's series of AI-based product enhancements, such as embedding a new ChatGPT-like AI chat assistant into Adobe's flagship creative software, may help to boost future performance beyond expectations in some analysts' views.

According to Anurag Rana, a senior analyst at Bloomberg Intelligence, the strong performance prospects offered by creative software leader Adobe should significantly ease investors' concerns about other generative AI tools affecting Adobe's growth prospects.

Dan Durn, Chief Financial Officer of Adobe, said during the earnings conference call that the company expects more new creative software businesses to accelerate development in the remaining time of this fiscal year.

The long-standing leader in creative art software faces a new round of investor concerns that Midjourney and Stability AI, and generative AI tools such as Sora, will squeeze its creative software market. In recent weeks, SaaS software peers such as Salesforce Inc., Workday Inc., and ServiceNow Inc. have also faced similar concerns after reporting a slowdown in software subscription demand.

However, Adobe's performance results and the positive expectations of the management for future performance indicate that Adobe, although inevitably in fierce competition with smaller competitors, including numerous start-ups focusing on generative AI emerging technologies (such as ChatGPT and Sora developers OpenAI), is fully capable of gaining support from loyal Adobe customers and some potential new customer groups by perfectly integrating generative AI technology into its creative software products.

Taylor Radke, an analyst at Citigroup, wrote in a report that Adobe's performance results and performance prospects and stock price are in "stark contrast" to other leaders in enterprise software.

Adobe CEO Shantanu Narayen said in prepared remarks that new AI innovations allow Adobe to attract an "ever-expanding user base."

In recent years, students and non-professional users have flocked to competitors such as Canva Inc. Whether Adobe can attract these users has always been a key issue of investor concern. The head of Adobe's creative business said that the monthly active users of Adobe Express more than doubled in the three months ending May 31 compared to the previous quarter. Express is a creative software product that Adobe provides for casual creative creators, similar to Canva.

Adobe users have generated 9 billion AI images with Firefly.

The proprietary AI large model Firefly exclusively developed by Adobe has been integrated into Adobe's flagship creative software such as Photoshop and Illustrator, and the company is developing similar generative AI technology for its video editing software Premiere. Narayen emphasized in prepared remarks that AI large model Firefly has generated more than 9 billion images.

During the earnings conference call, Adobe executives said that although the revenue effect is positive, the company is still in the earliest stage of profitability from AI products. CEO Narayen emphasized that Adobe is focusing on "transforming the core channels, user interests, and awareness of AI into monetization metrics."

The stock closed at $458.74 in New York on Thursday, but after the positive performance results and performance prospects data, it reached a three-month high of $537 after hours. After rising 77% in 2023, the stock has fallen 23% since the beginning of this year due to threats from many challengers such as Sora.

AI software demand is expected to explode and Adobe's "AI + Creative Software" revenue engine may continue to thrive.

Before Adobe released its financial report, the company had received bullish price targets for the next 12 months from many Wall Street investment institutions. The main logic was that Adobe's "AI + Creative Software" revenue engine is expected to continue to contribute huge sales and profits in the AI era. International banks, such as Mizuho, has a target stock price for Adobe of up to $640 within the next 12 months (the stock closed at $458.74 on Thursday). Well-known Wall Street investment institutions such as Evercore ISI Group have a target stock price for Adobe as high as $650, and another well-known institution DA Davidson is even more bullish about Adobe, with a target stock price of $685. These institutions all give Adobe optimistic buy ratings.

In 2023, ChatGPT is popular globally, the Sora video large model, and selling shovels for AI NVIDIA have had unparalleled performance for several quarters, which may mean that human society will gradually enter the AI era starting in 2024. With the epoch-making generative AI application-ChatGPT popular globally, not only the technology industry, but all industries worldwide have seen a surge in demand for NVIDIA AI chips, used for AI training/inference fields like H100/H200 AI GPU, making this technology giant continuously release world-shocking, incomparably strong performance for several quarters.

OpenAI's chief operating officer recently predicted that 2024 will be the "year of application" for artificial intelligence (AI) technology, which means that various generative AI applications such as ChatGPT and Sora developed by companies like OpenAI could see explosive growth. As the delivery time for high-performance AI GPU such as Nvidia H100/H200 has been significantly reduced from the previous 8-11 months to 2-3 months, it indicates that the global AI hardware deployment work is gradually improving. In addition, companies and individual users have gradually realized the significant work efficiency brought about by AI software and other auxiliary tools, and it is expected that generative AI technology will soon be widely used in various economies and markets around the world.

In a recent research report, international bank UBS pointed out that the global technology industry has just begun a large-scale period of growth. UBS expects that by 2027, AI technology will achieve an extremely wide range of applications in various industries in major economies around the world, thus promoting AI big models and AI software applications to become a sub-market with a value of up to 225 billion US dollars. This is an epic leap compared to a size of only 2.2 billion US dollars in 2022, and the compound annual growth rate during this period is expected to be as high as 152%. UBS also predicts that the total revenue of the AI industry will increase 15 times, from approximately US$28 billion in 2022 to US$420 billion in 2027.