In the third quarter, Adobe's revenue exceeded expectations, with a year-on-year increase of 11%, reaching a new record for single quarter. The key indicator of main business, ARR, increased by 8.6% instead of decreasing. However, the revenue guidance for the fourth quarter is expected to slow down, with a maximum increase of nearly 10%, and the ARR guidance is expected to decrease by 3.3%, which is more than double the analysts' expectations.
In the just past quarter, the sales growth of the multimedia and digital content creation software giant $Adobe (ADBE.US)$ continued to outperform expectations, but the guidance for this quarter shows a slower growth than expected by Wall Street, disappointing investors. After the financial report was released, Adobe's stock price plummeted in post-market trading, reflecting investors' increasing impatience with the prospect of the company's artificial intelligence (AI) tools for revenue generation.
On Thursday, September 12th, the post-market trading of U.S. stocks revealed Adobe's financial data for the company's third quarter (referred to as Q3) ending on August 30, 2024, and provided performance guidance for the fourth quarter (referred to as Q4).
1) Key Financial Figures:
Revenue: In Q3, revenue was $5.41 billion, a year-on-year growth of 11%, analysts expected $5.37 billion, and a year-on-year growth of 10% from the previous quarter.
EPS: Diluted earnings per share (EPS) adjusted on a non-GAAP basis for Q3 was $4.65, a year-on-year growth of 13.7%, analysts expected $4.53, and a year-on-year growth of 14.6% from the previous quarter.
2) Segment Business Data:
Digital media: In the third quarter, the revenue of the digital media business was $4 billion, a year-on-year growth of 11%, and a year-on-year growth of 11% in the previous fiscal quarter.
Creative: In the third quarter, the revenue of the digital multimedia Creative family applications was $0.807 billion, a year-on-year growth of 18%, and a year-on-year growth of 10% in the previous fiscal quarter.
Document Cloud: In the third quarter, the revenue of the Document Cloud business, which stores and shares large files online, was $3.19 billion, a year-on-year growth of 10%, and a year-on-year growth of 19% in the previous fiscal quarter.
Digital Experience: In the third quarter, the revenue of the digital experience was $1.35 billion, a year-on-year growth of 9.8%. Analysts expected $1.34 billion, and the year-on-year growth in the previous fiscal quarter was 9%. Among them, the revenue from digital experience subscriptions was $5.18 billion, a year-on-year growth of 12%, and a year-on-year growth of 13% in the previous fiscal quarter.
ARR: In the third quarter, the net new annual recurring revenue (ARR) of the digital media business was $0.504 billion, a year-on-year growth of 8.6%. Analysts expected an increase of $0.4604 billion, and the year-on-year growth in the previous fiscal quarter was 3.6%. Among them, the end-of-quarter digital media ARR was $16.76 billion, a year-on-year growth of 16.8%, Creative's ARR was $13.45 billion, a year-on-year growth of 12.4%, and Document Cloud's ARR was $3.31 billion, a year-on-year growth of 25.9%.
3) Performance Guidance:
Revenue: The expected revenue for the fourth quarter is $5.5 billion to $5.55 billion. Analysts expected $5.6 billion. Among them, the expected digital media revenue is $4.09 billion to $4.12 billion. Analysts expected $4.14 billion. The revenue from digital experience is expected to be $1.36 billion to $1.38 billion. Analysts expected $1.4 billion. The revenue from digital experience subscriptions is expected to be $1.23 billion to $1.25 billion. Analysts expected $1.24 billion.
EPS: The estimated adjusted EPS for the fourth quarter is $4.63 to $4.68, with analysts expecting $4.68.
ARR: The estimated net new ARR for the fourth quarter of digital media is approximately $0.55 billion, with analysts expecting $0.5611 billion.
After the financial report was announced, Adobe's stock price rose nearly 1.1% on Thursday but quickly fell, with post-market trading falling by more than 10% at one point.
Key indicators of the main business ARR increased by 8.6% in the third quarter and unexpectedly decreased by 3.3% in the fourth quarter.
The financial report shows that Adobe's performance in the third quarter continued the stronger-than-expected growth momentum of the previous quarter. The total revenue growth in the third quarter further accelerated, surpassing 10% growth rate and setting a new record for single-quarter revenue, and the revenue of the main business, digital media, maintained strong growth of more than 10%.
Adobe also performed well in measuring the key indicators of the subscription model and service-based business, ARR, in the third quarter. The net new ARR for the quarter did not decline as analysts expected, but instead accelerated its growth compared to the previous quarter, with a growth rate of 8.6% year-on-year, approximately 2.4 times that of the previous quarter.
Adobe's Chairman and CEO, Shantanu Narayen, said that the record-breaking performance in the third quarter reflects the company's unwavering innovation and commitment to providing value to customers. With the groundbreaking progress of AI in Creative Cloud, Document Cloud, and Experience Cloud, the company is supporting millions of users worldwide.
However, Adobe's guidance for the fourth quarter did not continue to exceed Wall Street's expectations for growth. Based on the guidance range, Adobe expects revenue growth of 8.9% to 9.9% year-on-year for the fourth quarter, while based on analysts' revenue expectations, the expected growth rate is about 10.9%. This means that even Adobe's projected highest revenue growth for this quarter will be slower than the 11% growth in the third quarter, and the slowdown will exceed analysts' expectations.
Adobe expects the net new ARR of its digital media in the fourth quarter to decline by 3.3% year-on-year, not only turning negative growth but also exceeding the expected decline, which is more than twice the expected decline by analysts. According to analysts' estimated ARR, the year-on-year decline in the fourth quarter is nearly 1.4%.
Comments point out that the net new ARR of digital media is a closely watched indicator of Adobe's new creative software business. In recent months, Wall Street has been increasingly concerned that AI may weaken the business of traditional software companies like Adobe, Salesforce, and Workday. Investors are looking for signals to determine how much AI technology is actually driving Adobe's sales.
From this perspective, it is not surprising that Adobe's post-market trading has fallen sharply, as investors are concerned about the prospects of AI assisting in Adobe's growth due to disappointing guidance.
Editor/Somer