Adobe shares sink amid soft guidance

Shares of creative software provider Adobe sank in after-hours trading after the company reported earnings for its third quarter of Fiscal Year 2024 that was followed by soft guidance. Adjusted earnings per share came in at $4.65, which beat analysts’ consensus estimate of $4.53 per share.

Adobe sales increased

Sales rose by 10.6% year-over-year, reaching $5.41 billion, surpassing analysts’ expectations of $5.373 billion. The primary source of this revenue growth was Adobe’s Digital Media segment, which increased by 11% year-over-year to $4 billion.

For a second consecutive quarter, Adobe’s document-processing software significantly beat estimates. That unit added $163 million of new annually recurring business in the quarter, compared with the $132 million expected by analysts. Wadhwani touted a 70% increase in use of AI within Document Cloud.

Adobe is seeing an investment return for its AI features. Canva Inc., an Australian-based closely held company that generally is considered Adobe’s largest competitive threat, cited new AI tools when it sharply raised prices on business users earlier this month.

Additionally, share buybacks contributed to an EPS figure that exceeded estimates. In the third quarter, Adobe repurchased 5.2 million shares, which slightly boosted the profit share for remaining shareholders. Adobe consistently engages in share repurchases each quarter.

Adobe shares fell about 9%

Investors are keen to see evidence that Adobe can make money from those tools, especially as anxiety rises that small startup rivals will take business from traditional software companies like Adobe, Salesforce Inc. and Workday Inc.

Those concerns seemed to be reaffirmed by a fiscal fourth-quarter sales guidance that fell short of Wall Street estimates. A closely watched metric that tracks the growth of recurring revenue in its creative software business — digital media net new annual recurring revenue — will be $550 million in the period ending in November, the company said Thursday in a statement. Analysts, on average, estimated $561.1 million. Total revenue will be as much as $5.55 billion in the period, compared with analysts’ average estimate of $5.6 billion.

The shares fell about 9% in extended trading after closing at $586.55. The stock has declined 1.7% this year.

Guidance for Q4 2024

Looking forward, management has provided the following guidance for Q4 2024:

1. Revenue of between $5.5 billion and $5.55 billion versus analysts’ estimates of $5.6 billion.

2. Adjusted EPS in the range of $4.63 to $4.68 compared to analysts’ estimates of $4.67.

The company’s outlook has turned out to be worse than anticipated, with revenue falling short of expectations and the midpoint of the EPS range coming in below forecasts. This discrepancy has driven the movement in the stock price during after-hours trading.