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Adobe Q3 Earnings Beat Estimates: Can GenAI Efforts Lift Shares?
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Adobe Inc. (ADBE - Free Report) released third-quarter fiscal 2024 non-GAAP earnings of $4.65 per share, beating the Zacks Consensus Estimate by 2.65%. The figure improved 13.7% on a year-over-year basis.
Total revenues were $5.41 billion, which beat the Zacks Consensus Estimate of $5.37 billion. The figure rose 11% both on a reported and a constant-currency basis from the year-ago quarter.
Top-line growth was driven by the strong performances of Adobe Creative Cloud, Document Cloud and Experience Cloud. Accelerating subscription revenues also contributed well.
Adobe’s strong efforts to bolster its GenAI-powered offerings are expected to boost its prospects. The company’s substantial investments in AI image and video generation to boost its presence in the design software industry are positives.
However, ADBE faces stiff competition in the AI software space from other tech giants and well-funded startups like Stability AI and Midjourney.
The ADBE stock has lost 1.7% year to date against the industry’s rally of 13.6%.
Intensifying competition might cause the returns from its AI push to take longer to materialize due to which its fiscal fourth quarter revenue outlook looks weaker. This led to a slump of more than 8% in the ADBE stock in the pre-market trading session.
Adobe reports revenues under three categories — subscription, product, and services & other.
Subscription revenues were $5.18 billion (accounting for 95.8% of the total revenues), up 11.6% on a year-over-year basis.
Product revenues totaled $82 million (1.5% of the total revenues), down 14.6% year over year.
Services & other revenues were $146 million (2.7% of the total revenues), decreasing 10.4% from the prior-year quarter.
ADBE’s Segmental Details
Digital Media: The segment generated revenues of $4 billion, which improved 11% on a year-over-year basis. The figure surpassed the Zacks Consensus Estimate of $3.97 billion. The segment comprises Creative Cloud and Document Cloud. Digital Media’s annualized recurring revenues (“ARR”) increased to $16.76 billion, of which the net new ARR was $504 million.
Creative Cloud generated $3.19 billion in revenues, up 10% year over year. The figure beat the Zacks Consensus Estimate of $3.18 billion. Creative ARR was $13.45 billion. The company witnessed the solid adoption of Creative Cloud All Apps across various geographies and customer categories, which contributed well to subscription growth. Solid adoptions of Acrobat Pro, Illustrator, Lightroom and Photoshop single apps were positives. The growing traction across Express mobile offerings was a plus. Also, early monetization of the new Firefly Service solution in the enterprise segment and strength in higher-value Creative plans contributed well.
Document Cloud’s revenues were $807 million, up 18% from the prior-year quarter. The figure surpassed the consensus mark of $791 million. Document cloud ARR was $3.31 billion. Solid momentum across the Acrobat ecosystem was a positive. Rising Acrobat desktop demand and mobile subscriptions across various customer segments and geographies contributed well. Strong monetization of AI Assistant with new Acrobat subscriptions was a positive. Growing enterprise and public sector sales, and solid momentum among SMBs drove top-line growth. Also, Google Chrome and Microsoft Edge extensions contributed well to growth in the monthly active user base.
Digital Experience: The segment generated revenues of $1.35 billion, up 10% on a year-over-year basis and beating the consensus mark of $1.33 billion. Experience Cloud subscription revenues were $1.23 billion, rising 12% from the year-ago quarter. Strength across transformational accounts, and Data Insights & Audiences, and Customer Journey categories drove subscription revenue growth. Strong demand for AEP and native apps contributed well. The solid adoption of AEM and Workfront solutions was another positive.
Operating Details of ADBE
The gross margin was 89.8%, which expanded 170 basis points (bps) on a year-over-year basis.
Adobe incurred operating expenses of $2.86 billion, reflecting a 9.5% year-over-year increase. As a percentage of total revenues, the figure contracted 50 bps to 52.9% from the year-ago quarter.
The adjusted operating margin was 46.5%, expanding 30 bps year over year.
ADBE’s Balance Sheet & Cash Flow
As of Aug 30, 2024, the cash and short-term investment balance was $7.5 billion, down from $8.1 billion as of May 31, 2024. Trade receivables were $1.8 billion, up from $1.6 billion in second-quarter fiscal 2024.
The long-term debt was $4.128 billion at the end of third-quarter fiscal 2024 compared with $4.127 billion at the end of second-quarter fiscal 2024.
Cash generated from operations was $2.02 billion in the reported quarter versus $1.94 billion in the previous quarter.
The company repurchased 5.2 million shares in the fiscal second quarter.
Q4 Guidance of ADBE
For fourth-quarter fiscal 2024, Adobe projects total revenues between $5.50 billion and $5.55 billion. The Zacks Consensus Estimate for the same is pegged at $5.60 billion.
Adobe expects Digital Media revenues between $4.09 billion and $4.12 billion. The Digital Experience segment’s revenues are expected between $1.36 billion and $1.38 billion.
Net new ARR in the Digital Media segment is projected to be $550 million. Subscription revenues of Digital Experience are anticipated to be $1.23-$1.25 billion.
Management expects non-GAAP earnings per share between $4.63 and $4.68. The consensus mark for the same is pinned at $4.65.
Image: Shutterstock
Adobe Q3 Earnings Beat Estimates: Can GenAI Efforts Lift Shares?
Adobe Inc. (ADBE - Free Report) released third-quarter fiscal 2024 non-GAAP earnings of $4.65 per share, beating the Zacks Consensus Estimate by 2.65%. The figure improved 13.7% on a year-over-year basis.
Total revenues were $5.41 billion, which beat the Zacks Consensus Estimate of $5.37 billion. The figure rose 11% both on a reported and a constant-currency basis from the year-ago quarter.
Top-line growth was driven by the strong performances of Adobe Creative Cloud, Document Cloud and Experience Cloud. Accelerating subscription revenues also contributed well.
Growing generative artificial intelligence (GenAI) capabilities contributed well.
Adobe’s strong efforts to bolster its GenAI-powered offerings are expected to boost its prospects. The company’s substantial investments in AI image and video generation to boost its presence in the design software industry are positives.
However, ADBE faces stiff competition in the AI software space from other tech giants and well-funded startups like Stability AI and Midjourney.
The ADBE stock has lost 1.7% year to date against the industry’s rally of 13.6%.
Intensifying competition might cause the returns from its AI push to take longer to materialize due to which its fiscal fourth quarter revenue outlook looks weaker. This led to a slump of more than 8% in the ADBE stock in the pre-market trading session.
Adobe Inc. Price, Consensus and EPS Surprise
Adobe Inc. price-consensus-eps-surprise-chart | Adobe Inc. Quote
ADBE’s Top Line in Detail
Adobe reports revenues under three categories — subscription, product, and services & other.
Subscription revenues were $5.18 billion (accounting for 95.8% of the total revenues), up 11.6% on a year-over-year basis.
Product revenues totaled $82 million (1.5% of the total revenues), down 14.6% year over year.
Services & other revenues were $146 million (2.7% of the total revenues), decreasing 10.4% from the prior-year quarter.
ADBE’s Segmental Details
Digital Media: The segment generated revenues of $4 billion, which improved 11% on a year-over-year basis. The figure surpassed the Zacks Consensus Estimate of $3.97 billion. The segment comprises Creative Cloud and Document Cloud. Digital Media’s annualized recurring revenues (“ARR”) increased to $16.76 billion, of which the net new ARR was $504 million.
Creative Cloud generated $3.19 billion in revenues, up 10% year over year. The figure beat the Zacks Consensus Estimate of $3.18 billion. Creative ARR was $13.45 billion. The company witnessed the solid adoption of Creative Cloud All Apps across various geographies and customer categories, which contributed well to subscription growth. Solid adoptions of Acrobat Pro, Illustrator, Lightroom and Photoshop single apps were positives. The growing traction across Express mobile offerings was a plus. Also, early monetization of the new Firefly Service solution in the enterprise segment and strength in higher-value Creative plans contributed well.
Document Cloud’s revenues were $807 million, up 18% from the prior-year quarter. The figure surpassed the consensus mark of $791 million. Document cloud ARR was $3.31 billion. Solid momentum across the Acrobat ecosystem was a positive. Rising Acrobat desktop demand and mobile subscriptions across various customer segments and geographies contributed well. Strong monetization of AI Assistant with new Acrobat subscriptions was a positive. Growing enterprise and public sector sales, and solid momentum among SMBs drove top-line growth. Also, Google Chrome and Microsoft Edge extensions contributed well to growth in the monthly active user base.
Digital Experience: The segment generated revenues of $1.35 billion, up 10% on a year-over-year basis and beating the consensus mark of $1.33 billion. Experience Cloud subscription revenues were $1.23 billion, rising 12% from the year-ago quarter. Strength across transformational accounts, and Data Insights & Audiences, and Customer Journey categories drove subscription revenue growth. Strong demand for AEP and native apps contributed well. The solid adoption of AEM and Workfront solutions was another positive.
Operating Details of ADBE
The gross margin was 89.8%, which expanded 170 basis points (bps) on a year-over-year basis.
Adobe incurred operating expenses of $2.86 billion, reflecting a 9.5% year-over-year increase. As a percentage of total revenues, the figure contracted 50 bps to 52.9% from the year-ago quarter.
The adjusted operating margin was 46.5%, expanding 30 bps year over year.
ADBE’s Balance Sheet & Cash Flow
As of Aug 30, 2024, the cash and short-term investment balance was $7.5 billion, down from $8.1 billion as of May 31, 2024. Trade receivables were $1.8 billion, up from $1.6 billion in second-quarter fiscal 2024.
The long-term debt was $4.128 billion at the end of third-quarter fiscal 2024 compared with $4.127 billion at the end of second-quarter fiscal 2024.
Cash generated from operations was $2.02 billion in the reported quarter versus $1.94 billion in the previous quarter.
The company repurchased 5.2 million shares in the fiscal second quarter.
Q4 Guidance of ADBE
For fourth-quarter fiscal 2024, Adobe projects total revenues between $5.50 billion and $5.55 billion. The Zacks Consensus Estimate for the same is pegged at $5.60 billion.
Adobe expects Digital Media revenues between $4.09 billion and $4.12 billion. The Digital Experience segment’s revenues are expected between $1.36 billion and $1.38 billion.
Net new ARR in the Digital Media segment is projected to be $550 million. Subscription revenues of Digital Experience are anticipated to be $1.23-$1.25 billion.
Management expects non-GAAP earnings per share between $4.63 and $4.68. The consensus mark for the same is pinned at $4.65.
Zacks Rank & Other Stocks to Consider
Currently, Adobe carries a Zacks Rank #2 (Buy).
Some other top-ranked stocks in the broader technology sector are Arista Networks (ANET - Free Report) , Badger Meter (BMI - Free Report) and Fortive (FTV - Free Report) , each carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Arista Networks’ shares have gained 53.4% in the year-to-date period. The long-term earnings growth rate for ANET is anticipated to be 17.2%.
Badger Meter’s shares have gained 34% in the year-to-date period. The long-term earnings growth rate for BMI is projected at 17.91%.
Shares of Fortive have returned 0.6% in the year-to-date period. The long-term earnings growth rate for DBX is expected to be 8.98%.