Shares of Adobe Inc were trending lower in extended trading today after the company offered light guidance that fell short of analysts’ expectations. The lower forecast signals that it’s facing stiff competition, resulting in softer demand for its artificial intelligence-powered editing tools.
The company reported third-quarter earnings before certain costs such as stock compensation of $4.65 per share on revenue of $5.41 billion, up 11% from the same period one year earlier. The results were better-than-expected, with Wall Street targeting lower earnings of just $4.53 per share on sales of $5.37 billion.
Adobe also boosted its bottom line, reporting a net income of $1.68 billion in the quarter, up from $1.4 billion in the year-ago period.
Adobe Chair and Chief Executive Shantanu Narayen (pictured) said rising adoption of AI-powered features such as Firefly and Acrobat AI Assistant are driving increased demand for the company’s services.
“With groundbreaking advancements in AI across Creative Cloud, Document Cloud and Experience Cloud, we are empowering millions of users worldwide,” he said. “Our vision revolves around Adobe’s deep technology platforms across Creative Cloud, Document Cloud and Experience Cloud which, when integrated, provide significant differentiation and value.”
Founded in 1982, Adobe is one of the world’s biggest suppliers of creative software products, which are used by visual and video artists. Its best known products, such as Photoshop, Acrobat and Premiere Pro, have helped to make Adobe one of the world’s most recognizable software companies.
However, the company has come under pressure in recent months, with high interest rates and a tough economy forcing enterprises to implement cost-cutting measures, which has led to reduced spending on software products.
In addition, Adobe faces increased competition from AI startups such as Stability AI Inc. and Midjourney Inc., which sell tools that allow users to generate images with text prompts. As a result, Adobe has struggled to grow as fast as investors had hoped.
Those struggles were evident in the company’s fourth quarter guidance, which came up short of expectations. Adobe officials said they’re looking for earnings of between $4.63 and $4.68 per share on sales of between $5.5 billion and $5.55 billion in the next quarter, with the midpoints falling below the Street’s targets of $4.67 per share in earnings and $5.61 billion in sales.
The lower guidance did little to reassure investors, and Adobe’s stock plunged more than 9% in the after-hours trading session.
Some aspects of Adobe’s business are looking healthy, though. The Digital Media segment, Adobe’s biggest, saw revenue increase 11% during the quarter to $4 billion. Within that segment, Document Cloud delivered sales of $807 million, up 18% from a year earlier, while Creative Cloud revenue rose 10% to $3.19 billion.
The company’s other main business segment, Digital Experience, generated $1.35 billion in sales, up 10% from a year earlier. Subscription revenue within that segment came to $1.23 billion, up 12%.
All told, Adobe’s subscription revenue rose 11% to $5.18 billion.
Third Bridge analyst Charlie Miner said Adobe’s weak guidance is the result of “spotty execution” by the company, and highlighted concerns from customers who view the Digital Experience Cloud as an “aging platform” with deteriorating win rates.
“Adobe will need perfect execution on the creative tools and AI fronts to drive the growth necessary to justify its premium pricepoint,” the analyst said.
However, despite these concerns, Miner said he is more optimistic about the company’s longer-term prospects. He explained that the narrative around Adobe and AI seems to be shifting, and that fears of AI disruption are slowly subsiding.
“Our experts are increasingly convinced that Adobe will emerge as one of the leaders in AI for the creative tools space,” he said. “While incremental revenue from AI remains uncertain, our experts have highlighted the ability of AI to democratize digital design, potentially leading to 20% to 35% growth in the industry’s total available market.”
There are signs that Adobe is making progress on the AI front. For instance, it revealed that “AI interactions” in Adobe Acrobat, its PDF creation and editing tool, were up 70% on a sequential basis, compared to the prior quarter. Earlier this year, Adobe integrated an embedded AI assistant within Acrobat. The chatbot can answer questions about user’s PDF documents and generate summaries of their content. During the quarter, Adobe updated those capabilities with new tools that enable users to generate images and embed them in PDFs.
Late last month, Adobe announced a major update to its Workfront platform for marketing teams. The new Workfront Planning features comes with an integrated AI assistant that can help marketers to centralize work, automate campaign planning and scheduling across organizations.
Later this year, Adobe plans to launch a new generative AI-powered video creation tool called Adobe Firefly Video Model. The company has high hopes about its potential to capture the imagination of creative professionals.