Adobe releases strong financial results

Adobe rose in extended trading after projecting strong future sales for its creative products, suggesting customers are adopting the company’s new artificial intelligence-based tools.

A closely watched metric of new creative software business — digital media net new annual recurring revenue — will be $460 million (R8.484 billion) in the current quarter, compared with the average estimate of $435.2 million.

The longtime leader in software for graphic arts professionals has faced a fresh wave of investor anxiety that generative AI will cut into its market.

Application software peers like Salesforce, Workday and ServiceNow have confronted similar concerns in recent weeks after reporting slowing demand.

The results signal that Adobe’s efforts to incorporate AI features into its products are gaining support among customers as the company battles smaller rivals, including startups focused on the emerging technology.

Adobe expects an acceleration in new creative business through the rest of the fiscal year, Chief Financial Officer Dan Durn said in a conference call after the quarterly results were released.

The company also raised its fiscal-year profit forecast to as much as $18.20 (R335.66) a share, excluding some items, compared with a previous outlook of $18 a share. Analysts, on average, estimated $18.02.

Adobe’s proprietary AI model, Firefly, has been integrated into products such as Photoshop and Illustrator while the company is working on developing similar technology for its video-editing software, Premiere.

The model has been used to generate over 9 billion images, chief executive officer Shantanu Narayen said.

The shares hit a high of $537.38 after closing at $458.74 in New York. After gaining 77% in 2023, the stock has dipped 23% since the start of the year.

The results and share reaction are a “positive contrast to the rest of enterprise software,” Tyler Radke, an analyst at Citigroup Inc., wrote in a note.

In the fiscal second quarter, sales increased 10% to $5.31 billion, Adobe said Thursday in a statement. Profit, excluding some items, was $4.48 a share.

Wall Street projected earnings of $4.40 a share on revenue of $5.29 billion. Customers are renewing to more expensive plans including greater use of Firefly, the company added.

New innovations are allowing Adobe to attract an “expanding universe of users,” Narayen said on the call.

Whether Adobe can lure new students and nonprofessional users, who have flocked to rivals like Canva Inc. in recent years, has been a key point of concern for investors.

Monthly active users of Express — Adobe’s product for casual creators that works similarly to Canva — more than doubled in the three months ended May 31 compared with the previous quarter, said David Wadhwani, who oversees Adobe’s creative business.

Still, the company is in the early stages of making money from AI products, executives said during the call.

Adobe is focused on “converting the pipeline, interest and awareness of AI into monetization,” Narayen said.

The digital media unit, which includes Adobe’s flagship creative and document-processing software, posted an 11% increase in sales to $3.91 billion, in the period ended May 31.

Revenue from the unit that includes marketing and analytics software rose 9% to $1.33 billion.

Particular strength was reported in Adobe’s document cloud business. That unit added $165 million of new annually recurring business in the quarter, compared with the $122.7 million expected by analysts.

This was driven by users opting for a new AI-assistant feature, which helps analyze and understand PDFs and other documents, Narayen said during the earnings call.

The strong outlook should allay investor concerns about other generative AI tools detracting from Adobe’s growth prospects, wrote Anurag Rana, an analyst at Bloomberg Intelligence.