Adobe (ADBE -9%) is experiencing a significant drop following its Q3 earnings report. The digital document giant returned to double-digit EPS growth after a smaller beat in Q2. Revenue increased by 10.6% year-over-year to a record $5.41 billion, surpassing expectations with strength across all three cloud segments. Net new Digital Media ARR was $504 million, exceeding the prior guidance of approximately $460 million.
- Q4 revenue guidance fell short of analyst expectations, disappointing investors after the positive Q2 guidance. During the Q&A, analysts expressed dissatisfaction with Adobe's Q4 guidance for net new Digital Media ARR at around $550 million. This outlook is the primary reason for the stock's decline today.
- The Digital Media segment saw revenue rise 11% year-over-year (12% in constant currency) to $4.00 billion, surpassing the prior guidance of $3.95-3.98 billion. Adobe's Digital Experience segment, which helps businesses manage customer experiences using analytics, grew revenue by 10% year-over-year (10% in constant currency) to $1.35 billion, also beating its prior guidance of $1.325-1.345 billion, driven by strong subscription revenue growth.
- Within the Digital Media segment, Document Cloud revenue increased by 18% year-over-year (18% in constant currency) to $807 million. Adobe's efforts in link sharing and reader distribution across mobile, web, and desktop continue to drive this business. The company also reported good usage and MAU growth across Adobe Reader and Acrobat, with strong demand for Acrobat desktop and mobile subscriptions.
- Creative revenue grew by 10% year-over-year (11% in constant currency) to $3.19 billion. Growth drivers included new subscriptions across customer segments like Teams, Enterprise, and Education, bolstered by back-to-school demand. There was also strength in Acrobat Pro, Illustrator, Lightroom, and Photoshop. Adobe is seeing increasing demand for its AI-first Adobe Express offerings and early monetization of its new Firefly Services in the enterprise segment.
- Addressing the weak guidance for both revenue and net new Digital Media ARR, Adobe stated that Q3-Q4 in aggregate is unfolding as expected. Q3 was slightly stronger than anticipated due to deals that historically closed in Q4 being finalized earlier. Additionally, Black Friday and Cyber Monday typically fall in the same quarter, but this year, Cyber Monday is in Q1.
Overall, Adobe reported solid Q3 performance. However, despite a reasonable explanation for the subdued Q4 guidance, investors are concerned about Adobe's outlook for closing out FY24. The higher guidance last quarter set positive expectations, so the current downside guidance has been disappointing. Additionally, positive sentiment heading into this report likely set the stage for profit-taking.
