Adobe posts solid earnings beat and raises its full-year guidance, but investors yawn – News

Adobe Inc. raised its full-year profit and revenue guidance after beating Wall Street’s targets in its latest financial results, but the positive numbers failed to impress investors much, and its stock was moving lower in late-trading.

The company reported second-quarter earnings before certain costs such as stock compensation of $5.06 per share on revenue of $5.87 billion, up 11% from a year earlier. That was better than expected, with analysts looking for earnings of just $4.97 per share on sales of $5.8 billion.

One year earlier, Adobe delivered earnings of just $4.48 per share on sales of $5.31 billion. The growing revenue helped Adobe to increase its bottom line, and it posted a net profit of $1.69 billion in the quarter, up from $1.57 billion in the year-ago period.

Adobe’s digital media segment saw annual recurring revenue increase by 12% to $18.09 billion, while the digital experience business saw subscription revenue rise 11% to $1.33 billion.

Adobe Chair and Chief Executive Shantanu Narayen (pictured) told shareholders that the company is delivering on its strategy to deliver innovation for business, creative and marketing professionals. “Adobe’s AI innovation is transforming industries, enabling individuals and enterprises to achieve unprecedented levels of creativity,” he said.

The company told analysts it’s now looking for full-year earnings of between $20.50 and $20.70 per share, up from its previous range of $20.20 to $20.50, while its revenue forecast now calls for between $23.5 billion to $23.6 billion, compared to its previous guidance of $23.3 billion to $23.6 billion.

The revised guidance suggests a lot of optimism from Adobe’s management, for it’s some way ahead of the analyst’s consensus estimates. Wall Street is looking for full-year earnings of just $20.39 on sales of $23.45 billion. But that optimism is sorely needed, because investors have a lot of concerns about Adobe.

Founded back in 1982, the company is an iconic name in the technology industry, best known for its creative software products like Photoshop, Acrobat and Premiere Pro, which are widely used by visual and video artists. But although it’s one of the world’s most recognizable software companies, it has come under considerable pressure in recent months, with high interest rates and a sluggish global economy forcing enterprises to cut back on software spending.

It has responded by embracing the rise of generative artificial intelligence tools for image and video creation, with AI photo tools such as Firefly. However, some analysts see AI as more of a threat than an opportunity for the company, even as it continues to add new tools with each passing quarter. They believe it could end up losing market share as its traditional creative tools become less relevant in a world where more design is being done by AI models.

Though Adobe has added plenty of its own generative AI tools, it’s not the only one, with rivals such as Canva’s Image Generator and OpenAI’s Sora and Google LLC’s Veo 3 for video generation making life harder for the company.

Investors have been looking for Adobe to show there is strong demand for its AI tools and demonstrate it can make money for them, but so far they have been left disappointed. The market was not thrilled with its guidance three months earlier, and competition in the AI industry continues to increase.

But analyst Liz Miller of Constellation Research Inc. sees it differently, and believes that Adobe’s classic tools like Photoshop are a long way from extinction, and will simply evolve and integrate many generative AI capabilities themselves.

“Assuming that Photoshop might soon die is a bit like thinking instant coffee will kill brewed coffee,” Miller said. “There will always be creative professionals that crave the process of creation, who are thrilled by the addition of generative AI capabilities that make that overarching process easier.”

Miller also believes generative AI is becoming a force multiplier for Adobe’s Digital Experience business, with marketers being called on by enterprises to try and ramp up growth to combat uncertainty in the markets.

“Generative AI solutions like GenStudio Foundation and GenStudio for Performance Marketing provide opportunities to do more with less,” the analyst continued. “The Firefly suite of models also continues to power progress and that won’t be slowing down anytime soon either. The outputs and quality of enterprise-ready, commercially safe generative AI continues to improve with new image, video and audio generation capabilities.”

In the wake of today’s results, Adobe’s stock declined just over a percentage point, and it’s now down 7% in the year to date, compared with a 2.8% gain by the broader S&P 500. The company’s valuation has been affected too, and its shares are trading at 19.1 times its expected earnings over the next 12 months, some way below its five-year average of 31.3 times.

Photo: Fortune Live Media/Flickr