AI boosts Adobe's second-quarter results beyond expectations, raises full-year guidance, and rises by about 17% after hours | Financial Report Insights

After the U.S. stock market closed on Thursday, June 13th, the American multinational computer software company Adobe reported that its revenue and profit for the second quarter of the 2024 fiscal year exceeded expectations. Although the revenue guidance for the next quarter was slightly lower than expected, the full-year target was raised above expectations, leading to a post-market increase of about 17% to a three-month high.

If the stock price maintains its upward trend until the opening of the market tomorrow, Adobe may recover most of the decline after the quarterly report was released. Some netizens jokingly commented:

"This is how I feel when I see Adobe's post-market increase."

Adobe's Quarterly Revenue Increases by 10% to a New High, Accelerating Attraction of New Users with AI Integration in Digital Media Business

According to the financial report, Adobe's total revenue in the second quarter reached a historical high, increasing by 10% year-on-year to $5.31 billion, surpassing the market's expected $5.29 billion. The adjusted EPS was $4.48, exceeding the expected $4.40.

In the quarter, the GAAP operating profit was $1.89 billion, and the non-GAAP operating profit was $2.44 billion, a 12% year-on-year increase. The GAAP net profit was $1.57 billion, and the non-GAAP net profit was $2.02 billion, nearly a 13% year-on-year increase.

Looking at the business segments, the revenue of the main business in the quarter, digital media, increased by 11% year-on-year to $3.91 billion, exceeding the upper limit of the company's previous guidance. Among them, the revenue of the Creative Cloud applications in the digital multimedia family increased by 10% to $3.13 billion, while the Document Cloud revenue increased by 19% to $782 million.

Additionally, the revenue of the digital experience department, including commercial marketing and analytics software, increased by 9% year-on-year to $1.33 billion, within the upper limit of the company's previous guidance. The digital experience subscription revenue increased by 13% year-on-year to $1.2 billion, surpassing the company's guidance.

In terms of indicators reflecting user growth, the "Annualized Recurring Revenue" (ARR) of the digital media business was $487 million, higher than the expected $430 million, with the Document Cloud's new ARR reaching $165 million, exceeding the expected $123 million The company's overall recurring revenue from digital media at the end of the second quarter on May 31 was $16.25 billion, with the ARR of the Creative family of applications reaching $13.11 billion and the ARR of Document Cloud reaching $3.15 billion.

Another key metric to note is the Remaining Performance Obligations (RPO), with a contract value of $17.86 billion, reflecting a portion of future revenue trends. Operating cash flow for the quarter was $1.94 billion, and approximately 4.6 million shares were repurchased.

Analysts have pointed out that the performance of Document Cloud has been particularly strong, with the recent launch of an AI assistant to help analyze and understand PDF documents. Adobe's in-house AI model, Firefly, has been integrated into flagship products such as Photoshop and Illustrator, and similar features are being developed for video editing software Premiere. This has led to the Net New ARR metric showing "strong future sales in the creative product line":

"Net New ARR for the Creative business exceeded expectations, indicating that customers are adopting the company's new AI-based tools. Adobe has proven itself to be part of the AI trend, with the CEO stating that they are attracting a growing user base. Since the release of the Firefly AI model in March last year, it has been used to generate over 9 billion images."

The company raised its full-year performance guidance above expectations, described as "strong outlook," with next quarter revenue largely meeting expectations and EPS positive

Adobe also raised its full-year performance guidance, expecting adjusted earnings per share in the range of $18 to $18.20, with revenue of $21.4 billion to $21.5 billion, higher than market expectations of $18.02 earnings per share and $21.46 billion in revenue. In March, the company had forecasted adjusted earnings per share for the full year to be between $17.60 and $18, with revenue of $21.3 billion to $21.5 billion.

The company's revenue outlook for the third quarter is $5.33 billion to $5.38 billion, slightly below market expectations of $5.4 billion, but the adjusted earnings per share guidance for the quarter is $4.50 to $4.55, higher than the market expectation of $4.48 per share.

The company expects revenue from the digital media business in the next quarter to be $3.95 billion to $3.98 billion, with analysts expecting $3.99 billion; Net New ARR for digital media is estimated to be around $460 million, and digital experience revenue is expected to be $1.33 billion to $1.35 billion.

Adobe's management stated that thanks to the strong growth of Creative Cloud, Document Cloud, and Experience Cloud, the quarterly revenue reached a new high. "Our highly differentiated artificial intelligence approach and innovative product delivery have attracted more and more customers," leading to an upward revision of the annual targets for net new ARR in digital media, digital experience subscription revenue, and EPS.

Some analysts pointed out that before Adobe's earnings report triggered a significant increase after hours, the stock had fallen by 23% year-to-date, while the S&P 500 index had risen by 14% during the same period. However, last year, new AI features drove Adobe's stock up by 77%, reaching a historical high of $699.54 in 2021.

In recent weeks, Adobe's application software peers such as Salesforce, Workday, ServiceNow, SentinelOne, UiPath, and Veeva have all warned of a slowdown in demand, with some companies lowering their full-year revenue expectations, causing concerns about Adobe's performance.

However, the "strong outlook" for the full fiscal year provided in this earnings report should help alleviate investors' concerns that other generative AI tools may harm Adobe's growth potential. The report indicates that the company's efforts to integrate AI capabilities into flagship products are gaining customer support. The management expects that the trend of new users in the Creative business will accelerate in the remaining time of this fiscal year.

Earlier analyses also suggested that Adobe's profitability steadily increased from 2017 to 2023, with the market generally expecting a decline in its earnings this year, followed by a rebound in 2025. The company's earnings per share were $16.07 last year, projected to decrease to $14.13 per share in 2024, and then increase again to $16.17 per share in 2025