Adobe's earnings guidance misses expectations, dropping over 8% in after-hours trading | Earnings report insights

Adobe announced its fourth-quarter results after the market closed on Wednesday, showing that although the company's adjusted EPS for the fourth quarter exceeded expectations, the guidance for fiscal year 2025 fell short of expectations. Adobe's stock dropped over 8% in after-hours trading. Analysts believe that Adobe's disappointing guidance has intensified market concerns about the potential impact from emerging AI startups.

Here are the key points from Adobe's earnings report:

Key Financial Data:

Revenue: Adobe achieved revenue of $5.61 billion in the fourth quarter of fiscal year 2024, a year-on-year increase of 11%, surpassing analysts' expectations of $5.54 billion.

Operating Profit: The GAAP operating profit for the fourth quarter was $1.96 billion, while the non-GAAP operating profit was $2.60 billion.

Net Profit: The GAAP net profit for the fourth quarter was $1.68 billion, and the non-GAAP net profit was $2.13 billion.

Earnings Per Share: The adjusted diluted earnings per share were $4.81, higher than analysts' expectations of $4.67.

Segment Data:

Digital Media Segment: Revenue was $4.15 billion, a year-on-year increase of 12%. Document Cloud revenue was $843 million, up 17% year-on-year. Creative Cloud revenue grew to $3.30 billion, an 11% year-on-year increase, in line with analysts' expectations.

New Digital Media: The annual recurring revenue (ARR) was $578 million, with digital media ARR reaching $17.33 billion at the end of the quarter. Document Cloud ARR grew to $3.48 billion. Creative Cloud ARR increased to $13.85 billion.

Digital Experience Segment: Revenue was $1.40 billion, a year-on-year increase of 10% (calculated on a reported and constant currency basis). Digital experience subscription revenue was $1.27 billion, up 13% year-on-year.

Full Fiscal Year Data:

Revenue: Adobe achieved revenue of $21.51 billion in fiscal year 2024, a year-on-year increase of 11%.

Operating Profit: GAAP operating profit was $6.74 billion, while non-GAAP operating profit was $10.02 billion.

Net Profit: GAAP net profit was $5.56 billion, and non-GAAP net profit was $8.28 billion.

Earnings Per Share: GAAP earnings per share were $12.36, and non-GAAP earnings per share were $18.42.

Cash Flow: The annual operating cash flow reached $8.06 billion.

Stock Buyback: Approximately 17.5 million shares were repurchased throughout the year.

Fiscal Year 2025 Guidance:

Revenue: The expected revenue for fiscal year 2025 is $23.4 billion, below analysts' expectations of $23.8 billion

Earnings per Share: Earnings per share are expected to be between $20.20 and $20.50, falling short of analysts' expectations of $20.52.

Adobe is known for the software it develops for creative professionals, and the company is currently adding generative AI features to its applications, such as embedding its proprietary model Firefly in products like Photoshop. However, some analysts have noted that the rollout of its AI video products is significantly lagging behind OpenAI's Sora service.

At the annual user conference held in October, Adobe launched an AI tool for creating videos, which has been integrated into the editing application Premiere and is currently being gradually opened to the public. David Wadhwani, head of Adobe's creative business, stated that the company will soon launch a "new high-priced Firefly service" that includes video model capabilities.

Adobe's Chairman and CEO Shantanu Narayen stated:

"Adobe achieved record revenue in fiscal year 2024, reflecting strong demand for Creative Cloud, Document Cloud, and Experience Cloud, as well as the critical role these products play in driving the AI economy. Our highly differentiated technology platform, rapid pace of innovation, diversified market strategies, and integration of cloud services position us well for growth in the coming year."

However, Adobe's path to AI transformation remains uncertain. So far this year, Adobe's stock has fallen 7.8%, underperforming the software industry index, which has risen over 30%. Concerns have repeatedly emerged among investors that AI-based creative tools from companies like OpenAI or Runway AI could capture Adobe's market share. After the earnings report was released, Adobe's stock price fell more than 8% in after-hours trading on Wednesday.

In the last quarter, Adobe stated that its strategy is to encourage customers to use AI features rather than directly profit from these tools. However, this strategy has begun to test investors' patience.

Citigroup analyst Tyler Radke previously lowered Adobe's target price, believing that due to Adobe's greater focus on expanding its user base rather than monetizing technology, its stock price may continue to fluctuate within a range.

Alonso Munoz, Chief Investment Officer of Hamilton Capital Partners, believes that Adobe needs to win customer recognition through practical AI products, similar to Salesforce.

"If Adobe's pricing can translate into growth this quarter, and investors like this performance, then the stock price will be rewarded. If this goal can really be achieved, I think it will catch up with other AI stocks."