Adobe (ADBE.O) delivered another strong set of earnings reports on Thursday, with August quarter sales and earnings beating most expectations.

But guidance for the November fiscal year was slightly below Wall Street's average expectations. In after-hours trading Thursday, shares fell 9.5 percent to $531. Software stocks have reacted sharply to any disappointments this earnings season.

Asked on the call why guidance for the November quarter implied the lowest quarter-to-quarter growth in Adobe's history, Chief Executive Officer Shantanu Narayen said the just-reported quarter was "very strong."

Some large transactions were completed just before the end of the third quarter.

"The third quarter was slightly stronger than you expected," Chief Financial Officer Dan Durn said.

After the market closed Thursday, the company reported cash profit of $4.65 per share (excluding expenses such as stock compensation) on revenue of $5.4 billion. That was an 11% increase from revenue in the same period last year. The consensus forecast was $4.53 per share on revenue of $5.37 billion.

Sales in Adobe’s largest category, which includes products used to create digital media, rose 11% year-over-year to $4 billion. That figure matched analysts’ forecasts.

A key focus for investors is the number of new subscriptions to digital media products. This growth was $550 million, well ahead of Adobe's guidance of $460 million and even above the $490 million level that pleased investors in May.

The graphics software company is widely favored by analysts, and shares have rebounded strongly in June. JPMorgan Chase & Co.'s Mark Murphy added the stock to his watch list this month.

Adobe's shares lost a third of their value in the first half of the year after its February quarter slowed. A recovery in May has put the stock back in favor. Thursday's close of $584.55 is up about 4% year to date, still lagging the S&P 500's 17% gain. That's 32 times cash earnings forecasts for the fiscal year ending in November, and 29 times estimates for November 2025.

In its earnings report Thursday, Adobe guided for revenue of between $5.5 billion and $5.55 billion and cash profit of between $4.63 and $4.68 for the next quarter. Those numbers were actually below Wall Street's average forecast of $5.6 billion in revenue and $4.67 in earnings per share.

In the closely watched metric of new digital media subscriptions, Adobe’s November forecast would be in line with August’s $550 million. Wall Street had been expecting November’s figure to be around $565 million.

“We think this is the key indicator that caused the stock to fall in after-hours trading,” ISI Evercore analyst Kirk Materne said Thursday.

Speaking with Barron's, the CFO noted that Adobe beat its subscription growth guidance in both May and August. Guidance for August was $460 million, and Adobe achieved $550 million in subscription growth revenue.

Therefore, investors may not have to worry about November guidance not being higher.

When asked by Barron’s how much of the August quarter’s revenue growth came from price increases, Durn said new subscriptions were the biggest contributor to revenue growth, followed by sales of other Adobe products to customers. Price was third in terms of revenue growth.

Supporters of the stock believe Adobe will be one of the first software companies to profit from generative artificial intelligence, which allows artists to generate images, videos and animations.

In its earnings report, Adobe previewed improvements to video generation in its Firefly GenAI product, and Durn said the pace of innovation is faster than ever before.

“Adobe is in the early stages of exploring its GenAI innovation,” Mizuho Securities’ Gregg Moskowitz wrote in his earnings preview. “GenAI will drive higher platform adoption and profitability in the foreseeable future, and indeed the entire industry.”

The article is forwarded from: Jinshi Data