Adobe Inc. shares dropped after the company delivered an outlook that failed to quell investor impatience for new artificial intelligence tools to start generating cash.
Known for its software for creative professionals, Adobe has been adding AI features to its applications, such as embedding its proprietary technology, Firefly, into products like Photoshop and Illustrator. But investors are keen to see evidence that Adobe can make money from those tools, especially as anxiety rises that small startup rivals will take business from traditional software companies like Adobe, Salesforce Inc. and Workday Inc.
Those concerns seemed to be reaffirmed by a fiscal fourth-quarter sales guidance that fell short of Wall Street estimates. A closely watched metric that tracks the growth of recurring revenue in its creative software business — digital media net new annual recurring revenue — will be $550 million in the period ending in November, the company said Thursday in a statement. Analysts, on average, estimated $561.1 million. Total revenue will be as much as $5.55 billion in the period, compared with analysts’ average estimate of $5.6 billion.
The shares fell about 9% in extended trading after closing at $586.55. The stock has declined 1.7% this year.
On a call with analysts after the results were released, David Wadhwani, digital media division chief, said Adobe is still focused on making sure customers use its AI innovations rather than seeking to directly make money from the tools. The company is also working on developing similar technology for its 3D and video-editing software. Chief Executive Officer Shantanu Narayen added that new content types, like video, will give Adobe more ways to sell the tools in the future.
But investors were expecting Adobe to show results from AI in the second half of this fiscal year, Michael Turrin, an analyst at Wells Fargo, said in an interview with Bloomberg Television. They were likely hoping for better fourth-quarter guidance, he added.
Wadhwani touted price increases announced last year as one way Adobe is seeing a return on investment for its AI features. Canva Inc., an Australian-based closely held company that generally is considered Adobe’s largest competitive threat, cited new AI tools when it sharply raised prices on business users earlier this month.
In the fiscal third quarter, Adobe reported that sales increased 11% to $5.41 billion. Profit, excluding some items, was $4.65 a share. Analysts, on average, projected earnings of $4.53 a share on revenue of $5.37 billion, according to data compiled by Bloomberg.
For a second consecutive quarter, Adobe’s document-processing software significantly beat estimates. That unit added $163 million of new annually recurring business in the quarter, compared with the $132 million expected by analysts. Wadhwani touted a 70% increase in use of AI within Document Cloud.
Still, the fact that the document-processing software outperformed expectations by more than the products for editing photos and videos — where Adobe has created proprietary AI models — may also be fueling investor anxiety, wrote Tyler Radke, an analyst at Citigroup.
