After strong Q2, Adobe looks to accelerate growth on AI power

Adobe Inc. (NASDAQ: ADBE) has impressed the market with better-than-expected second-quarter numbers and updates on its generative AI initiatives. The design software maker also raised its full-year guidance as it continues to reap the benefits of adopting the subscription-based business model.

The company’s stock rallied soon after the earnings announcement this week, continuing the uptrend witnessed in the run-up to the event. After rebounding from a slump in mid-2022, the shares continued to gain and the momentum accelerated in the past 30 days. While the company’s long-term prospects look bright, it might experience a slowdown this year due to cautious enterprise spending as companies reduce or postpone their software purchases, concerned about macroeconomic uncertainties.

Results Beat

Earnings per share, adjusted for non-recurring items, rose in double-digits to $3.91 in the second quarter. Over the past several years, the company has been regularly reporting better-than-expected quarterly earnings and it was not different this time. At $4.82 billion, revenues were up 10% and above estimates. The main operating segments of Digital Media and Digital Experience, which together account for about 98% of revenues, contributed materially to the top-line growth.

The company is optimistic about repeating the good show and expects that revenues would increase to $4.83-4.87 billion in the third quarter. It is looking for adjusted net income in the range of $3.95 per share to $4.00 per share for the August quarter. Digital Media net new ARR is expected to be approximately $410 million. For fiscal 2023, the management raised its revenue target to $19.25-19.35 billion. Full-year earnings per share guidance have been increased to the new range of $15.65 to $15.75.

‘On Fire’

Firefly, Adobe’s new generative AI-enabled software, is designed to allow customers to use popular Adobe suites like Illustrator and Photoshop more effectively. The advanced features and increased affordability would help a wider range of businesses to meet their design needs and increase productivity.

Commenting on the AI initiatives, Adobe’s CEO Shantanu Narayen said at the earnings call, “We will build foundation models in the categories where we have deep domain expertise including imaging vector video documents and marketing. We are bringing generative AI to life as a copilot across our incredible array of interfaces to deliver magic and productivity gains for a broader set of customers. Since its launch in March, Firefly has captured the imagination of the world with over 0.5 billion generations, and we’re just getting started.”

Figma Deal

The planned acquisition of Figma, which competes against Adobe’s XD platform in the user interface and user experience design markets, is expected to support the company’s AI push. The $20-billion deal, the biggest-ever acquisition by the company, is currently pending due to regulatory scrutiny. The combination can create significant synergies — Figma is a rapidly growing and highly profitable business with products that can add value to Adobe’s portfolio.

Adobe’s stock got a major boost following the earnings announcement this week and once again crossed the $500 mark, before paring a part of those gains. It traded up 2% on Friday afternoon.