Adobe's ($ADBE) fiscal fourth-quarter revenue outlook, which has fallen short of Wall Street's expectations, may actually prove to be more conservative than initially thought. According to RBC Capital Markets, this could indicate an upside potential as analysts look towards year-end trends. On late Thursday, Adobe, the renowned software company, released its third-quarter results, surpassing projections with impressive revenue growth in both its digital media and experience segments.
The company has now set its revenue forecast for the current quarter between $5.50 billion and $5.55 billion. This guidance was carefully constructed by taking into account various macroeconomic conditions as well as the typical seasonal strength expected at year-end. Chief Financial Officer Dan Durn elaborated on these projections during a Thursday earnings conference call, as noted in a Capital IQ transcript. Despite this positive trajectory, both RBC and market analysts were anticipating a revenue figure of around $5.60 billion, which adds a layer of complexity to Adobe's current standings in the market.
Following the announcement, Adobe's shares plunged by 9.4% during Friday's afternoon trading session, marking nearly an 11% decline in value for the year to date. As for the company’s remaining performance obligation (RPO) at the end of the quarter, it stood at a substantial $18.14 billion, reflecting a 15% increase from the previous year.
Concurrently, current RPO also saw a 12% rise, indicating a pattern of 'broader enterprise adoption', as interpreted by RBC analysts Matthew Swanson and Dan Bergstrom in their recent note to clients. The analysts also suggested that the market's reaction to the stock may be seen as an 'overreaction' given the overall strong performance in the quarter. The analysts articulated that despite the robust quarter, the guidance for the fourth quarter and the general outlook for the fiscal year appeared weaker due to three significant deals that were pushed into this quarter, which disrupted the usual seasonal revenue linearity as well as unfavorable foreign exchange rates that had been anticipated. They further identified potential upside factors, including increased strength in net-new digital media's annualized recurring revenue.
Maintaining an 'outperform' rating with a $610 price target for Adobe's stock underlines RBC's confidence in the company's future potential. On the creative side, analysts believe that pricing headwinds encountered in the first half of the fiscal year could transform into tailwinds for the fourth quarter as Adobe continues to expand its generative artificial intelligence (AI) features.
This expansion is expected to facilitate additional up-selling and cross-selling opportunities, with a more explicit monetization approach emerging from services provided by Firefly. Firefly offers a suite of generative AI tools integrated within Adobe's applications, enhancing productivity and creativity.
Additionally, the Experience Cloud presents a near-term monetization opportunity driven by generative AI, allowing Adobe to capitalize on the content supply chain effectively. The analysts highlighted that this drive for return on investment is increasingly evident, manifesting as a consistent upside in RPO. Looking ahead, the next significant event for Adobe could be the Adobe Max conference taking place next month.
While it's anticipated that the company may not offer specific guidance for fiscal 2025, insights into generative AI trends are expected to be of paramount interest to investors, as noted by Swanson and Bergstrom..