Adobe hopes to acquire new users, firm up margins as it lets Firefly AI out of its jar

Adobe Inc. shares traded between slight gains and losses in the extended session Thursday after the company topped Wall Street estimates for the quarter and provided a revenue outlook that was roughly in line with estimates.

Adobe shares

were down 1.7% at last check, following a 0.3% decline to close the regular session at $552.16.

For the fourth quarter, Adobe forecast earnings of $4.10 to $4.15 a share, while analysts had estimated $4.06 a share, while the midpoint of its forecast revenue range rested at roughly $5 billion, about $2.4 million above the Wall Street consensus estimate.

Adobe’s digital media net new annualized recurring revenue of about $520 million forecast for the fourth quarter was, however, above the $462.1 million consensus estimate, according to FactSet data. On the call, Adobe clarified that the AI contribution to that $520 million forecast was expected to be “modest.”

On the call, Adobe Chief Financial Officer Dan Durn addressed analysts’ concerns about the costs of maintaining AI, such as how compute costs will weigh on margins in rolling out a commercial version of Firefly,  its new generative artificial-intelligence tool. Durn pointed out that in the six-month beta version of Firefly, more than 2 billion images have been generated.

“All this was done while we’re delivering strong margins,” Durn said, citing that Adobe has investments from a cost-of-goods-sold standpoint, when it comes to AI inferencing, content, R&D, training and creating foundation models.

Adobe reported operating margins of 46.3% in the third quarter, following margins of 45.3% in the second quarter, compared with 44.1% in the year-ago third quarter and 45% in the year-ago second quarter.

As for the forecast, Durn said that a 44.5% operating margin target was implicit for the fourth quarter, compared with a margin of 44.7% in the previous fourth quarter.

“So, as you think about us leading this industry, leading the inflection that’s unfolding in front of us, that mid-40s number, we think, is the right ballpark to think about the margin structure of the company as we continue to drive this technology and leadership,” Durn told analysts.

The company reported third-quarter net income of $1.4 billion, or $3.05 a share, compared with $1.14 billion, or $2.42 a share, in the year-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were $4.09 a share, compared with $3.40 a share in the year-ago period.

Revenue rose to $4.89 billion from $4.43 billion in the year-ago quarter.

Analysts surveyed by FactSet had forecast adjusted third-quarter earnings of $3.98 a share on revenue of $4.87 billion.

Adobe reported $3.59 billion in digital-media sales, while analysts expected $3.57 billion.

On the call, Adobe Chairman and Chief Executive Shantanu Narayen told analysts the quarter was driven by Adobe’s value-added services, as it seeks to integrate Firefly into more of its products, and gets “very good at segmenting our customers and understanding how we can make sure that they have the right offering.”

“Now think of that with all of the breadth of offerings that we have across mobile and desktop and web,” Narayen said. “I think internally and externally this has been, again, a real sort of ‘drinking from the fire hose’ of how we embrace AI.”

As it did last quarter, Adobe dropped its Firefly news just ahead of earnings. Ahead of its earnings report back in June, Adobe announced it planned to monetize Firefly, sending shares higher.

The commercial version of Firefly, announced Wednesday, implements a credit system to charge users when they use Firefly AI in their applications, based on “the generated output’s computational cost and the value of the generative AI feature used.”

Adobe shares are up 64.1% year to date, while the tech-heavy Nasdaq Composite Index

is up 33.1%, the S&P 500

has advanced 17.3% and the iShares Expanded Tech-Software Sector exchange-traded fund

has advanced 40.2%.

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