Why Is Adobe (ADBE) Down 11.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Adobe Systems (ADBE). Shares have lost about 11.6% in that time frame, underperforming the S&P 500.Will the recent negative trend continue leading up to its next earnings release, or is Adobe due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts. Adobe Q3 Earnings and Revenues Surpass EstimatesAdobe released third-quarter fiscal 2024 non-GAAP earnings of $4.65 per share, beating the Zacks Consensus Estimate by 2.65%. The figure improved 13.7% on a year-over-year basis.Total revenues were $5.41 billion, which beat the Zacks Consensus Estimate of $5.37 billion. The figure rose 11% both on a reported and a constant-currency basis from the year-ago quarter.Top-line growth was driven by the strong performances of Adobe Creative Cloud, Document Cloud and Experience Cloud. Accelerating subscription revenues also contributed well.Growing generative artificial intelligence (GenAI) capabilities contributed well.Adobe’s strong efforts to bolster its GenAI-powered offerings are expected to boost its prospects. The company’s substantial investments in AI image and video generation to boost its presence in the design software industry are positives.However, ADBE faces stiff competition in the AI software space from other tech giants and well-funded startups like Stability AI and Midjourney. Intensifying competition might cause the returns from its AI push to take longer to materialize due to which its fiscal fourth quarter revenue outlook looks weaker.ADBE’s Top Line in DetailAdobe reports revenues under three categories — subscription, product, and services & other.Subscription revenues were $5.18 billion (accounting for 95.8% of the total revenues), up 11.6% on a year-over-year basis.Product revenues totaled $82 million (1.5% of the total revenues), down 14.6% year over year.Services & other revenues were $146 million (2.7% of the total revenues), decreasing 10.4% from the prior-year quarter.ADBE’s Segmental DetailsDigital Media: The segment generated revenues of $4 billion, which improved 11% on a year-over-year basis. The figure surpassed the Zacks Consensus Estimate of $3.97 billion. The segment comprises Creative Cloud and Document Cloud. Digital Media’s annualized recurring revenues (“ARR”) increased to $16.76 billion, of which the net new ARR was $504 million.Creative Cloud generated $3.19 billion in revenues, up 10% year over year. The figure beat the Zacks Consensus Estimate of $3.18 billion. Creative ARR was $13.45 billion. The company witnessed the solid adoption of Creative Cloud All Apps across various geographies and customer categories, which contributed well to subscription growth. Solid adoptions of Acrobat Pro, Illustrator, Lightroom and Photoshop single apps were positives. The growing traction across Express mobile offerings was a plus. Also, early monetization of the new Firefly Service solution in the enterprise segment and strength in higher-value Creative plans contributed well.Document Cloud’s revenues were $807 million, up 18% from the prior-year quarter. The figure surpassed the consensus mark of $791 million. Document cloud ARR was $3.31 billion. Solid momentum across the Acrobat ecosystem was a positive. Rising Acrobat desktop demand and mobile subscriptions across various customer segments and geographies contributed well. Strong monetization of AI Assistant with new Acrobat subscriptions was a positive. Growing enterprise and public sector sales, and solid momentum among SMBs drove top-line growth. Also, Google Chrome and Microsoft Edge extensions contributed well to growth in the monthly active user base.Digital Experience: The segment generated revenues of $1.35 billion, up 10% on a year-over-year basis and beating the consensus mark of $1.33 billion. Experience Cloud subscription revenues were $1.23 billion, rising 12% from the year-ago quarter. Strength across transformational accounts, and Data Insights & Audiences, and Customer Journey categories drove subscription revenue growth. Strong demand for AEP and native apps contributed well. The solid adoption of AEM and Workfront solutions was another positive.Operating Details of ADBEThe gross margin was 89.8%, which expanded 170 basis points (bps) on a year-over-year basis.Adobe incurred operating expenses of $2.86 billion, reflecting a 9.5% year-over-year increase. As a percentage of total revenues, the figure contracted 50 bps to 52.9% from the year-ago quarter.The adjusted operating margin was 46.5%, expanding 30 bps year over year.ADBE’s Balance Sheet & Cash FlowAs of Aug 30, 2024, the cash and short-term investment balance was $7.5 billion, down from $8.1 billion as of May 31, 2024. Trade receivables were $1.8 billion, up from $1.6 billion in second-quarter fiscal 2024.The long-term debt was $4.128 billion at the end of third-quarter fiscal 2024 compared with $4.127 billion at the end of second-quarter fiscal 2024.Cash generated from operations was $2.02 billion in the reported quarter versus $1.94 billion in the previous quarter. The company repurchased 5.2 million shares in the fiscal second quarter.Q4 Guidance of ADBEFor fourth-quarter fiscal 2024, Adobe projects total revenues between $5.50 billion and $5.55 billion. Adobe expects Digital Media revenues between $4.09 billion and $4.12 billion. The Digital Experience segment’s revenues are expected between $1.36 billion and $1.38 billion.Net new ARR in the Digital Media segment is projected to be $550 million. Subscription revenues of Digital Experience are anticipated to be $1.23-$1.25 billion.Management expects non-GAAP earnings per share between $4.63 and $4.68.How Have Estimates Been Moving Since Then?It turns out, estimates revision have trended upward during the past month.VGM ScoresAt this time, Adobe has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.OutlookEstimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Adobe has a Zacks Rank #3 (Hold). 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