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Adobe (ADBE -9%) is heading a good bit lower following its Q3 (Aug) earnings report last night. This digital document giant did return to its double-digit EPS upside pattern after a smaller beat in Q2 (May). Revenue rose 10.6% yr/yr to a record $5.41 bln, which also was better than expected with strength across all three clouds. Net new Digital Media ARR was $504 mln, above prior guidance of approx $460 mln.

• However, the Q4 (Nov) revenue guidance was light of analyst expectations. This was a letdown following upside guidance when Adobe reported Q2 results. Also, during the Q&A, analysts seemed disappointed with Adobe's Q4 guidance for net new Digital Media ARR at approximately $550 mln. The Q4 outlook seems to be the main reason why shares are lower today.
• Its Digital Media segment performed well with revenue rising 11% yr/yr (+12% CC) to $4.00 bln, which was above prior guidance of $3.95-3.98 bln. DM is by far Adobe's larger segment, so people watch it closely. Adobe's other major segment is Digital Experience, which allows businesses to manage/track customer experiences using analytics. DE segment revenue grew 10% yr/yr (+10% CC) to $1.35 bln, which was above its $1.325-1.345 bln prior guidance, with strong subscription revenue growth.
• Within its DM segment, Document Cloud revenue drove overall segment growth at $807 mln, up 18% yr/yr or +18% CC. Link sharing and what Adobe has done with reader distribution across mobile, web and desktop continues to drive this business. Adobe is also seeing good usage and MAU growth across Adobe Reader and Acrobat. Adobe also saw good demand for Acrobat desktop and mobile subscriptions.
• Creative revenue grew to $3.19 bln, up 10% yr/yr or +11% CC. Creative Cloud growth drivers included new subscriptions across customer segments, including Teams, Enterprise, and Education with back-to-school demand; strength across Acrobat Pro, Illustrator, Lightroom and Photoshop. Adobe is also seeing growing demand for its AI-first Adobe Express offerings and early monetization of its new Firefly Services in the enterprise segment.
• Turning to the weak guidance for both revenue and net new Digital Media ARR, Adobe argues that Q3-Q4 in the aggregate is playing out as expected. Specifically, Q3 was a little stronger than expected because a few deals that would have historically closed in Q4 closed earlier than expected. Another factor is that typically Black Friday and Cyber Monday are in the same quarter. However, this year, Cyber Monday is in Q1.

Overall, Adobe reported solid upside in Q3. However, while Adobe offered a reasonable explanation for the tepid Q4 guidance, investors seem nervous about Adobe's outlook to close out FY24. Recall that Adobe guided higher last quarter, so downside guidance this time was a letdown. Another factor is that sentiment was likely pretty positive heading into this report following the gap higher last quarter, so the guidance provides a reason to book profits.