01:55 PM EDT, 03/15/2024 (MT Newswires) -- Adobe's (ADBE) digital media net new annualized recurring revenue, or ARR, guidance for its fiscal second quarter was "underwhelming" and contributed to investor concerns around generative artificial intelligence upside, RBC Capital Markets said.

Late Thursday, the software maker said it expects digital media net new ARR of about $440 million for the ongoing quarter. RBC's prior estimate was $472.4 million, according to a note emailed Friday. For the three months through March 1, Adobe logged stronger-than-expected financial results. Remaining performance obligations growth was 16% year over year led by enterprise strength, Adobe said in its financial statement.

Adobe shares dropped 14% in Friday afternoon trade.

The first-quarter results were "solid," but with less upside than recent history, with net new digital media ARR beating by 5.4% below the average four-quarter beat, RBC analysts, including Matthew Swanson, said. The company's confidence in that metric's outlook likely has increased from 90 days ago, according to the note.

"Net/net pricing will remain a headwind in (the second quarter) before reaching break-even in (the third quarter) and a tailwind in (the fourth quarter), which, along with ramping products, should lead to accelerating" growth in net new digital media ARR in the second half of the year, RBC said.

Adobe late Thursday projected second-quarter adjusted earnings of $4.35 to $4.40 per share on revenue between $5.25 billion and $5.30 billion. In December, Adobe expected fiscal 2024 adjusted EPS of $17.60 to $18 on revenue of $21.30 billion to $21.50 billion.

RBC said there was "confusion" on the company's earnings conference call if its management was reiterating its full-year guidance. "The underlying concerns around the lack of perceived GenAI upside were complicated by pricing dynamics, creating a headwind from a comp perspective," the analysts said.

The brokerage lowered its price target on the Adobe stock to $630 from $650 while maintaining its outperform rating.

"While we expect GenAI to have a long-tail benefit as management opted away from a consumption-focused model initially to one more focused on up-tiering customers deeper into the platform, the stock could remain range-bound until we get additional clarity on the pricing dynamics and GenAI benefit," the analysts wrote.

RBC said it is bullish on the long-term benefit of GenAI and expects the company to provide "additional clarity" as soon as the Adobe Summit event, scheduled for March 26. "While the focus of the event will be showcasing new experience products including a new generative experience model and AI assistant, we feel additional financial color would be warranted."

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