Key Takeaways
- Q4 revenue forecast of $6.8B-$6.85B fell slightly below the Street’s $6.85B expectation
- Projected non-GAAP EPS of $6.30-$6.35 aligned with analyst consensus of $6.30
- Shares declined approximately 3% in post-market hours, adding to a 29% year-to-date decline
- Morgan Stanley maintained its Underweight stance with a $240 target price
- Company appointed Anil Chakravarthy, head of marketing and analytics division, as incoming CEO starting December 1
The software giant posted strong third-quarter results but shares tumbled as its forward-looking guidance disappointed investors. Trading at approximately $248.83 in regular hours, the stock slid roughly 3% after the market close.
Third-quarter revenues reached $6.76 billion, representing a 13% jump from the prior year and exceeding the company’s own projections by roughly 1%. Non-GAAP earnings per share hit $6.13, surpassing Wall Street’s expectations. Solid performance on the surface.
However, traders shifted their attention to future expectations. The company’s fourth-quarter revenue projection of $6.8 billion to $6.85 billion disappointed the Street. While the shortfall was modest, with the midpoint landing just below the $6.85 billion consensus, it was sufficient to trigger selling pressure.
The projected non-GAAP earnings per share for Q4 of $6.30 to $6.35 matched the $6.30 analyst consensus.
The company also lifted its fiscal 2026 revenue outlook by approximately $50 million, reflecting the third-quarter outperformance. Management maintained its fiscal 2026 ARR growth projection at 10.2% and operating margin forecast at 45%.
Annual Recurring Revenue Expansion Decelerates Amid Freemium Pivot
Total annual recurring revenue climbed to $27.5 billion. Net new ARR exceeded expectations by approximately $400 million, though this metric contracted 38% compared to the same period last year. Adobe explained that the decline stems from directing more users toward freemium offerings instead of traditional paid subscriptions.
Fourth-quarter projections suggest approximately $775 million in net new ARR, nearly doubling the third quarter but still representing a 16% year-over-year decrease.
Remaining performance obligations and current RPO expanded 8% and 9% respectively, marking a deceleration from the 13% growth rate recorded in both metrics during Q2.
User engagement metrics showed strength, with total monthly active users surpassing 1 billion, climbing 20% year-over-year. Creative freemium MAU exceeded 100 million, jumping 70%. AI-focused ARR topped $650 million, soaring 150%. Firefly App and credit-pack ARR expanded 40% sequentially.
The company maintains an impressive gross profit margin of 89.4%, demonstrating robust pricing leverage throughout its software ecosystem.
Leadership Transition Sparks Investor Concern
Earlier in the week, the company revealed that Anil Chakravarthy, currently heading the marketing and analytics software segment, will assume the CEO role on December 1.
The selection surprised many observers. Chakravarthy’s current division represents a smaller portion of revenues compared to the flagship creative business. The alternative internal contender, David Wadhwani, who managed the creative segment, will depart the organization later this month.
Morgan Stanley maintained its Underweight rating on the stock after reviewing the quarterly results, holding its $240 price objective. The investment bank pointed to insufficient signs of business momentum improvement. Shares had already declined 29% year-to-date prior to the earnings announcement.
While the company’s AI-focused ARR surged 150%, market participants remain skeptical about whether this expansion can counterbalance competitive threats from emerging AI technologies enabling content creation outside Adobe’s ecosystem.
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