Key Takeaways
- Fourth-quarter revenue projection of $6.8B to $6.85B slightly missed the $6.85B Street consensus
- Adjusted earnings per share forecast of $6.30 to $6.35 aligned with analyst expectations of $6.30
- Shares declined approximately 3% during after-hours session, extending year-to-date losses to 29%
- Morgan Stanley maintained its Underweight stance with a $240 target price
- Company appointed Anil Chakravarthy, an internal executive, as incoming CEO starting December 1
Despite posting solid third-quarter results that exceeded expectations, Adobe saw its shares retreat as forward guidance disappointed investors. Trading at approximately $248.83 during regular hours, the stock tumbled roughly 3% in the after-market session.
Third-quarter revenue totaled $6.76 billion, marking a 13% increase from the prior year and surpassing the company’s own projections by approximately 1%. Adjusted earnings per share reached $6.13, topping Wall Street forecasts. By most measures, a solid performance.
However, investors turned their attention to future expectations. The company projected fourth-quarter revenue between $6.8 billion and $6.85 billion. The middle of this range fell below the $6.85 billion Wall Street consensus. While the shortfall was marginal, it was sufficient to trigger a selloff.
The adjusted earnings per share outlook for the fourth quarter landed between $6.30 and $6.35, essentially matching the analyst consensus of $6.30.
The software giant also increased its fiscal 2026 revenue outlook by approximately $50 million, essentially incorporating the third-quarter outperformance. The company maintained its fiscal 2026 annual recurring revenue growth target at 10.2% and operating margin projection at 45%.
Annual Recurring Revenue Expansion Decelerates Amid Freemium Pivot
Total annual recurring revenue hit $27.5 billion. Net new ARR exceeded expectations by approximately $400 million, though this metric dropped 38% compared to the same period last year. Adobe explained the decrease as a result of channeling more users toward freemium offerings instead of paid subscriptions.
The fourth-quarter outlook suggests approximately $775 million in net new ARR, nearly twice the third-quarter figure but still representing a 16% year-over-year decline.
Both remaining performance obligations and current RPO expanded by 8% and 9% respectively, representing a deceleration from the 13% growth rate recorded in both metrics during the second quarter.
Regarding user metrics, total monthly active users exceeded 1 billion, climbing 20% year-over-year. Creative freemium monthly active users surpassed 100 million, jumping 70%. AI-focused ARR climbed above $650 million, surging 150%. The Firefly App and credit-pack ARR expanded 40% sequentially.
The company’s gross profit margin stands at 89.4%, demonstrating robust pricing strength throughout its software ecosystem.
Leadership Transition Heightens Investor Concerns
Earlier in the week, Adobe revealed that Anil Chakravarthy, currently leading the company’s marketing and analytics software segment, would assume the CEO role on December 1.
The selection caught many by surprise. Chakravarthy’s current division is considerably smaller than Adobe’s flagship creative business. David Wadhwani, the other internal contender who managed the creative unit, will depart the organization later this month.
Morgan Stanley maintained its Underweight rating on Adobe after reviewing the quarterly results, holding its $240 price target unchanged. The investment firm pointed to insufficient signs of a business turnaround. Shares had already fallen 29% year-to-date prior to the earnings announcement.
While Adobe’s AI-focused ARR surged 150%, investors continue to express skepticism about whether this expansion can counterbalance competitive pressures from rival AI platforms that enable content creation outside Adobe’s ecosystem.
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