Editing Adobe

At first glance, everything seems to be chugging along just fine at Adobe. Their earnings yesterday continued to show that revenue is still growing at double digit rate with operating margins remaining quite stable.

In fact, Adobe mentioned their ARR from “AI first” offering tripled YoY with monthly active users (MAU) across Acrobat, Creative Cloud, Express and Firefly growing 17% YoY to reach 850 million. Moreover, creative freemium (which includes web and mobile versions of Firefly, Express, Premiere, Photoshop and Lightroom) MAU crossed 80 million, growing 50% YoY.

Given that context, Adobe shareholders may be forgiven if they wonder what exactly this company needs to do to get back in investors’ good book again. Let me suggest what they may need to accomplish to make investors re-think about Adobe’s future.

Adobe shared the below datasheet in their press release yesterday. I will particularly highlight “Total Adobe ARR” row in this table. Notice that Adobe’s ARR (when adjusted for currency) has consistently decelerated for every single quarter in the last nine quarters. In fact, it is the rate of deceleration that slightly accelerated in 1Q’26 which obviously doesn’t inspire a lot of confidence among investors. Adobe did mention that they experienced a “greater-than-anticipated decline” in their stock images book of business which is a $450 million segment for them, but even if you completely adjusted for this segment, its ARR would grow at 11.2% YoY (FX adjusted) which still indicates deceleration.

If such deceleration continues and given Adobe projects 10.2% ARR growth for FY’26, it is quite conceivable that the business may end up with HSD ARR growth by FY4Q’26. As I have laid out in my “How Elephants May Die” piece, you don’t need to believe in a sudden decline in revenue for you to get concerned about a business’s long-term future, but a persistent deceleration can be sufficient to make you concerned.

Moreover, while Adobe’s margin doesn’t seem to show much of a pressure today, you will notice that Sales & Marketing (S&M) in the last four quarters has consistently grown at least ~200 bps faster than revenue. They managed to maintain their operating margins by keeping R&D expenses growth noticeably slower than revenue growth.

I have also updated Adobe’s Digital Media business and compared with Figma’s revenue trajectory. Even though Figma was only 6.6% of Adobe’s Digital Media business in 4Q’25, Figma’s share of incremental growth was much higher and seems to be picking up. Of course, there is a swarm of other (new and old) competitors in creativity software industry which are private companies. If we could have access to the total creativity software industry revenue data every quarter, it would be hardly surprising to learn that Adobe’s share loss in creativity software industry has accelerated quarter after quarter post-ChatGPT.

Of course, the most likely reason for the stock to be down post-earnings is that Shantanu Narayen, who has been Adobe’s CEO for the last 18 years, has abruptly announced his retirement yesterday. He’ll remain as CEO until the company finds a replacement. Narayen became CEO of Adobe in December 2007 and successfully transitioned Adobe in the SaaS era. It is actually remarkable that despite the current ~60% drawdown in Adobe stock, Narayen’s tenure almost matched S&P 500 since he became the CEO of Adobe.

Clearly, the fact that Adobe didn’t announce a replacement right away indicates this is not a typical succession plan for Adobe. I do think it may help Adobe to have a fresh perspective on how to set this company for re-accelerating growth. Adobe has entered a materially higher competitive intensity environment than Narayen likely experienced in his 18-year tenure as CEO, and the company probably needs a different leader to navigate the current phase. This isn’t a criticism of Narayen who is perhaps one of the better software CEOs in Silicon Valley, rather an acknowledgement to the reality that creativity software industry has graduated from stable, quasi-monopoly profit pool structure to a much more competitive one which likely requires bit of an “editing” of Adobe itself.

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