(Speedwell Members click here for the full post or click here for a PDF version of this post).
3Q26 Financials.
Adobe reported fiscal 3Q26 and the stock was down ~2% after hours, but recovered most of that the next day. Post earnings sell offs have been common for Adobe, where they’ve sold off in 11 of the past 13 quarters, suggesting that the market is looking for a clear narrative change, which this quarter did not provide. There was evidence for both bulls and bears to support their pre-existing theses.
Revenues grew +13% y/y (+12% constant currency), which was a ~60bps beat relative to the high end of management’s last quarter guidance. ARR growth decelerated for the 11th consecutive quarter. (Recall that the optically elevated ARR in 2Q26 was the result of the Semrush acquisition, which added $480mn in ARR, absent of which ARR growth would have been closer to 10.5%). This quarter’s ARR growth was 11.2%, but backing out the Semrush acquisition it would be closer to 9.3% y/y. No doubt this continued decline in growth rates has caused investor uneasiness.
Management has attributed this growth slowdown primarily to the shift to a freemium model, which creates more top of funnel usage, but increases the time it takes for them to monetize that usage. The other smaller factor is that their Adobe Stock Image business (~$450mn last disclosed in 1Q26) is under pressure from generative AI images. It is a bit perplexing why they don’t break this business out separately as it is clearly in structural decline and could help investors better understand the underlying business. (Though, at last disclosed it pressured ARR growth by about 30bps, so perhaps it isn’t a large enough drag to change the narrative meaningfully.)
Management continues to vocalize that the freemium strategy is working with creative freemium users growing +70% y/y to hit 100mn MAUs. Below incoming CEO Anil Chakravarthy notes that the funnel is growing and the downstream monetization with Firefly credit packs is starting to work with monetization of the freemium funnel. Firefly ARR was +40% q/q.
It is hard to know for sure though that this freemium usage will ever convert. Management likes to talk about their old strategy of how they made PDF readers free to use and then later monetized with Acrobat to edit PDFs, but how much this analogy holds is a bit of a question mark as there are already many popular alternatives in the low to mid end space (Canva is a primary competitor, but there are others across their apps in addition to free AI generative usage from most model providers). The hope seems to be if they drive enough usage and get users to create a habit on Adobe Express and their other Creative products, they will be able to eventually push them into paid plans or upsell existing creative suite users.
While this strategy makes sense, it will be a while before we know if it pays off. In the meantime, what we do know is that they are bearing the cost of these freemium users who subscription cost grew +24% y/y against subscription revenue growth of +14%, taking subscription gross margins down ~80bps. That gap has widened every quarter this year: subscription COGS grew +10%, then +16%, then +24%, while subscription revenue growth held steady around ~14%.
Now this 8 point increase in COGS growth q/q (the +24% growth this Q vs +16% last Q) is largely the result of the Semrush acquisition, but it still holds that COGS are growing faster than revenues. This becomes even clearer if we look at the underlying COGS drivers, which has been offset by an amortization tailwind. (The disclosure below is from their 2Q 10-Q, since their 3Q 10-Q isn’t out yet, but this trend is largely the same. Amortization was probably a ~2 point smaller tailwind in 3Q).
This is likely because they are serving more costly AI features and not charging commensurately for them, leading to gross margin pressure (one of the risks we entertained in our Adobe Deep Dive).
Now this trade off could be worth it. Taking a small gross margin hit to grow top of funnel usage makes sense. The other aspect of this worth remembering is that they deferred the Creative Cloud price increases. Their annual ARR target at the beginning of 2026 was 10.2%, which was never raised when they acquired Semrush (Semrush did ~$480mn in ARR at the time, which implied a 2 point shortfall to their original target). This was interpreted by many investors as a de facto lowering of their annual revenue target.
Last quarter they noted that half of the ARR shortfall was from not taking pricing up on their Creative Cloud plans and the other half is from diverting traffic to the freemium strategy.
Below Anil reiterates that traffic has been diverted to the freemium funnel.
There still is the lingering question though that if they were so confident in their position, then why would they defer the price increase? The concern is competition is weighing on their ability to raise prices and they feel the need to provide more value and create more user habit before they increase prices.
RPO (remaining performance obligations) is a forward-looking figure, and it slowed to +8% y/y, the first single digit growth rate since 2023. When an analyst asked about it on the call Shantanu said that it was consistent with the ARR trend (remember ex-Semrush ARR is growing closer to 9%). He then gave the same freemium reasoning to explain it, which explains part of it, but cRPO (current RPO) grew a little more at +9% y/y. The cRPO is just the piece of RPO due in the next twelve months, so the fact that it grew faster than the total means the longer-dated portion, where the multi-year enterprise contracts sit, is growing the slowest. That isn’t something the freemium strategy accounts for, making it a bit of an unsatisfying answer. The clear take away though is that Adobe’s revenue growth deceleration isn’t on track to reverse anytime soon.
Their Business Professional & Consumers segment, which includes Acrobat, Adobe Express, and Firefly, grew +16% y/y to $1.91bn in subscription revenue. Their Creative & Marketing Professionals segment, which includes all of their Creative Suite and the old Digital Experiences business grew +13% y/y (or ~10% ex-Semrush) to $4.65bn. Later in the call though they noted that Adobe Experience Manager, Adobe Genstudio, and Adobe Experience Platform grew ARR >20% y/y. This suggests that their core Creative Suite is growing well below that 10% segment consolidated figure.
Perhaps one of the reasons they resegmented the business was to better hide this growth deceleration in what used to be the Digital Media business. Growth in the Creative & Marketing segment is expected to further decelerate in 4Q to 10% (or perhaps ~7% stripping out Semrush). Management continues to point to the growth in non-financial metrics to assuage concerns: 100mn freemium MAUs +70% y/y and 1bn total MAUs +20% y/y, but it is still an unsettling level of growth deceleration. (We will pick back up on this conversation in the business commentary section).
Moving down the P&L, total operating income was +8% y/y vs revenue growth of +13% as opex was +15% y/y (driven by increased R&D and G&A, offset by slower S&M growth). It’s worth mentioning that Semrush is diluting their operating margins.
From a financial perspective, this quarter was fine. They beat management’s guidance and slightly raised their full year revenue guide by $26mn, but kept flat their ending ARR growth guide (they called out a slight FX headwind in the back half of the year). Their old guide is compared to their new guide below.
In the quarter they repurchased ~$2.3bn of stock, bringing diluted shares outstanding down to 395mn, a -1.8% reduction q/q. They note they have $24.55bn left on their existing stock buyback authorization.
The bigger questions with Adobe have less to do with their recent financial performance and more with their pending strategy shift and how they expect future users to interact with their software suite.
Business Commentary.
The incoming CEO of Adobe is Anil Chakravarthy who was The President of Customer Experience Orchestration Business (referred to as CX) before becoming CEO. This business used to be called Digital Experiences but was renamed to emphasize the agentic workflows. There is a growing chorus of executives (including the incoming CEO) who believe agentic work will be the next “platform” shift and Adobe must manage it like they did prior licensing to SaaS transitions.
The question of what it meant that they appointed the former head of Digital Experiences instead of Digital Media (David Wadhwani) meant for the business…
The rest of this post is for members only. Join here.
(Speedwell Members click here for the full post or click here for a PDF version of this post).
For further reading, check out our 99 page Adobe Research Report
The Synopsis Podcast.
Follow our Podcast below. We have four episode formats: “company” episodes that breakdown in-depth each business we write a report on, “dialogue” episodes that cover various business and investing topics, “article” episodes where we read our weekly memos, and “interviews”.
Speedwell Research Reports.
Become a Speedwell Research Member to receive our Adobe Report and all of our other in-depth research reports, shorter exploratory reports, updates, and Plus members also receive Excels.
(Many members have gotten their memberships expensed. If you need us to talk with your compliance department to become an approved vendor, please reach out at info@speedwellresearch.com).
*At the time of this writing, one or more contributors to this report may have a position in stocks mentioned. Furthermore, accounts one or more contributors advise on may also have a position in stocks mentioned. This may change without notice.
Leave a Reply