Adobe Earnings: Good Quarter Overall; Longtime CEO Retiring

Key Morningstar Metrics for Adobe

• Fair Value Estimate

  : $380

• Morningstar Rating

  : ★★★★

• Morningstar Economic Moat Rating

  : Narrow

• Morningstar Uncertainty Rating

  : High

What We Thought of Adobe’s Earnings

Adobe’s ADBE fiscal first-quarter revenue grew by 12.0% year over year as reported to $6.40 billion, while non-GAAP operating margin was 47.4%, both of which topped guidance.

Why it matters: Second-quarter guidance was slightly better than our near-consensus model contemplated on the top and bottom lines. This is the seventh straight quarter of top-line upside versus our model. Despite being left for dead, growth accelerated for total revenue, subscription revenue, and current remaining performance obligation, or CRPO, and artificial intelligence-related annual recurring revenue tripled year over year to more than $400 million.

• Countering this was a drag on ARR growth from freemium offerings and weaker stock photo sales. ARR decelerated to 10.9% growth year over year, in line with revenue growth in constant currency. Management expects reacceleration in the second half of the year.
• Beyond the financials and operational data, 62-year-old CEO Shantanu Narayen announced he is stepping down after 18 years at the helm but will remain until a successor is named. The search will include external and internal candidates.

The bottom line: We maintain our fair value estimate of $380 per share for narrow-moat Adobe and view shares as attractively valued for patient and risk-tolerant investors. While we made minor adjustments to reflect near-term guidance, our long-term assumptions remain steady.

• We recognize the sentiment around software, but we see no signs of the bear case unfolding for the industry in terms of AI disruption. Various vectors of acceleration for Adobe underscore that point. Still, heightened uncertainty from the AI threat drove our recent moat rating downgrade.

Coming up: Second-quarter guidance was ahead of our expectations, including sales of $6.43 billion-$6.48 billion, and non-GAAP EPS of $5.80-$5.85. Adobe reaffirmed full-year targets, including 10.2% ARR growth. Given upside in the quarter, we think the firm is on track to exceed fiscal 2026 guidance.