Adobe’s (ADBE) AI Bet Is Finally Showing Up In Revenue

Adobe (NASDAQ:ADBE) reported record third-quarter revenue of $6.76 billion, a 13% increase year-over-year, and raised its full-year revenue and profit targets. Non-GAAP EPS grew 15% to $6.13, and GAAP EPS rose 11% to $4.62. Hidden within these figures was the emergence of AI-first revenue, which topped $650 million, a 150% year-over-year growth.

Shantanu Narayen stepped down as CEO, with Anil S. Chakravarthy taking over on December 1. Adobe's AI tools, such as Firefly and the Acrobat AI Assistant, are no longer experimental; Firefly's recurring revenue jumped 40% quarter-over-quarter, while the AI Assistant doubled its monthly active users over three months. The company's user base expanded significantly, with total monthly active users surpassing 1 billion, a 20% year-over-year increase, and creative premium MAU reaching 100 million, a 70% year-over-year boost.

This user growth, primarily in free and freemium tiers, fuels the adoption of paid AI upgrades, reflected in Adobe's AI-first recurring revenue. Cash flow from operations reached a quarterly record of $2.52 billion, and Adobe repurchased shares worth around 9.5 million. Management raised the full-year revenue target to a range of $26.58 billion to $26.63 billion and the non-GAAP EPS target to $24.45 to $24.50.

Enterprise demand remained strong, with Adobe Experience Manager, Adobe Gen Studio, and Adobe Experience Platform seeing their ending ARR grow more than 20% year-over-year. However, remaining performance obligations, the backlog of recognized revenue, grew only 8% year-over-year, trailing the revenue growth and ending ARR growth.

The foreign-exchange headwind slightly impacted the third-quarter results, leading management to adjust full-year guidance before the acquisition of Topaz Labs, which would integrate AI enhancement models into Firefly and Creative Cloud. Despite AI-first ARR being a small portion of Adobe's overall ARR, the transition to an AI-first strategy coincides with Chakravarthy's appointment as CEO, as the company intensifies its focus on agentic software.

Hedge funds reduced their Adobe positions slightly from 86 to 81 quarter-over-quarter, but short interest remains at 4.89% of the float. The stock's forward P/E of 9.22, as of September 11, appears low given the strong revenue growth and AI-first ARR growth. While Adobe navigates execution challenges, including a pending regulatory approval for the Topaz Labs deal, the AI-driven, freemium-driven growth strategy shows promise.