Adobe's Q1/2026 Earnings Review

A good topline mixed with a sudden CEO departure.

I have been very vocal about Adobe and believe the current selloff is unjustified. The numbers still look good, and Adobe is trading at a silly valuation. Sometimes it feels that certain investors are preparing for the funeral of Adobe, but the company is still very much alive.

Before we get into the earnings, make sure to read my deep dive on Adobe and my take on the Q4/2025 earnings. You will find both articles here:

Invest at your own risk; this is not financial advice! This is not a recommendation to buy or sell any securities discussed in the article.

The drawdown reached a new low, and the stock is down 64% from its highs.

The main reason is fear that AI is disrupting businesses. Indeed, the fear is that most of the existing SaaS companies will face strong competition going forward. I believe this reasoning is too simple, and I went into more detail here:

Management’s summary

That’s how the management described the Q2/2025 results:

“Adobe delivered record Q1 results with AI-first ARR more than tripling year over year and subscription revenue growing 13 percent,” said Shantanu Narayen, chair and CEO, Adobe. “Our mission to empower everyone to create represents an even larger opportunity as content powers all experiences in the AI era.”

“Adobe delivered 13 percent subscription revenue growth and record Q1 cash flow of $2.96 billion,” said Dan Durn, executive vice president and CFO, Adobe. “As we accelerate AI-powered capabilities across creativity, productivity and customer experience orchestration, Adobe is well positioned for continued profitable growth.”

Income Statement

Based on the numbers, Adobe is still doing well. Revenue increased 12% YoY, and gross margins are almost touching 90%. SG&A expenses have been rising rather fast, while R&D is mostly flat. That is why operating margins are at 38% again.

Net income with 4% growth has been somewhat slower than topline growth due to rising SG&A expenses and higher income tax expenses. The effective tax rate in Q1/26 was 22%, and for the full year, the tax rate is expected to be 20.5%, which will help earnings in the next quarters.

EPS increased by 11%, significantly faster than net income growth, driven by strong share buybacks. Adobe is using the cheap valuation to buy back shares, and the number of outstanding shares decreased by 6.2% year over year.

The reduction in shares, paired with increasing net income, is one of the reasons I have included Adobe in my Best Buys for February 2026. Learn more about the other candidates here:

Balance Sheet

The balance sheet remains solid, with cash and cash equivalents still being higher than debt. Notice, however, that the large surplus of recent quarters has disappeared due to large share buybacks.

What I like is the position “unearned revenue current”. Customers are paying upfront to receive services, the dream of every working capital manager. Even better: This position continues to grow. This indicates that business is higher than it was a year ago. All of this unearned revenue current will eventually become real revenue that will be visible on the income statement.

Cash Flow Statement

No nig surprises here. Net income is largely transformed into operating cash flow by adding depreciation and amortization, adding the (too large) stock-based compensation, and adding the change in unearned revenue.

Capital expenditures remain minimal for a company this size; therefore, free cash flow is almost equal to operating cash flow.

So what does Adobe do with all the cash?

Adobe buys back shares—a lot of them. In the last four quarters, the share buybacks totaled $10.9 billion. I hope management continues large share buybacks, given the cheap valuation.

The CEO is leaving

Wait, what? That was my first thought when I read that Shantanu Narayen is stepping down after more than 18 years. There is one take from Bill McDermott, CEO of ServiceNow, which I found quite insightful:

Find the video here. If you haven’t followed me on X/Twitter yet, this is a great time to do so

41investments@41investments

That's a great video explaining why $NOW is so crucial

10:18 AM · Mar 15, 2026 · 161 Views

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“You either get really turned on by this environment … or probably it could be a bit more daunting”. Maybe the latter is the case for Shantanu, and he decided to hand over the reins of the company to someone better suited to this large transition into the world of AI.

I am surprised that Adobe has not yet announced a successor, and it leaves a bitter aftertaste.

Over the coming months, I will be working with Frank Calderoni, Adobe’s Lead Director and the Board of Directors to identify my successor and to ensure a smooth transition. Until then, I will continue to lead Adobe as CEO and will stay on as Chair of the Board to support my successor just as John and Chuck did when I took on this role.

Why would you issue such a statement when the stock has been under pressure for months? You need to reassure investors that everything is under control, that you already have a successor in hand, and that you will announce him right away.

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Operational metrics

Both segments are doing well.

Creative & Marketing Professionals grew by 10.5% from FY24 to FY25, and Q1/26 numbers are +12% vs Q1/25.

Business Professionals & Consumers grew by 14.8% from FY24 to FY25, and Q1/26 numbers are +16.4% vs Q1/25. Even though it is the smaller segment, the growth is stronger.

Adobe’s ARR (annual recurring revenue) keeps growing steadily and shows no sign of decline. This metric shows you the expected annual recurring revenue based on the current subscriptions. This is a forward-looking metric, so it is very important to keep an eye on it. There is one trend to note, however: ARR growth has been slowing every quarter since Q1/24, if you use the old currency rates, and since Q1/25 if you use the December 2025 currency rates.

Adobe’s RPO (remaining performance obligations) is another metric I keep an eye on. This one shows how much revenue will come in from signed contracts that have not yet been billed. If you sign a 1-year deal and are in month 1, you will have recognized only 1/12 of it as revenue, with the remaining 11/12 considered RPO.

The RPO shows its usual small decline in Q1, since many deals are usually signed in Q4.

Earnings Call Analysis

I went through the earnings call in detail and compiled the most important parts, so you don’t have to listen to the whole call.

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