Adobe beats expectations but another top executive leaves, putting pressure on its stock

A bad day for the creative software company Adobe Inc. was made even worse after it revealed another top executive is departing, as the news overshadowed a solid earnings and revenue beat.

The company said today that Chief Financial Officer Dan Durn is going to leave on June 15, having served in the role for almost five years, to seek a new “professional opportunity.” He will be replaced by Steve Day, senior vice president of corporate finance and the CFO of the Customer Experience Orchestration business, on an interim basis.

The market reacted negatively to the news, which came just three months after longtime Chief Executive Shantanu Narayen (pictured) announced his own plans to step down from the company later in the year, once a successor has been found. Narayen has served as the company’s CEO for 18 years, notably overseeing the company’s shift from selling packaged software to a software-as-a-service model. Adobe’s stock fell more than 5% in late trading, having already slumped more than 6% during the regular trading session, as the announcement appeared to eclipse an upbeat financial report.

The company reported second-quarter earnings before certain costs such as stock compensation of $5.96 per share, surpassing Wall Street’s expectation of $5.82 per share. Revenue for the period came to $6.62 billion, up 13% from a year earlier and above the $6.45 billion forecast.

Adobe also raised its full-year revenue guidance, saying it now expects sales of between $26.50 billion and $26.60 billion, up from an earlier range of $25.9 billion to $26.1 billion. Analysts are targeting full-year revenue of $26.1 billion. For the current quarter, Adobe is seeking earnings of between $6.05 and $6.15 per share on sales of $6.67 billion to $6.72 billion. Wall Street is forecasting earnings of just $5.77 on $6.52 billion in sales.

Narayen told analysts on a conference call that the strong results reflect “strong AI-driven demand across our customer groups.” He explained that this has prompted the company to rethink its strategy going forward, and that it will now focus on expanding its “freemium” artificial intelligence offerings in an effort to grow its user base. This will come at the expense of short-term annualized recurring revenue growth, he said.

The CEO insisted that the strategy will pay off, helping the company to acquire new customers through a frictionless onboarding process without immediate paywalls. He told analysts that it’s the best way to accelerate adoption of the company’s AI products.

According to Narayen, the company’s user number growth during the second quarter offers strong evidence for this belief. During the quarter, Adobe Acrobat and Express grew its monthly active user base to 850 million, up from 700 million a year ago. Meanwhile, creative freemium monthly active users grew to more than 90 million, up from just 50 million one year earlier. Ultimately, Narayen thinks there’s an opportunity to amass “billions” of Acrobat and Express users and hundreds of millions of creative users.

However, Durn conceded that the plan will put pressure on Adobe’s ARR for awhile. ARR is a key metric that’s closely watched by investors as it provides evidence of the company’s return on its AI investments.

“This shift will come at the cost of short-term ARR, but will accelerate user acquisition in MAU while building the foundation for long-term growth by removing friction from user onboarding, enabling deeper user engagement, and driving stronger lifetime value,” he said, appearing in his last conference call for the company. “We’re confident that driving MAU, which has an impact on ARR, is the right tradeoff and will drive future business growth.”

Narayen also tried to reassure investors that Durn’s departure won’t cause too much disruption, despite the new plan to focus on freemium offerings. He explained that his successor Day is a longtime company veteran. “Steve has been a key member of our finance organization for two decades, and his deep understanding of Adobe’s business will be critical as we execute our strategy to deliver AI innovations to a broader set of customers across creativity, productivity and customer experience orchestration,” Narayen said.

Photo: Adobe