Adobe sells content creation, document and digital marketing software on subscription. Subscriptions were $22,904 million of $23,769 million of FY2025 revenue, or 96.4%; the rest came from perpetual licences and royalties ($325 million) and from consulting, training, maintenance and advertising ($540 million). Cash is collected ahead of revenue: deferred revenue stood at $7,030 million at year end.
The business in one page
Revenue grew 10.5% to $23.77 billion, gross margin was 89.3% and operating margin 36.6%. Net income was $7.13 billion and free cash flow $9.85 billion, a 41.4% margin, against $1.94 billion of stock-based compensation. Reported growth flatters the comparison: FY2024 carried the $1.0 billion non-deductible Figma termination fee, and on a like-for-like basis net income grew 8.7% rather than 28.2%, while net margin went from 30.5% to 30.0%.
Two things changed the balance sheet and the disclosure. Buybacks of $11,281 million, 114.5% of free cash flow, turned net cash of $1,830 million into net debt of $53 million. And from the first quarter of FY2026 the three reportable segments merge into one, which removes the segment gross margin that makes the cost of AI infrastructure visible.
What we think matters
- Revenue is contracted, not won each year
- Margins are the highest of the three years in the filing
- Cash conversion above net income
- Cost is rising faster than revenue in the main segment
- Shares bought above the year-end price
- Stock-based compensation of $1,942 million
How Adobe makes money
Competitive advantage
Consolidated gross margin of 89.27% and Digital Media gross margin of 95.23% are consistent with a product customers find hard to replace, but the filing offers no direct evidence: it publishes no renewal rate, no subscriber count and no churn.
Recurrence is documented. Subscriptions are 96.36% of revenue and remaining performance obligations are $22.52 billion, about 65% of it expected within twelve months.
The filing itself limits the claim. It describes its markets as having limited barriers to entry, short product lifecycles, customer price sensitivity, and states that it faces increasing competition from companies offering generative and agentic AI solutions. The competition section names no competitor.
On AI the stated approach is to combine proprietary models - Firefly, trained on licensed and public domain content - with selectable third-party models inside the applications. The filing does not quantify revenue attributable to these features.
Pricing power
Not demonstrable from the filing, which contains no price list, no average revenue per subscriber and no breakdown of growth between price, volume and mix.
Subscription revenue grew 11.61% while gross margin rose from 89.04% to 89.27%.
Management attributes Digital Media growth to strength in Creative Cloud Pro and other flagship apps as well as Acrobat, which points to a mix contribution.
In the other direction: Digital Media cost of revenue rose 23.68%, from $680 million to $841 million, more than twice the pace of segment revenue.
Transparency of growth
Growth over the three years is almost entirely organic. Acquisitions absorbed $17 million in FY2025 and nothing in the two prior years; goodwill rose $14 million from acquisitions.
Currency is marginal: management estimates a revenue reduction of about $18 million, offset by $22 million of hedging gains, so the 10.53% is substantially at constant rates.
ARR, the main management metric, grew 11.5% to $25.20 billion. It is built at rates fixed at the start of the year, is not an accounting measure and appears only in the management discussion.
From FY2026 the perimeter changes: Semrush, at about $1.9 billion, is roughly 29% of year-end cash and securities. The filing gives neither its revenue nor its profitability.
Scalability
Three cost lines out of four grew more slowly than revenue. The exception is sales and marketing, up $724 million, which the filing attributes primarily to advertising - $1.37 billion against $1.04 billion, so advertising explains a little under half the rise.
Operating leverage is smaller than the reported figures suggest. Excluding the Figma fee, FY2024 operating margin was 36.00% against 36.63% in FY2025: an improvement of 0.63 points, not 5.28.
Fixed investment is light, with capital expenditure at 0.75% of revenue, but the infrastructure is largely rented: non-cancellable purchase commitments, primarily for third-party hosting and data centre services, are $6,821 million, $2,083 million of it due in FY2026.
The $2,083 million due in FY2026 equals 81.7% of FY2025 total cost of revenue.
Catalysts identified in the filing
- Lower cash taxes from FY2026
The July 4, 2025 US tax law restores immediate expensing of domestic research and development, effective for Adobe from FY2026. In FY2025 cash taxes exceeded the income statement charge by $615 million. The filing does not quantify the expected benefit.
- Growth in the Business Professionals and Consumers group
Subscription revenue rose 14.71% to $6,495 million, after 19.35% in FY2024, against 10.54% for Creative and Marketing Professionals. Acrobat Studio, combining Acrobat, Express and AI agents, launched in August 2025.
- Digital Experience margin
Segment gross margin went from 67.24% to 72.29% in two years, with cost of revenue almost flat, from $1,603 million to $1,625 million, while revenue grew $971 million.
- Revenue already under contract
Remaining performance obligations grew about 12.8%, and deferred revenue 12.32%, both faster than the 10.53% growth in recognised revenue.
- Remaining buyback authorisation
$6,369 million remained at November 28, 2025, valid to March 14, 2028; after completion of the September 2025 agreement the filing puts the residual at $5.90 billion.
Financial analysis
Figures for 3 fiscal years, taken from the Key Metrics tables of each annual report. When a later filing restates a figure, we use the figure reported for that year's own filing.
Key metrics
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Revenue | $19.4B | $21.5B | $23.8B |
| Gross margin | 87.9% | 89.0% | 89.3% |
| Operating margin | 34.3% | 31.4% | 36.6% |
| Net margin (GAAP) | 28.0% | 25.9% | 30.0% |
| Operating cash flow | $7.30B | $8.06B | $10.0B |
| Capex | $0.36B | $0.18B | $0.18B |
| Free cash flow | $6.94B | $7.87B | $9.85B |
| Stock-based compensation | $1.72B | $1.83B | $1.94B |
| Dividends + buybacks | $4.40B | $9.50B | $11.3B |
| Net cash | – | $1.83B | -$0.05B |
| Total debt | – | $6.06B | $6.65B |
| Shareholders’ equity | $16.5B | $14.1B | $11.6B |
| Effective tax rate | 20.2% | 19.8% | 18.4% |
| ROIC (year-end basis) | – | 44.1% | 60.9% |
Key risks
The main weaknesses and risks identified in the latest annual report, in the order the report presents them.
- Cost is rising faster than revenue in the main segment
Digital Media cost of revenue rose 23.68% against segment revenue up 11.25%, taking gross margin from 95.71% to 95.23%. Of the 13-point rise in subscription cost, 8 points come from hosting and data centre, a line the filing says includes AI inferencing costs.
- Shares bought above the year-end price
The filing gives monthly average repurchase prices for fiscal Q4 of $353.68, $345.96 and $332.31, all above the $320.13 close of November 28, 2025. For the full year only an estimate is possible, about $366 a share, and the method is imprecise because payments and deliveries in accelerated repurchases fall in different periods.
- Stock-based compensation of $1,942 million
It takes free cash flow from $9,852 million to $7,910 million, and $475 million of withholding taxes on vested awards are paid in cash on top. Unrecognised cost is $3.24 billion over an average of 2.19 years.
- Litigation without an estimate
The Department of Justice complaint over subscription cancellation practices survived Adobe's motion to dismiss on May 2, 2025 and is in discovery. The filing concedes resolution could involve significant monetary costs or penalties and discloses no provision and no range.
- Earnings growth flattered by the base
Reported net income grew 28.24%; excluding the non-deductible Figma fee from FY2024 it grew 8.69%, and net margin fell from 30.50% to 30.00%. The deterioration comes from the non-operating line, down from $190 million to $28 million.
- Goodwill exceeds equity
Goodwill of $12,857 million against equity of $11,623 million, 43.6% of total assets, two thirds allocated to Digital Experience. Tangible equity is negative at -$1,729 million and the annual impairment test was qualitative only.
Open questions the filing does not answer
- Renewal rate and subscriber count: the filing publishes neither, and without them the durability of Digital Media revenue is an inference.
- The split of growth between price, volume and mix, and the revenue attributable to generative AI features.
- Disclosure after the move to a single segment: it is not clear whether segment gross margin and Digital Media ARR will keep being published.
- The potential size of penalties and remedies in the cancellation case, and the share of online revenue exposed to a simplified-cancellation requirement.
- Revenue, margins and implied price of Semrush, on which the filing gives no financial data.
- The reason pre-tax income shifted from foreign ($3,334 million to $2,013 million) to domestic ($3,465 million to $6,721 million).
At the $320.13 close of November 28, 2025 and 410.5 million shares, the market valued Adobe at $131.4 billion. That is a 5.4% earnings yield and a 6.0% free cash flow yield net of stock-based compensation, against revenue growth of 10.5% and ARR growth of 11.5% - yields consistent with an expectation of slower growth ahead. The filing does not let one establish what risk the market is pricing.
The FY2025 accounts neither confirm a slowdown nor rule one out. Contracted revenue grew faster than recognised revenue, about 12.8% against 10.5%, which points to demand. Digital Media gross margin fell 0.48 points with costs growing at twice the pace of segment revenue, consistent with AI costs not yet passed through to prices; the filing gives no data to verify it. The case rests on three checkable conditions: ARR growth staying near 11.5% without a further rise in advertising spend, consolidated gross margin holding above the FY2024 level of 89.04%, and buybacks at prices that do not end up above the quoted price - in fiscal Q4 all three monthly average prices paid were above $320.13. It weakens if the move to a single segment removes the disclosure needed to check those conditions.
Strengths
- Revenue is contracted, not won each year
Subscriptions are 96.36% of revenue, up from 95.42% in FY2024 and 94.20% in FY2023, and remaining performance obligations stand at $22.52 billion, of which about 65% is expected to convert within twelve months.
- Margins are the highest of the three years in the filing
Gross margin 89.27% and operating margin 36.63%. On a like-for-like basis, excluding the Figma fee from FY2024, the ranking holds for gross, operating and FCF margin - but not for net margin, which was 30.50% in FY2024 against 30.00% in FY2025.
- Cash conversion above net income
Free cash flow of $9,852 million is 1.38 times net income, with capital expenditure at 0.75% of revenue. Owner earnings, with stock-based compensation counted once, are $7,769 million.
- No financial pressure
Net debt of $53 million, interest cover of 33.1 times, gross debt at 0.70x EBITDA and no senior note maturing in FY2026. The $1.5 billion revolving facility and the $3.0 billion commercial paper programme are both undrawn.
- Buybacks reduced the share count, not just the dilution
Shares outstanding fell from 441 to 413 million, down 6.35%, with 31 million repurchased against 3 million reissued to employees. Stock-based compensation fell from 8.85% to 8.17% of revenue over two years.
Last year’s watch-list, checked against this filing
| What we flagged | What happened | Result |
|---|---|---|
| Debt repayment - $1,499 million classified as current at November 29, 2024, notes due February 2025 | In February 2025, $1.5 billion of senior notes became due and were repaid | DONE |
| Buyback programme - March 2024 authorisation of $25,000 million through March 14, 2028 | $18,631 million used at November 28, 2025, or 74.5% of the authorisation | AHEAD OF SCHEDULE - three quarters of the amount used in under half the term |
| Dividends - the company does not anticipate paying any cash dividends in the foreseeable future | No dividend in any of the three years | AS STATED |
| Figma acquisition - merger agreement of September 15, 2022 | Terminated December 17, 2023; $1,000 million fee paid in FY2024 | NOT COMPLETED - cost equal to 18.0% of FY2024 net income |
| Leased property rationalisation - $78 million of impairments in FY2024 | Operating lease cost down from $106 million to $92 million | CONSISTENT |
| Dilution offset - repurchase programme established to minimize the impact of ongoing dilution | Shares outstanding down from 441 to 413 million | EXCEEDED - net reduction of 6.35% |
| Semrush funding - the company expects to finance the acquisition using cash on hand | Closing expected in the first half of FY2026 | NOT YET MEASURABLE |
What to watch in the next filing
- Total ARR growth. Below 10% a year, from 11.5%, would signal that competition is reaching renewals or new subscriptions.
- Consolidated gross margin. Below 88.0%, from 89.27%, would indicate that hosting and inference costs are persistently outgrowing revenue.
- Growth in remaining performance obligations. Falling below revenue growth - today about 12.8% against 10.5% - would anticipate a slowdown.
- Stock-based compensation as a share of revenue. Above 9.0%, from 8.17%, would reverse the three-year trend.
- Buybacks as a share of free cash flow. Above 100% for a third consecutive year (114.5% in FY2025), with net debt beyond 1.0x EBITDA from 0.01x, would signal repurchases funded with debt.
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