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Shares of Adobe fell sharply by 8% in premarket trading on Friday after the software company said long-time chief executive Shantanu Narayen would step down, triggering investor concern at a time when the industry is also grappling with rapid changes brought about by artificial intelligence.
While the fiscal first quarter results largely beat estimates, the magnitude was not enough to assuage concerns that AI could make software companies’ services irrelevant.
Slow growth in the company’s annual recurring revenue (ARR) also showed that AI is not driving significant financial benefits yet.
The move also follows a broader sell-off in software stocks last month, when fears that autonomous AI agents could replace some traditional applications triggered a global market rout that erased nearly $1 trillion in value across the sector.
Why Narayan’s departure matters to investors
Morgan Stanley analysts said Narayen’s departure could deepen uncertainty among investors who are already closely watching how legacy software companies respond to the rapid rise of generative artificial intelligence.
“The loss of an iconic leader at a time of peak uncertainty around the future of software more broadly, and the positioning of Adobe specifically in this new GenAI world is bound to further investor uncertainty and anxiety around the shares,” said analysts at Morgan Stanley.
Narayen, who joined Adobe in 1998 and became chief executive in 2007, helped transform the company into one of the world’s most prominent software firms, overseeing its shift from boxed software products to cloud-based subscriptions.
In a letter to employees, Narayen said he would remain involved with the company as chair of the board and work alongside lead independent director Frank Calderoni in the search for a successor.
“This is not a goodbye by any means, but a time for reflection,” he wrote.
Analysts at Jefferies said the leadership change may be appropriate given the scale of transformation underway in the software industry.
“Adobe CEO Shantanu Narayen’s decision to stand down from his position was the right one for the company,” Brent Thill, an analyst at the firm, said.
Thill said that while he led a transition across the software industry in that time, the rise of AI will create large challenges for the sector.
“While we admire CEO Narayen as a living legend in [the] software industry, we agree it is time for a change given massive industry shift due to AI,” the analyst wrote.
Earnings exceed estimates but ARR growth comes slower
The leadership announcement came shortly after Adobe reported fiscal first-quarter results that largely exceeded Wall Street expectations, though the modest earnings beat did little to calm concerns about the company’s longer-term growth prospects.
For the quarter, Adobe reported profit of $1.89 billion, or $4.60 per share, compared with $1.81 billion, or $4.14 per share, a year earlier.
Adjusted earnings came in at $6.06 per share, ahead of analysts’ estimates of $5.87, according to FactSet.
Revenue rose 12% to $6.40 billion, topping analysts’ expectations of $6.28 billion, while subscription revenue increased 13%.
The company said its artificial intelligence initiatives were contributing to growth across its product portfolio.
Adobe’s AI-first annualised recurring revenue more than tripled from a year earlier, Narayen said, as customers increasingly adopt tools powered by machine learning and generative AI.
The company ended the quarter with annual recurring revenue of $26.06 billion, broadly in line with Wall Street expectations.
However, growth in that key metric slowed slightly to 10.9%, compared with 11.5% in the previous quarter, a development that analysts said investors are monitoring closely.
The slow growth showed that AI is not driving significant financial benefits yet.
“We continue to believe that ARR reacceleration remains the focus for investors to get more constructive,” RBC Capital Markets analyst Matthew Swanson said in a note to clients.
AI strategy at the centre of Adobe’s future
Adobe has positioned artificial intelligence at the centre of its long-term strategy as the company seeks to maintain its leadership in creative software.
The company has integrated third-party AI models into flagship products including Photoshop and Premiere Pro, while also developing its own generative AI platform, Firefly.
Narayen has said the company’s objective is to expand its customer base by embedding AI capabilities across its product suite and making creative tools more accessible to a broader audience.
“The next era of creativity is being written right now — shaped by AI, by new workflows and by entirely new forms of expression,” he said.
In December, Adobe said its AI features were helping it win additional business from enterprise customers as companies adopt new content creation and marketing tools.
Yet the company is facing growing competition from a wave of AI startups offering automated design tools that can generate images, videos and marketing materials with minimal user input.
Outlook remains closely watched
Investors are closely watching whether Adobe can translate its AI investments into sustained revenue growth.
For the second quarter, the company expects revenue between $6.43 billion and $6.48 billion and adjusted earnings per share between $5.80 and $5.85.
Analysts project revenue of about $6.43 billion and adjusted earnings of $5.68 per share.
Some analysts believe the company’s recent performance suggests it may be navigating the transition successfully.
Morgan Stanley said several indicators from the latest quarter suggest Adobe may be stabilising after a difficult period for software companies.
“After steering the Adobe ship through rough seas over the past several years, several data points from the most recent quarter suggest the captain may have brought this franchise into a safe harbor,” the bank said.
Still, Adobe’s shares have fallen about 23% this year and remain under pressure as investors assess whether the company can maintain its dominance in a rapidly evolving AI-driven software industry.
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