# How Adobe makes money

CXProWealth Business Lens · Adobe (ADBE) · Q3 FY2026

Read from the 10-Q for the period 2026-05-30 to 2026-08-28, filed 2026-09-22 with the SEC (accession 0000796343-26-000156): https://www.sec.gov/Archives/edgar/data/796343/000079634326000156/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $6.8B (+12.9% on the year)
- Operating income: $2.4B (operating margin 34.8%)
- Net income: $1.8B (net margin 27.0%)
- Gross margin: 88.7%
- Free cash flow: $2.4B (36.1% of revenue)
- Cash conversion (operating cash flow / net income): 1.38x
- Capital expenditure: 1.3% of revenue

## Where the money goes (Q3 FY2026)

- Subscription → Total revenue: $6.6B
- Product → Total revenue: $67.0M
- Services and other → Total revenue: $111.0M
- Total revenue → Total cost of revenue: $763.0M
- Total revenue → Gross profit: $6.0B
- Gross profit → Total operating expenses: $3.6B
- Total operating expenses → Research and development: $1.3B
- Total operating expenses → Sales and marketing: $1.8B
- Total operating expenses → General and administrative: $488.0M
- Total operating expenses → Amortization of intangibles: $40.0M
- Gross profit → Operating income: $2.4B
- Operating income → Income before income taxes: $2.4B
- Total non-operating income (expense), net → Income before income taxes: $3.0M
- Income before income taxes → Provision for income taxes: $530.0M
- Income before income taxes → Net income: $1.8B

## Where the revenue comes from

### Products and services (CONDENSED CONSOLIDATED STATEMENTS OF INCOME)

| Member | Value | Share |
|---|---:|---:|
| Subscription | $6.6B | 97.4% |
| Services and other | $111.0M | 1.6% |
| Product | $67.0M | 1.0% |

The members sum to total revenue.

### Regions (REVENUE - Schedule of Disaggregation of Revenue by Geography (Details))

| Member | Value | Share |
|---|---:|---:|
| Americas | $4.0B | 58.8% |
| Emea | $1.9B | 27.4% |
| Apac | $934.0M | 13.8% |

The members sum to total revenue.

### MajorCustomers (REVENUE - Schedule of Disaggregation of Subscription Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| Creative & Marketing Professionals customer group | $4.7B | 68.8% |
| Business Professionals & Consumers customer group | $1.9B | 28.2% |
| Other subscription revenue | $26.0M | 0.4% |

The members do not sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Total revenue | $6.8B | 100% |
|   Subscription | $6.6B | 97.4% |
|   Product | $67.0M | 1.0% |
|   Services and other | $111.0M | 1.6% |
| Total cost of revenue | $763.0M | 11.3% |
|   Subscription | $633.0M | 9.4% |
|   Product | $5.0M | 0.1% |
|   Services and other | $125.0M | 1.8% |
| **Gross profit** | $6.0B | 88.7% |
| Research and development | $1.3B | 19.1% |
| Sales and marketing | $1.8B | 27.0% |
| General and administrative | $488.0M | 7.2% |
| Amortization of intangibles | $40.0M | 0.6% |
| **Total operating expenses** | $3.6B | 53.9% |
| **Operating income** | $2.4B | 34.8% |
| Interest expense | ($66.0M) | 1.0% |
| Investment gains (losses), net | $21.0M | 0.3% |
| Other income (expense), net | $48.0M | 0.7% |
| **Total non-operating income (expense), net** | $3.0M | 0.0% |
| **Income before income taxes** | $2.4B | 34.9% |
| Provision for income taxes | $530.0M | 7.8% |
| **Net income** | $1.8B | 27.0% |
| Basic net income per share (in usd per share) | $5 | 0.0% |
| Shares used to compute basic net income per share (in shares) | 395,000,000 |  |
| Diluted net income per share (in usd per share) | $5 | 0.0% |
| Shares used to compute diluted net income per share (in shares) | 395,500,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2007 | $3.2B | $857.6M | $723.8M | $1.4B | $132.1M | $1.3B |
| FY2008 | $3.6B | $1.0B | $871.8M | $1.3B | $111.8M | $1.2B |
| FY2009 | $2.9B | $690.5M | $386.5M | $1.1B | $119.6M | $998.2M |
| FY2011 | $3.8B | $993.1M | $774.7M | $1.1B | $169.6M | $943.4M |
| FY2012 | $4.2B | $1.1B | $832.8M | $1.5B | $210.3M | $1.3B |
| FY2012 | $4.4B | $1.2B | $832.8M | $1.5B | $271.1M | $1.2B |
| FY2013 | $4.1B | $422.7M | $290.0M | $1.2B | $188.4M | $963.3M |
| FY2014 | $4.1B | $412.7M | $268.4M | $1.3B | $148.3M | $1.1B |
| FY2015 | $4.8B | $903.1M | $629.6M | $1.5B | $184.9M | $1.3B |
| FY2017 | $5.9B | $1.5B | $1.2B | $2.2B | $203.8M | $2.0B |
| FY2018 | $7.3B | $2.2B | $1.7B | $2.9B | $178.1M | $2.7B |
| FY2018 | $9.0B | $2.8B | $2.6B | $4.0B | $267.0M | $3.8B |
| FY2019 | $11.2B | $3.3B | $3.0B | $4.4B | $395.0M | $4.0B |
| FY2020 | $12.9B | $4.2B | $5.3B | $5.7B | $419.0M | $5.3B |
| FY2022 | $15.8B | $5.8B | $4.8B | $7.2B | $348.0M | $6.9B |
| FY2023 | $17.6B | $6.1B | $4.8B | $7.8B | $442.0M | $7.4B |
| FY2024 | $19.4B | $6.7B | $5.4B | $7.3B | $360.0M | $6.9B |
| FY2024 | $21.5B | $6.7B | $5.6B | $8.1B | $183.0M | $7.9B |
| FY2025 | $23.8B | $8.7B | $7.1B | $10.0B | $179.0M | $9.9B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +10.5% (year before +10.8%): steady
- Operating income: +29.1% (year before +1.4%): accelerating
- Net income: +28.2% (year before +2.4%): accelerating
- Free cash flow: +25.1% (year before +13.4%): accelerating

## Operating figures stated in the filing

- Total Adobe ARR: $27.5B (as of 2026-08-28). "Total Adobe ARR grew to $27.50 billion at the end of the third quarter of fiscal 2026, representing 11.2% year-over-year growth, driven by strength in Creative Cloud flagship apps, Acrobat, and Adobe Experience Manager and agentic web apps, including the contribution from Semrush." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Total Adobe ARR: $24.7B (as of 2025-08-29). "Total Adobe ARR of $27.50 billion as of August 28, 2026 increased by 11.2% from $24.74 billion as of August 29, 2025 revalued using currency rates determined at the beginning of fiscal 2026." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Total Adobe ARR year-over-year growth: 11.2% (as of 2026-08-28). "Total Adobe ARR grew to $27.50 billion at the end of the third quarter of fiscal 2026, representing 11.2% year-over-year growth, driven by strength in Creative Cloud flagship apps, Acrobat, and Adobe Experience Manager and agentic web apps, including the contribution from Semrush." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Remaining performance obligations: $22.2B (as of 2026-08-28). "Remaining performance obligations of $22.16 billion as of August 28, 2026 increased by 8% from $20.44 billion as of August 29, 2025." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Remaining performance obligations: $20.4B (as of 2025-08-29). "Remaining performance obligations of $22.16 billion as of August 28, 2026 increased by 8% from $20.44 billion as of August 29, 2025." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Remaining performance obligations year-over-year growth: 8.0% (as of 2026-08-28). "Remaining performance obligations of $22.16 billion as of August 28, 2026 increased by 8% from $20.44 billion as of August 29, 2025." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)

## Key insights

### Cost of revenue grew faster than revenue, led by AI hosting

Cost of revenue rose 18.85% against revenue growth of 12.89%; the filing names hosting and data center costs, including AI inferencing, as the driver.

Total cost of revenue was $763M against $642M a year earlier, and rose to 11.29% of revenue, up 0.57 points. Cost of subscription revenue was $633M against $510M, equal to 9.6% of subscription revenue of $6.582B. The filing attributes the increase mainly to hosting services and data center costs, a category it says includes AI inferencing costs. _(from the filing)_
Research and development grew 18.38% to $1.288B, 19.05% of revenue and up 0.88 points as a share. The filing ties it to compensation and to hosting costs, including AI training costs. Gross margin was 88.71%, down 0.57 points. _(from the filing)_
Analysis: gross margin remains very high for any business, so the shift is in direction rather than level. Classic desktop software cost little to serve once written; generative features carry a cost each time they run, while most of the price is still a flat subscription. Subscription cost set against subscription revenue, quarter by quarter, shows whether pricing and usage charges keep pace. _(analysis)_

### Net income grew 3.1% as the tax rate rose

Operating income rose 8.33%, but a tax rate of 22.5% against 19.0% and smaller non-operating income cut net income growth to 3.1%.

Operating income was $2.354B against $2.173B a year earlier, up 8.33%. The tax provision was $530M against $415M on pre-tax income of $2.357B against $2.187B, an effective rate of 22.5% against 19.0%. The filing attributes the rise to a smaller net tax benefit from non-U.S. operations and higher net tax expense related to stock-based compensation. _(from the filing)_
Non-operating income fell to $3M from $14M, which the filing puts down to lower average overall cash balances. Net income was $1.827B against $1.772B, and net margin fell 2.57 points to 27.03% of revenue. _(from the filing)_
Analysis: the slowdown below operating income comes from tax and cash balances rather than from the business itself. Both causes the filing names connect to choices elsewhere on the page: stock-based compensation, and cash used for repurchases and an acquisition. That makes operating income the better guide to operating momentum this quarter. _(analysis)_

### Fewer shares turned slow profit growth into larger per-share gains

Diluted shares fell to 395.5M from 424.1M, so earnings per share rose to $4.62 from $4.18 while net income grew 3.1%.

Diluted shares used to compute earnings per share were 395.5M against 424.1M a year earlier, 93.3% of the prior count. Diluted earnings per share was $4.62 against $4.18, while net income was $1.827B against $1.772B. The filing says financing cash went mainly to payments for common stock repurchases. _(from the filing)_
Analysis: per-share growth this quarter owes more to a shrinking share count than to growth in profit. The filing also describes lower cash balances and notes falling due within a year that it intends to refinance, so the pace depends on free cash flow continuing to cover repurchases and acquisitions without rising net borrowing. _(analysis)_

### Contracted backlog is growing slower than recurring revenue

Remaining performance obligations rose 8% while ARR rose 11.2%, so backlog now equals 80.6% of ARR against 82.6% a year earlier.

Total Adobe ARR, management's measure of annualized recurring revenue, was $27.50B against $24.74B a year earlier, up 11.2%, with growth credited to Creative Cloud flagship apps, Acrobat, Adobe Experience Manager and agentic web apps, including the contribution from Semrush. Remaining performance obligations, contracted revenue not yet recognized, were $22.16B against $20.44B, up 8%. _(from the filing)_
Reported revenue grew 12.89%, faster than ARR. The filing says a weaker U.S. dollar against EMEA currencies added to reported revenue, and Semrush, acquired during the fiscal year, is included from its acquisition date. _(from the filing)_
Analysis: three measures of the same customer base move at different speeds: revenue fastest, ARR next, backlog slowest. A slower backlog can reflect shorter contract terms, more monthly self-serve plans or slower enterprise commitments; the filing does not say which. Underlying demand is clearest once the acquisition sits in both years' figures and currency effects are set aside. _(analysis)_

### Competitive edge

- **Nearly all revenue renews by contract** Subscriptions were $6.582B of $6.76B, 97.37% of revenue, recognized over each contract's term, so most of a quarter is set before it starts.
- **Professionals pay for depth, office users bring reach** Creative & Marketing Professionals brought $4.651B, 68.8% of revenue; Business Professionals & Consumers, Acrobat and Adobe Express, brought $1.905B, 28.2%.
- **Little capital needed, so cash runs ahead of profit** Free cash flow was $2.438B, 36.07% of revenue and above net income of $1.827B, with capital spending at 1.26% of revenue.

### What to watch

- **AI-native tools compete for the same creative work** The filing names AI or cloud-native companies among its competitors and warns that other companies may limit its use of third-party models.
- **AI costs could rise ahead of what customers adopt** The filing warns AI computing costs could hurt margins as it scales AI solutions without assurance of adoption; operating margin already fell 1.47 points.
- **Subscription terms draw legal and reputational scrutiny** A Justice Department complaint over subscription disclosure and cancellation was settled this fiscal year, while consumer protection enforcement is rising in general.

## Investor view

**Revenue grew at a double-digit pace but net income rose 3.1%, as hosting, R&D and taxes grew faster than sales**

### How it makes money

Adobe sells software as subscriptions. Subscription revenue was $6.582B of $6.76B in the quarter, 97.4% of the total. Licenses for on-premise software (Product) brought $67M, and consulting, training, support and advertising (Services and other) $111M. The filing describes a "recurring and predictable revenue stream that is recognized ratably", meaning over the term of each contract. _(from the filing)_
Two customer groups carry the subscriptions. Creative & Marketing Professionals, $4.651B or 68.8% of revenue, covers Creative Cloud flagship apps such as Photoshop, Lightroom, Illustrator and Premiere, plus marketing products such as Adobe Experience Manager, Adobe Analytics and Marketo Engage. Business Professionals & Consumers, $1.905B or 28.2% of revenue, is Acrobat and Adobe Express. _(from the filing)_
Serving the software is cheap; selling it is not. Gross profit was $5.997B on $6.76B of revenue, with cost of revenue at $763M. The largest cost below that line is sales and marketing at $1.827B, 27.0% of revenue, ahead of research and development at $1.288B, 19.1% of revenue. Operating income was $2.354B. _(from the filing)_
Revenue is spread across regions: the Americas $3.974B (58.8% of revenue), EMEA $1.852B (27.4%) and APAC $934M (13.8%). The filing says revenue rose in every region, and that a weaker U.S. dollar against EMEA currencies added to reported revenue. _(from the filing)_

### What shifted

Costs grew faster than sales. Total cost of revenue was $763M, up 18.9% against revenue growth of 12.9%, and the cost of subscription revenue was $633M against $510M a year earlier. The filing attributes the increase mainly to hosting services and data center costs, a category it says includes "AI inferencing costs". _(from the filing)_
Spending on people and product ran ahead too. Research and development was $1.288B, up 18.4% and 19.1% of revenue, which the filing ties to compensation and, to a lesser extent, hosting. General and administrative was $488M, up 19.6%, on compensation, professional and consulting fees and software licenses. Sales and marketing grew 11.5%, slower than revenue, and fell 0.34 points as a share of it. _(from the filing)_
Below operating income the gap widened. The tax provision was $530M against $415M, an effective rate of 22.5% against 19.0%, which the filing puts down to a smaller net tax benefit from non-U.S. operations and higher net tax expense related to stock-based compensation. Non-operating income fell to $3M from $14M on "lower average overall cash balances". Net income rose 3.1% to $1.827B. _(from the filing)_
Within subscriptions, the smaller customer group grew faster. Business Professionals & Consumers reached $1.905B on "strength in Acrobat". Creative & Marketing Professionals reached $4.651B, with growth the filing credits to Creative Cloud flagship apps, Adobe Experience Manager and agentic web apps, including Semrush, acquired during the fiscal year. _(from the filing)_

### Risks in the filing

Competition is changing shape. The company names "AI or cloud-native companies" among its competitors and says it faces growing competition from generative and agentic AI tools, some embedded in third-party AI platforms. It also warns that other companies may prevent or limit its use of third-party models in its products. _(from the filing)_
AI costs and AI rules. The filing warns that the computing costs of AI could hurt margins as the company scales AI solutions "without assurance that our customers and users will adopt them", and that the EU AI Act and other new rules could raise compliance costs or force changes to products and pricing. Third-party models it offers carry liability if their training data was not properly licensed. _(from the filing)_
Subscription practices draw legal and reputational scrutiny. The filing describes a Justice Department complaint alleging unclear disclosure of subscription terms and a hard cancellation process, settled during the fiscal year, and notes rising consumer protection enforcement in general. It also names backlash from customers or the creative community over product decisions or its approach to AI. _(from the filing)_
Delivery depends on infrastructure the company does not fully control. Many critical applications "reside in only one of our data centers", and it relies on third parties for hosting, generative AI and large language models. Because its products sit in the supply chains of many companies, a single security compromise could affect a large share of customers at once. _(from the filing)_
Of these risks, the cost of AI is the one the numbers already show: cost of revenue and research and development both grew faster than revenue this quarter, and the filing names hosting and data center costs as the main driver. Competitive pressure is not yet visible in revenue, since both customer groups and every region grew. The subscription case is settled, but its terms can still shape how plans are sold and cancelled. _(analysis)_

## Founder view: mechanisms

### Subscriptions buy visibility

Almost all revenue is a subscription recognized over the contract term, so most of any quarter's revenue is decided by contracts already signed. Management steers by annualized recurring revenue rather than by one-off sales. That visibility lets the company commit to large, multi-year spending on AI models, hosting and acquisitions with less risk of a sudden revenue gap. _(analysis)_

### One suite, two audiences

Adobe sells the same platform to professionals who create and market content and to office workers and consumers who handle documents. The professional side carries depth and price; the document side carries reach. File formats and trained users tie work to the tools, and integrated products such as GenStudio connect creation to marketing, so a customer who buys one step of the workflow is a natural buyer of the next. _(analysis)_

### AI compute inside a subscription

Classic desktop software cost almost nothing to serve once written. Generative and agentic features move work onto servers, so each use carries hosting and inference cost while most of the price is still a flat subscription. The model holds only if AI raises prices, upgrades or retention by more than it raises serving cost. The filing notes some subscription revenue is recognized on a usage basis, one way to match price to cost. _(analysis)_

### Cash ahead of revenue

Customers pay at the start of a term and revenue is recognized over it, while the product needs little physical investment. Cash therefore arrives faster than profit, and the surplus funds acquisitions and share repurchases. As the share count shrinks, per-share results can grow faster than the company itself. _(analysis)_

## Member research

Signed-in members read, on the page: what Adobe's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Adobe 10-Q for the period to 2026-08-28: https://www.sec.gov/Archives/edgar/data/796343/000079634326000156/ (2026-09-22)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-01 · as of 2026-11-01