The Six Five team discusses Real Time Adobe Q3FY24 Earnings Reaction
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Transcript:
Patrick Moorhead: So about, was it 30 minutes or an hour?
Daniel Newman: An hour, it’s over an hour. I mean I don’t know, you and I, we were time zoning when we put this on the calendar, but yeah, what’s it three o’clock here? The market closes. So about an hour and a half ago.
Patrick Moorhead: So, the company beat on EPS by a range you would expect that it’s done over the last three quarters, between two and 3%, it beat by 2.49%. And on revenue it beat on a very similar structure, which was 0.65%. You can say it met it beat, but that was very eerily similar to the previous three beats, a 0.3 0.71 and 0.59. But as we know, it’s all about the guide, missed on revenue, it’s slightly missed on EPS for the fourth quarter. And Dan, as you said, it is down roughly 8% after hours. But let’s talk about growth here. So digital media grew around 11%. Digital experience grew 10%. Digital experience revenue grew by 12% and digital media ARR was four, 500 million of net new ARR. I mean very clippity business, you know what I’m saying? They just deliver, fricking EPS 4 dollars and 65 cents. I mean that’s just absolutely astonishing.
I think the important thing that everybody is looking at from Adobe is unfortunately, or fortunately, investors want to know what are you doing in AI? Adobe is not making it very easy to parse out exactly what that growth is. I’m certainly paying, gosh, almost 20 bucks a month to be able to query my PDS. I’ll be honest, the experience is not great and sometimes I feel like I get much better results taking that PDF, having it sucked into perplexity and giving me answers. But listen, for large enterprises, Adobe is the language of creative professionals. And I would say, after Salesforce, when it comes to overall CX and marketing and being able to tie the creative with the actual marketing and the campaigns, Adobe is right in there. And my final comment, well I guess the reason why their target market of I would say enterprises is important is I don’t see enterprises just willy-nilly moving off to some new startup technology like Sora, let’s say.
And the reason for that is, is that Adobe I think looks, and I think in many cases, is actually a more internally regulated company when it comes to these types of things. Wouldn’t you hate to be a Ford Motor Company, you use all of Adobe’s tools, you send out all the creative for print advertising, digital media advertising, and then you realize that, my gosh, you used some copyrighted something or other and then you’re getting take down requests in every single country on the planet. You’re ripping down billboards, you’re getting DMCA notices, it just gets ugly. And there’s a lot of workflows inside of big companies, and my daughters work for a big tech company and their entire workflow and all their creative comes from Adobe. They’re just not going to rip out something. By the way, if Adobe waited too long on something like a video service, I think they’ve shown when it comes to still images and integrated in all their creative suite that they’ve been able to light up experiences that people are actually using and find valuable.
But when it comes to the end-to-end process here, you’re going to not have any enterprise that’s going to move unless Adobe would be one or two years behind. Final comment, Adobe in the spirit of not being behind in certain things, they dropped, let me see, what date was that? Oh well it was yesterday. An update on generative AI, bringing generative AI video with Adobe Firefly video model. They gave a little bit of a fun little update on some examples that they put out there. And again, like I said before, highlight that says all of which designed to be commercially safe and available in beta later this year, sign up for the wait list here. So it’s not ready, it’s not commercialized, but there is a sign of life for Adobe Firefly video model.
Daniel Newman: Right on. So listen, first of all, Pat, we were joking about company misses slightly. This is a company, that in the last quarter, generated a net income of one point, hold on, I’m going to pull this number up here. It had $4.65 cents of, and it recorded 1.68 billion of net income this quarter, positive. The market gap of the company at close was $260 billion. After they dropped 8%, it just went down to about 240. So it’s barely more valuable than OpenAI at this point currently. So anyways, this is why, I know I sound sardonic a little bit about it, but it’s been a bit of a tumultuous run with the kind of reactions. This stuff is hard, this image generators and trying to figure out what’s licensed. And you and I both knew that one of the biggest problems and challenges that were going to have to be solved going forward is going to be rights usage for AI. And so Adobe did its best to train and make sure it had the right rights for all-
Patrick Moorhead: Stubbed its toe a few times.
Daniel Newman: And it stubbed its toe a few times. And that’s definitely been a bit of an area. I mean it’s been performant. I think at times as CEO Shantanu had to say, Hey, it’s a little slower. It’s a little conservative. Pat, you and I have talked about this. This is the economy too, it’s not that good out there people, I’m sorry. It’s just-
Patrick Moorhead: Where’s the first area? What do you cut first?
Daniel Newman: Marketing.
Patrick Moorhead: Marketing. Exactly.
Daniel Newman: Marketing. And so while companies are looking to get more efficient and use generative AI, we saw the subscription revenue grew double digits, by the way, 11% right on par with what Sales force grew right up. This is what Adobe apps grew. This is how much that market is growing right now it’s about 10% for enterprise applications. So they’re growing-
Patrick Moorhead: Netsuite. Netsuite infusion, ERP boom, 10%.
Daniel Newman: Yeah, they actually grew a little faster, but same thing. Yeah, I mean they were in a sub-twenty. And so the point is everything is slowing, the market’s slowing, the economy’s slowing. We’re seeing inflation drop a little bit. I’m not meaning to make this all about economy, but sometimes company performance, when you’re CEO, you have to have the gall to say, “It’s getting slower out there. I’m not going to over promise. I’d rather take the hit now over deliver later.” The 11% growth in digital media with Firefly, it’s good, I think people want to hear this AI growth thing. Though they want to hear it’s growing a lot, it’s growing fast and there’s a ton of money coming in from it. And Pat, you and I have gone that kind of the gambit today. We talked about Oracle saying we’re not going to charge at all for it.
Companies like Adobe have been able to make money with tools like Firefly using tokens and rights. And I don’t think we’ve settled on which is the right approach just yet. I think near term though, investors want to hear, we’re making more money because of AI. I still like Adobe, a lot of recurring, a lot of predictable revenue, the company is in good shape. It’s got those little toe stubs to deal with. Diversified across different parts of creative and more traditional marketing and documents. And Pat, they beat. I mean, look, nobody’s ever going to be okay with a bad guide or a down guide, but hopefully that guide sets the company up to have a better performance next quarter versus expectations.
Patrick Moorhead: Yeah, good stuff Dan. And just a correction, Oracle Enterprise SaaS was 10% growth when you peeled back the onion on Fusion Cloud ERP, it was 16% and-
Daniel Newman: NetSuite was 20.
Patrick Moorhead: NetSuite was 20. So good catch on that
