The Six Five team discusses Adobe Q4FY24 Earnings
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Transcript:
Patrick Moorhead: Adobe, did we see some AI action here, Daniel? What’s going on?
Daniel Newman: Oh, man. So Adobe, good quarter, Pat, but the problem nowadays is a good quarter is only as good as its guide and the company had a really solid result this quarter. It was on the right side of history on both the earnings and on the revenues. Everything’s moving in the right direction. It has some great revenues in its digital experience, some great growth in its document cloud, multi-double digit percentage growth that – in a really great way. But they guided below expectations, and the market puked on it. I mean literally puked on it. Now Pat, let’s talk about what the… that’s going on here. This week we saw some stocks rip under the idea of a measurable AI increase. Most specifically, this was Broadcom. We’ll talk about that later. People want to know how AI is influencing business. So the challenge is if you listened to Shantanu and the team, they kind of talked about AI as a horizontal that’s influencing and impacting the success of many of their product lines in their portfolio.
So there’s the creative, they built their models. They were early to visual generative AI tools. They also have lots of AI embedded in their CRM and experience platforms, as well as in their document tools. By the way, this was being done long before it was even so trendy. The challenge is: how do you account for that? So when you’re growing at around 11% and that looks like the same amount you were growing before generative AI was a thing or in those same ballpark, people are kind of looking for that incrementalism. And when you can’t really discern the incremental growth and how AI is impacting it, what it looks like is… to the outside lens is sometimes that it’s a little bit AI washing. And by the way, this has been a bit of a theme with software as a whole. The early AI trade was all about infrastructure. It was all about chips, then it was all about sort of the OEM, selling lots and lots of servers.
And I’ve said for a long time these kind of second, third network effects, which is the implementation as well as the applications is where AI is going to be explosive. But to some extent, there’s a pretty good argument to be made that hasn’t totally been able to be discerned in any sort of data, whether it’s been Salesforce, which is showing a little bit of love for service now, was able to show a little… But nobody’s like, “Oh my gosh, the business is doubled because we added some generative AI feature to our tool.” This is a combination of things. You have some companies like Oracle; companies like… them are basically saying, “We’re just baking AI into everything to keep our products sticky.” I’m talking about on the app side, “To keep our products sticky, to keep our products usable.” And this seems to be a bit more of what the leadership at Adobe is reflecting when they talk, is they’re making AI part of the product to keep customers on the product, to keep customers working more closely with the company, and keep them attrition rates down.
But I think what people want to see is, “Hey, we’re doubling our growth rate. Customers are spending X amount more per month because of the AI features that we’re loading in, and this is changing the calculus of the business evaluation. And we’re a pioneer and leader in AI.” Pat, TLDR. I like saying that. I don’t know why, is that AI features inside of SaaS applications have not yet become totally transparent in terms of how much revenue and how much stickiness they’re creating for customers. Because of that, companies like Adobe can have really good quarters when they guide down, people go, “Oh my god, does that mean AI is not… Is this another indicator that the AI capabilities and features aren’t impactful enough?” So my take, we’re going to see more transparency. I think Adobe is going to work to show more how AI is driving growth in the business. Double-digit percent growth in enterprise apps matches our intelligence of how the sector growth is expected just to the top end, if not a little bit above. So overall solid from them. But that’s kind of my external viewpoint on why Adobe, despite having a good quarter from a standpoint of earnings, revenue and growth of their businesses, maybe didn’t quite meet or satisfy the street and that was why they sold pretty hard after resolve.
Patrick Moorhead: So Daniel, I am with you on almost everything that you said. The one thing that is starting to change my mind is what Salesforce did. Salesforce was in the exact same position, single-digit growth, maybe super-duper low double-digit growth, yet they came out and gave a very good guide and attributing it to AI. And they said that they had signed up 200 incremental customers for Agentforce within a month of the product going GA, and then the stock absolutely ripped. So it’s hard for me to chalk this up as the state of the industry when we saw what Salesforce did. I know they do… they have some overlapping products, but they have more products that don’t overlap than do. But I guess, it’s fair to say that we’re going to have to wait until Salesforce’s next earnings and let’s see what service now can do inside of AI as well.
I think the other thing that I know I want to do more research on, Dan, is: what is it about marketing, not only the creative side and also on the document side and also I’ll call it the CRM side, that is necessarily different and unique? One interesting thought here, Dan, is that if you lay off marketing people, you have less seats and a lot of the ways that Adobe charges is on a per seat basis versus, let’s say, an outcome. Agentforce is priced as a dollar per transaction or dollar per chat and list prices is two bucks every time that you use it. One thing though, if I look at the core of where Adobe makes most of its money, and that’s on the creative side, and then I would say overall on the enterprise for this end-to-end content to distribution pipeline, I don’t see enterprises moving very quickly right off of Adobe. It’s the safe choice. Now, does it have threats from the upstarts like an OpenAI and more? 110%, but they just can’t be too far behind. Okay?
Sora got a lot of discussion and a lot of, “Oh gee whiz,” and even the early image creation tools, but they never really caught on. Sora kind of, maybe, sort of went GA, but there’s still a sign-up sheet, so there’s no way I can even call that GA and I know-
Daniel Newman: Dude, that was crap.
Patrick Moorhead: Yeah. So yeah, I feel pretty good on the outlook for Adobe, but I’m also not blinded. I really want to understand a little bit more. I’ve got to do more research in the difference between Adobe-Outlook and Salesforce-Outlook.
