ADBE Earnings Test Hinges on Setting Prices Amid Agentic AI Growth

SPEAKER_1 (0:00)

Joining us right now, Stephen Sopko, Semiconductor and Deep Tech Industry Analyst, Hyperframe Research. And we're taking a look here at Adobe, ahead of the numbers, and there is a lot of optimism, at least for certain parts of the story, such as faster user growth. What say you as we prepare for Adobe?

Stephen Sopko (0:20)

I think one of the biggest things we're all looking for in the Adobe Print this time is that continuation of the story around, are they making money out of AI, and is it enough of a differentiator to increase the perceived value of Creative Cloud and the other Adobe products? I think there are a couple of different dimensions to Adobe that hit differently in the market space, particularly for enterprise, the feature set around the product model, like Firefly, that produces generative output based on training that was done using Adobe's own intellectual property and other public domain intellectual property. I think things like that are very important to enterprise, but I don't know that that will drive the kind of user growth that we're all looking for on the AI side.

SPEAKER_1 (1:08)

So you talked about Firefly and some of the advantages that the company may or may not have. And does Firefly go in there or you're just not sure yet?

Stephen Sopko (1:21)

That's the key. I think the advantage is there. The question is, is the valuation of the advantage there? So when I think about a major corporation that is an Adobe customer, they're really obsessed with making sure that the creative output from Adobe's products is generally safe for them. It reduces their risk.

What I need to see is how far down the customer size ladder does that go? Does it go into small and medium enterprise? Does it go all the way down to the small agencies that have been really the fuel behind Adobe's growth for decades? I think that's the question on Firefly. Now, we all focus on Firefly because it's a generative tool, but it's still, I think, just shy of $300 million ARR in the last quarter. That's what we've really got to see is meaningful growth because that's just a fraction of Adobe's $27 billion ARR base.

SPEAKER_1 (2:10)

There's a lot of focus on this name. Obviously, it hit a low of 190 over the summer right now. It's a 257, so it is up off the low. But another thing you talked about with the product tests is something like Creative Cloud Relationships. What are these features and how you monetize them in particular, and will they be free?

They're stepping up on what they're offering, and what are people willing to pay for versus not pay for? That's a big story, right?

Stephen Sopko (2:38)

That's a huge story, and Adobe is not alone in facing it. I think we saw at the end of August with the Zoom releasing their numbers and even Salesforce.

The question across software is, okay, AI generates additional value, but how do you really quantify that value and help customers see that it makes sense to pay for it? Because I think one of the things we've all seen with tech really since the beginning is this idea that, okay, freemium is fantastic, but unless there's a real needle moving value, people tend not to want to pay for it, and that is the biggest challenge. And what I'm seeing right now with Zoom is, yes, Zoom is doing very well. I think nine out of their 10 big CX deals had paid AI as part of them. That's fantastic, but that isn't really translating to moving the needle in terms of revenue and user growth. So I think that's the biggest question right now. And I think that's why you see a split in the market looking at sort of these infrastructure companies like Oracle, which is going to release its numbers the same night. That's an infrastructure play. And so we're all looking at is, how does Oracle convert and execute against infrastructure? And then we look at companies like Adobe, where that infrastructure will pay benefits to the end users of the software. The question is, how fast will that happen? And I think as agentic AI rolls out, anybody who's used AI agents, we all become somewhat addicted to them. So I think the big question for us is, will the infrastructure be able to support that agentic AI growth, that will potentially translate into real value perception for customers all the way down into the middle of the enterprise stack.

SPEAKER_1 (4:21)

Right, and we will talk about the leadership change in a moment. I do want to hit the Csqt story, but you mentioned Salesforce. And so I think about the agentic work and you mentioned Slackbot and Headless. And so the numbers that came in for some of the growth was 4.9%. It should have been more, you were thinking.