Adobe is 'much further along' in AI race than others: Analyst

Adobe sales guidance for its fiscal fourth quarter falling short of the streets estimates and that's overshadowing the company's top and bottom line beats in its latest quarter now looking at losses of just about 10% that disappointing Outlook bolstering some anxiety on Wall Street the software companies are struggling to make money from Hefty AI Investments so here to discuss is Alex zukin he is a wolf research managing director and head of software Alex it's great to have you here so talk to me about the reaction that we're seeing the stock this morning Shares are off % do you think that's warranted given the beats that we saw in the most recent quarter but obviously falling short of guidance here for the fourth quarter I don't uh I think this is an overreaction I think there are some timing elements where a few deals that were expected to close in Q4 closed towards the end of Q3 uh I think if you look back at last year the guidance for the second half is exactly the same as the guidance was last year and I think that ultimately the company will execute and you're going to start to see adob as one of the best ways to monetize AI Investments that you were just mentioning in the Enterprise segment and I think you're going to see accelerating growth and improving margins and this quarter didn't really change any of those uh thesis for for us uh I definitely understand the frustration uh given the implied Q4 guidance is below where consensus was for a key metric uh which is a forward-looking indicator a lot of times to to the growth rate but I I don't it just nothing changed in the fundamentals in our opinion which which of the Adobe clouds needs to see the most significant uptick or or just demonstrate continued growth in order to for it to pass through to the profit margin for the company definitely the digital media business is the cloud that needs to see the biggest impact from AI monetization I think that they have a number of different levers to do that with generative credits uh within the portfolio of Photoshop illustrator I think some of the new launches and Innovations they're going to be releasing at Max around the video model I think is that that's a pit pivotal moment to unlock some of that incremental monetization in the Enterprise uh but I think that's the cloud that investors are really laser focused on to see how generative AI functionality gets ultimately monetized by the company do do you think that they're where do you think they are in that in that track in that span of kind of delivering what what the market is expecting not not the equity Market but what their consumer base and customer and client base is expecting for what generative AI layered into that digital media Cloud should look like yeah I I'll even step back a second I think all of enterprise software companies are relatively early in that journey I think they're figuring out how to get it to be useful for the user how to get it to be repeatable how to get uh you know compliance and legal to be okay with the data that's traversing uh those models and and you know the the outcomes that it's generating I think of the general pack of companies Adobe is much further along uh I would put them almost right behind Microsoft and their ability to actually show real like disruptive Roi uh to those companies where they can understand how adopting generative functionality within their creative workflow really can increase content velocity and content generation capabilities at a much lower price point than they're used to uh as most historically budgets within marketing you know really are going to the creative agencies and I think Adobe has a chance to to kind of bring that back to uh to bear and and and really see kind of a win-win situation with customers you mentioned the fact just a moment ago that you think that this is a bit of an overreaction the state of competition came up a few times on earnings call something I'm reading a lot about here uh this morning how worrisome is that do you think not only for Adobe but some of the other larger software players in the space when it comes to some of those smaller startup Rivals that are looking to chip away at their market share yeah look I think this is an exciting time uh in in software there's a lot of innovation happening there's a lot of capital going into the space there's a lot of you know really unique exciting new players emerging but I think that this wave of uh generative AI Innovation uh there's a lot of benefits to incumbency I think those benefits rise when you go into the Enterprise I think the ability to already have large contracts that are approved that are through procurement that are through legal uh that's a big Advantage both from a budgetary perspective where budgets are not expanding or growing at the rate that some you know would otherwise want and so you're looking at how to consolidate budgets how to do more with less vendors I think that's an Advantage for large incumbents like Adobe I ultimately think that some of the bigger advantages that are going to crew in this age of AI uh is the indemnification is the legal protection is the security that some of the larger vendors can offer uh at least even from a perception perspective to customers versus some of the upstarts I think that specifically for Adobe is a very unique competitive differentiation that is ultimately in our minds going to compound as they release more and more of these models and uh in multiple modalities