Adobe CEO to Step Down in Face of Investor Concerns Over AI

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2:11Alexis Christoforous:Adobe out with earnings today, Anurag, but it's the departure of their longtime CEO. He was in that seat for 18 years. You say that's overshadowing what were otherwise pretty good results. Yeah, I mean, this was a quarter wasn't bad at all. I mean, if you see, look at what's happening with Adobe over the last two and a half years or so, this is the poster child that AI is going to disrupt the software industry and basically take over what Adobe does as a software product. Now, we don't think that's going to be the case. They're going to maybe lose some work on the lower end or the periphery. But I think they're still going to remain a healthy company.

2:49Alexis Christoforous:But having said that, since the beginning of last year, their fundamentals has remained intact. Yet, stocks down over 40%, which is partially the reason why most likely the CEO is leaving.

3:01Anurag Rana:And OK, so what will investors want to hear about the profile of Adobe's next CEO to maybe restore confidence? Because to your point, it's really overshadowing and otherwise really good earnings.

3:12Alexis Christoforous:Yeah, I think the next CEO has to be a completely AI-first CEO, which is somebody who understands the large language models a lot more than, let's say, the older generation CEOs. Now, I'm not saying that Shantanu didn't understand this. He's probably one of the most well-respected CEOs in the software landscape, made massive improvements in Adobe's market position in this 18-year period. And you can look at any metric and it's, you know, beyond comparison. But I think the next CEO has to be somebody who is just, you know, day in and day out, absolutely in AI products. Anurag, I'm a little surprised that a succession plan was not in place.

3:54Alexis Christoforous:I mean, the current CEO is 62, been there for 18 years. You know, you'd think that maybe they had thought about it and had somebody in the wings, unless that somebody is not the right person for this moment in time, which is the moment about AI. Yeah. No, I would say is when you have a large company like this, they have to do the due diligence of bringing people in and out. You know, we think, for example, the leader, David Wadhwani, who is the head of the creative products, I think he is very capable of running this company. But, you know, the same thing happened with Microsoft. Even though Satya was in-house, you know, they had to go out and give a full search, both internal and external, and then they decided to go in-house.

4:35Alexis Christoforous:So I won't be surprised if they run the search and eventually, you know, in the end, they decide with an internal candidate.

4:41Anurag Rana:So an AI first CEO, so that's what you want to see. Where do you see the biggest competitive threat coming in from AI creative tools in the next years? And what do you want to hear specifically from the CEO or just the direction of Adobe?

4:55Alexis Christoforous:Yeah, the AI creative tools are already out there. I mean, you and I can go on Google today and create our own image and videos and other things. But the key part of Adobe is it's not just the creation of digital assets, but how those digital assets go into your workflow. And that's where Adobe's products come in. And I mean, they have done a very good job of integrating external tools. For example, if you go into the Adobe suite right now, you can use Google models to create your images. One of the things they talked about on the call yesterday was they have a product called Adobe Stock, which is basically a repository of hundreds of millions of images.

5:31Alexis Christoforous:They're saying that people's use of those ready-made pictures have gone down and people are using more LLM-produced images. So what we want to see from the next CEO is we want to make sure that they are using all the models to create the images and models, but keeping intact the integrity of the workflow. When you look at Adobe and then other application software companies like a Salesforce, they're struggling to win new customers in the face of these AI upstarts. Who do you feel is best positioned at the moment? So, you know, we created a big framework around this and published a report a few weeks ago.

6:13Alexis Christoforous:So one of the big things we are talking about is if you are a big system of record, you know, somebody like an SAP or a Workday. SAP does a lot of supply chain and ERP related stuff. Or a Workday, which is the core HR system of record for most large enterprises, you know, you have a lot less disruption risk than, let's say, a smaller company that's out there. The other thing that we talk about is are you just a one product company or do you have a suite of multiple products? because I think that matters a lot as well. So, you know, on our frameworks, some of these larger companies with absolutely massive market shares, I think they are the ones that are less at risk compared to, let's say, something that's just, you know, giving one product function out there.

6:59Anurag Rana:Anurag, can Adobe maintain its pricing power if generative AI tools make creative production cheaper and faster? Like, will people still go to Adobe for that?

7:08Alexis Christoforous:I think that's probably the most important question right now for investors. And one of the things we talk about it is, it's not just a question of, as I said, creating images. When you think about just the image creation part of it, you know, that's not what you should be going to Adobe for. But creating an entire marketing campaign, they're adding so much AI capabilities into that entire workflow. So for example, if you are on California, your product may have a completely different marketing campaign compared to somebody on the East Coast or in Canada. And you can change those marketing campaigns at a very fast pace because the entire supply chain of every asset state you can think about can now be changed because of AI.

7:51Alexis Christoforous:So you're not just buying Adobe for creating images, but the entire workflow is the most important aspect.

7:58Anurag Rana:Stay with us. More from Bloomberg Intelligence coming up after this. Hello, hello.

8:05Alexis Christoforous:I'm Malcolm Gladwell, host of the podcast Smart Talks with IBM. I recently sat down with IBM's chairman and CEO, Arvind Krishna. And I asked him, how can companies use AI to its fullest potential to create smarter business? My one advice to them, pick areas you can scale. Don't pick the shiny little toys on the side. For example? If anybody has more than 10 % of what they had for customer service 10 years ago, they're already five years behind. If anybody is not using AI to make their developers who write software 30 % more productive today, with the goal of being 70 % more productive. Yeah. So we are not asking our clients to be the first experiment on it.

8:57Alexis Christoforous:We say you can leverage what we did. We're happy to bring out all our learnings, including what needs to change in the process, because the biggest change is not technology. It's getting people to accept that there's a different way to do things. To listen to the full conversation, visit IBM.com slash smart talks.

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11:22Anurag Rana:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube.

11:37Alexis Christoforous:Alexis Christophorus in for Paul Sweeney. Isabel Lee doing duty for Scarlett Fu on this Friday. We want to talk a little housing market before we get to the top of the hour here, because Lenar, the homebuilder, out with earnings today. Revenue and earnings per share missed the mark, but Lenar's shares are actually up nearly 4 % right now. So here to help us make sense of it is Drew Redding, Bloomberg Intelligence U.S. homebuilding analyst. First off, I'm just going to start with the stock, Drew. Why the positive reaction when the top and bottom line missed the mark?

12:11Isabelle Lee:Yeah, thanks for having me. So keep in mind, Lennar's stock has been down about 35 % since September. The whole group has really been under pressure since mid-February. So, you know, I think part of it is just the fact that it's been so beaten down. You know, when you look at the results for the quarter, when you're talking about the builders, there's really two things you're looking at. You're looking at orders and gross margins. So while their orders did hit the midpoint of guidance for the quarter. Their outlook for 2Q was about 7 % below consensus, and gross margin was probably a little bit weaker than what people were looking for.

12:44Isabelle Lee:So all in all, 2Q earnings are about 15 % below expectations. But it really goes back to how Lenar is running their business, which is a volume-first focus. So they're willing to sacrifice and carry a lower gross margin in this environment in order to gain the efficiencies with delivering higher volumes.

13:03Anurag Rana:How much of that slowdown is being driven by higher mortgage rates versus just broader economic uncertainty overall?

13:11Isabelle Lee:Yeah, that's a great question. It's really a combination of the two. You know, obviously, affordability has been the major challenge in the market since 2022, really, when mortgage rates skyrocketed. But it's not just rates. It's, you know, the massive run up in home prices we've had since 2019. Prices are up, you know, over 50 percent or more, depending on what market you're talking about. But to your point, what we've heard increasingly from the builders is just this overall sense of uncertainty in the market, whether it's, you know, less certainty about the outlook for the direction of the economy.

13:47Isabelle Lee:You have more people concerned about maybe the outlook for employment, which is actually something that Lenar referenced on their call today. And, you know, basically, while traffic has remained pretty stable, there's just not a lot of urgency in the market. I think you have people out there maybe sitting on the fence who are saying to themselves, look, maybe mortgage rates are going to come down a little bit. Maybe home prices are going to fall and now it's not a great time to buy. So to your point that the uncertainty from the macro environment, as well as the geopolitical environment more recently, is certainly weighing on buyers.

14:21Alexis Christoforous:Would you tell us more about what they had to say on the call about the job market, because, I mean, I think that's the driver, right? If you feel good about your job and confident in the paycheck, you might be willing to take on what is really the largest purchase in your life for many folks, right? Their home. Yeah.

14:37Isabelle Lee:So at the end of the day, the labor market is really the most important driver of housing demand. Certainly, you know, mortgage rates get all the attention on a daily basis. But if the employment picture is strong, that usually drives demand for housing. And you're seeing in different parts of the market relative strength or relative weakness, you know, whether it's employment in the tech market, making things more challenging on the West Coast. And, you know, to your question directly, it is something that Lenar pointed out on the call. It's just that broad uncertainty that consumers aren't necessarily certain, you know, about the employment picture over the next 12 months.

15:14Isabelle Lee:And interestingly enough, one of the things they pointed to is what we've heard from AI, all of the headlines that have been out there in terms of AI disrupting the labor market. So it's certainly something that's weighing on the market.

15:25Anurag Rana:And despite near-term pressure, Lennar says that it's positioned for long-term growth. What's the key thing that could turn them around or turn the market around for them? Right.

15:34Isabelle Lee:So Lennar's strategy, as I mentioned before, has been on driving volume over margin. And really what they're trying to do is create a more efficient business model to prepare for an eventual market rebound. They've certainly gained scale. They're doing a lot of investments in technology. They're driving down costs. They have a more asset-light land strategy. So all of these things will ultimately help. But at the end of the day, in order to see a rebound in their growth, they need to see improvement in the broader market. And that's really the same for all the home builders. So they are putting themselves in a better position for the long term, but they, like everyone else, need to see the market turn higher.

16:13Alexis Christoforous:So does this earnings report from Lennar basically reinforce the fact that in this expensive housing market, people need deals and incentives to get in the door? Yeah.