Where AI fits into Adobe's outlook

Adobe (ADBE) shares are falling in Thursday's extended-hours trading despite topping fiscal first-quarter earnings estimates, posting $5.18 billion in revenue and gains of $4.48 per share. The software giant's fiscal second-quarter outlook on revenue and earnings ultimately fell short of Wall Street expectations. Adobe also announced a $25 billion share buyback program.

Wolfe Research Managing Director and Head of Software Research Alex Zukin joins Yahoo Finance on Adobe's outlook riding the winds of AI adoption and integration into editing software.

"I think it will be really important for them [CEO Shantanu Narayen] to come out and remind folks that Adobe's strength is around the editing side and all of these wonderful, new pieces of content — video or image — that are getting generated now for professional, commercial-grade distribution, you're still going to need to edit them," Zukin says, adding. "This doesn't change in any way my opinion on the competition with the foundation models... or diffusion models themselves..."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- Alex, just give us your first blush reaction, please.

ALEX ZUKIN: Yeah, I mean, I would say the net new digital media ARR was, I think, a bit south of where people were expecting that performance to be, the outperformance against their guide. That's probably one of the key metrics. There was also no raise for the year. That was a little different than this time last year.

I think the big surprise was the buyback and the size of the buyback. I think that was a question a lot of investors had after Figma, what would be next, how would they use the capital they were going to use for Figma. So it's really great to see that the company, you know, believes in their story enough to buy back that much stock. And I think that it'll be great to hear on the call about the generative AI strategy, the puts and takes, and how the company sees that as potentially adding to the growth opportunity, to the growth algorithm for their core business over the course of the year.

- I do you know, Alex, I do wonder whether this print is going to kind of generate some worries among at least some investors that, you know-- just about competition from those AI-focused start-ups like OpenAI. It was a worry heading into this print. And now with that forecast, maybe they'll throw some more fuel on that. What's your response to that, Alex?

ALEX ZUKIN: I think we're going to hear a lot about that on the call itself. I think it'll be really important for Shantanu to come out and kind of remind folks that Adobe's strength is around the editing side. And all of these wonderful new pieces of content, video, or image that are getting generated now for professional, commercial grade distribution, you're still going to need to edit them. And the kinds of content that are able to be used are going to be super important, understanding what data set that content is trained on. I think that's going to be super important.

So I would say this doesn't really change in any way, my opinion, on the competition within the-- with the foundation models themselves or diffusion model providers themselves. But I do think that the smaller outperformance than the last few quarters is certainly going to raise some questions whether it's macro, whether it's competition, whether it's market, whether it's, by the way, seasonality. And maybe there's more goodness later in the year as more of these features are fully commercial grade and commercialized. And you're going to get to see pricing as a tailwind probably closer to the second half of this year.

- Alex, I'm also curious. I mean, given that Adobe is a visual company, right, that's-- they make visual management-- visual software. There was this report in Semafor this week that their Firefly tool repeated some of the same mistakes that Google's Gemini had originally made prompted, for example, by the reporter to show a picture of German soldiers in 1945. It showed Black soldiers.

So, you know, sort of these things that are nonsensical, if you will. Is that going to be a problem for Adobe? Is that something they need to address?

ALEX ZUKIN: I think even that article talked about how it's less of a-- that's more of a technological limitation rather than, I think, folks embedding bias. I think the ability to take historical context and better understand and embed context for those types of inquiries, it's still very much a work in progress.

I think the big difference is that for Adobe, specifically, it's really part of a suite of solutions to create the best content possible via ideating and then editing and changing and then producing and then scaling and commercializing content. So it's not as much, I think, a problem for them because the end result ultimately is how do we, you know, deliver the best content, not necessarily just generate it.

- Alex, in terms of what's ahead, the company does have its so-called Summit conference, Alex, coming up later this month. What do you expect to hear there?

ALEX ZUKIN: I think it's going to be super important. I think it's going to be great to hear about what Adobe's doing in video diffusion model capabilities, how that's coming along. I think it's going to be really great to get an update on the newly launched Acrobat AI product that they've talked about.

And look, I think, ultimately, we would love to get a better understanding of how the company itself views its own path to gen AI commercialization and tailwinds for their products, specifically how folks are using Firefly within creative cloud, how many images they're generating, how many videos they're generating, and how ultimately that's going to reflect on the growth and earnings growth equation for Adobe over the next two to three years. And I think we'll get a lot of that, hopefully, at Summit.

- And, Alex, just quickly here. Again, I know we haven't heard on the call yet more details on this. But just at first blush here. Given the decline and given the decline we've seen this year, is this an opportunity for investors to get in here? Do you think they should be buying?

ALEX ZUKIN: So I'm going to talk about before the-- without the context of the--

- Of course.

ALEX ZUKIN: --numbers because we have to wait to see the call. But we've been advocates that this is after Microsoft, the second best example of generative AI tailwinds inside of the product for growth for a company in enterprise software. So we absolutely believe that this is a multiyear opportunity. Adobe has a front row seat in changing this industry and benefiting from that change via growth and profitability. So we're still very bullish.

- Alex, thanks so much for joining the show today. Really appreciate your time.

ALEX ZUKIN: Thank you, guys, for having me.