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Adobe out with earnings today on RAG. But it's the departure of their longtime CEO. He was in that seat for eighteen years. You say that's overshadowing what were otherwise pretty good results.
Yeah, I mean this is 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, is 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. But having said that, since the beginning of last year, their fundamentals has remained intact. Yet stocks down over forty percent, and which is partially the reason why most likely the CEO is leaving.
And okay, so what investors want to hear about the profile of Adobe's next CEO to maybe restar confidence because to your point, it's really overshadowing and otherwise really good earnings.
Yeah, I think the next CEO has to be in a completely AI first CEO, which is somebody who understands the large language models a lot more then let's say the older, you know generation CEOs. Now I'm not saying that CHA didn't understand. This is probably one of the most well respected CEOs in the software landscape, made massive improvements in Adobe's market position in this eighteen year period. You can look at any metric and it's it's you know,
beyond comparison. But I think the next CEO has to be somebody who is just you know, day and out absolutely in AI products.
Anrag.
I'm a little surprised that a succession plan was not in place. I mean, the current CEO, he's sixty two, been there for eighteen 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.
Now 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 Wadwani, who's 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. So I won't be surprised if they run the search and eventually you know, in the end they decide with an internal candidate.
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.
Yeah, the AI creative tools are already out there. I mean, you and I can go on Google today and you know, 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 call Adobe Stock, which is basically a repository of hundreds
of millions of images. They're saying that people's use of those already made pictures have gone down and people are using more LLM produced images. So what we want to see from the next CEO is they want to make We want to make sure that they are using all the models to create the image 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 as best positioned at the moment.
So you know, we created a big framework around this and published a report a few weeks ago. 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 larger enterprises, you know, you have a lot less disruption risk then
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 see some of these larger companies with absolutely massive market sharees. I think they are the ones that are less at risk compared to that, say something that's just you know, giving one one product function.
Out there and rob don't be maintained. It's pricing power. If generative AI tools make creative production cheaper and faster, like, will people still go to Adobe before that?
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 ADO before, 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 you know 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.
So you're not just buying Adobe for you know, creating images, but the entire workflow is the most important aspect.
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Alexis Christaph for us, in for Paul Sweeney, Isabell Lee doing duty for Scarlet Foo 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 four percent right now. So here to help us make sense of it. Is Drew reading Bloomberg Intelligence US home building analyst.
First off, I'm just to start with the stock, Drew. Why the positive reaction when the top and bottom line missed the mark?
Yeah, thanks for having me.
So keep in mind Lenar stock has been down about thirty five percent 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 two Q was about seven percent below consensus, and gross margin was probably a little bit weaker than what people were looking for. So all in all, two Q earnings are about fifteen percent below expectations. But it really goes back to how Lenar's 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.
How much of that's low it on is being driven by higher mort get rich versus just a broader economic uncertainty overall.
Yeah, that's 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 twenty twenty two, really when Moorg's rates skyrocket it but it's not just rates, it's you know, the massive run up in home prices we've had since twenty nineteen. Prices are up, you know, over fifty 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. 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. We're 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.
Would Drew 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, 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 that it is something that Lenar pointed out on the call, is just that that brought uncertainty that consumers aren't necessarily certain you know about the employment picture
over the next twelve months, 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.
And despite your 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, So, Leonard'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 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, you know, the market turn higher.
So does this earnings report from Lenar basically reinforce the fact that in this expensive housing market, people need deals and incentives, you know, to get in the door.
Yeah, I mean you hit the nail on the head their affordabilities the issue. Lenar is offering incentives which total about fourteen percent of the delivered home price. Now to provide some contact for that in a normal market and centives are typically about four to six percent of the home price, so you could see just how massively important
incentives have been to get buyers through the door. I think a lot of the optimism, you know, coming into the year was that if mortgage rates came down, they'd be able to take their foot off the gas pedal a little bit. But you know, to this point, what we've heard from most of the builders is that incentives
have remained stubbornly high. Lenard did tell it that their incentives on new orders, which are a better leading indicator, are a little bit below where they were on deliveries, but we still expect them to remain pretty elevated as we get through the spring selling season, because, as you mentioned, buyers are aware of these incentives and they're looking for a deal.
What are you expecting from pending home sales in about twenty seconds. Next week we get pending home sales for February, so I think.
It's going to be more of the same for the existing home market and pending home sales. Last month, pending's home sales were at the lowest level on record. I think you'll have a little bit of weather still impacting results, but by and large, it's still going to be the affordability constraints that we're seeing out there.
In the market.
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I think one of the industries really upended by this war is the aviation industry and the global travel. We're seeing lots of flight being canceled and really a lot of TSA disruptions. Let's bring a Jeff Friedman, he's CEO of the US Travel Association, to shed some light on the situation. Jeff, I'm really scared. I'm really scared, and I'm just over winter now. I want it to be summer. That said, could higher oil prices translate to weaker demand and weaker travel in the US ahead of the summer.
You're speaking my language. I can't take anymore this winter. And obviously all of us as travelers want to get out there and see the country, see the world. And there's no doubt that there are limitations on travel right now. There are issues with international travelers coming to the United States, there are issues with travelers moving about the United States. Certainly,
we're seeing some pressure on prices. That said, travel generally has run below general inflation over the past year or so, so I think that is a bonus for people across the country. One of the best things we saw coming out of COVID, and you can't get a lot of sentences that way, but one of the best things we saw coming out of COVID was a new demand for travel.
People prioritize travel experiences, creating memories over goods. At this point, that's a good thing for us, but only if we remove the obstacles to travel, And what's happening at TSA right now is the single biggest obstacle the travelers are confronting.
Yeah, I want to talk about that, because this is sort of a double whammy right for travelers. This is we've got a record spring travel season upon us, We've got a partial government shut down. These TSA workers are working without pay for I don't know weeks.
Now.
What is the situation like at at the airports.
Yeah, I'll get to travelers in a second, because it's a travesty what's happening for travelers, But I want to start with the people who are most affected, the real victims here, and that's the TSA workers. You know, we have more than fifty thousand TSA officers who go to work every day. Last year, they found more than six thousand weapons at various checkpoints. These people, for the second time now in just a matter of months, are going
completely unpaid. We're asking these workers to do something that none of us do, that no member of Congress does. We're asking them to go to work based on an IOU. And if you think they're not thinking about their rent, their gas, their need for groceries, the other things they have to do for their kids while they're trying to do their job, then we're kidding ourselves. This will have an effect on the aviation system. It is having effect on the aviation system.
And it's a.
Man made disaster. It doesn't need to be this way. The fault lies with Congress. For travelers, it's leading to incredible uncertainty. I saw the lines in Austin, Texas earlier today, three hour long lines down there. I went through San Diego yesterday and I got through in ten minutes. What that means is travelers don't know do I need to arrive at the airport an hour ahead of time? Do
I need to arrive five hours ahead of time? It creates massive uncertainty, It harms the system, it encourages people. It discourages some people from traveling, which will have a significant impact on the economy. During the last shutdown, we saw travel spending decline by about one billion dollars per week.
When I'm in the airport and when I go and zoom by everything, that's just like I feel like my day is made and I'm a superhero. So then if we see more travel disruptions, how could that impact the broader economy, especially if the conflict dragsone? Do you see it affecting maybe the airline costs and ticket prices? And I mean, how will that ripple through.
Yeah, if travelers, and let's look at there are different types of travelers. There are leisure travelers who are going out for spring break. There are business travelers who are going on their third, fourth, sixth trip of the month. I think the leisure traveler is generally more resilient. If I promised my kids that we're going somewhere warm for spring break, I'm going to be irritated, but I'm going to tolerate that unnecessarily long line at TSA for the
frequent business traveler. Frankly, the people who are spending more often sitting in the front of the plane, spending more at the hotel, spending more at the restaurants in various communities. It's the frequent business traveler who we're putting at risk here. It's that person who says, I'm going to skip the convention, I'm going to skip this meeting. I'm going to move it to zoom or an alternative. That's where the effect really hits the economy. It's incredibly unfortunate, but that's what
Congress is doing. I think there's some degree, obviously of gamesmanship that's going on on Capitol Hill right now, with the sense that there isn't a consequence to the way they're behaving. TSA officers have now gone upwards of a month without pay. Again, no member of Congress has offered to do the same. That is, in my mind, borderline criminal in the way that we're treating these TSA officers.
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