July 18, 2024
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Adobe’s AI-powered future hits a roadblock

Adobe’s AI-powered future hits a roadblock

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There isn’t a good time to be sued by US regulators. But for Adobe, the timing of the lawsuit filed by the Federal Trade Commission this week, accusing it of making it too difficult for customers to cancel their subscriptions, looks particularly poor.

Regulatory scrutiny in the UK and Europe had already prompted the maker of Photoshop, Acrobat and Illustrator to abandon its proposed $20bn acquisition of rival design software company Figma back in December. While Adobe, which has a market value of $232bn, had to pay Figma a $1bn termination fee, the collapse of the cash-and-stock transaction was in many ways a blessing in disguise.

The deal was pricey, valuing Figma at roughly 50 times annual recurring revenue, and twice its last private valuation. The world has also dramatically changed since Adobe announced the acquisition in 2022. Back then ChatGPT and generative AI had yet to enter the everyday lexicon.

Now that AI is the top focus for investors, excitement over Adobe’s AI strategy helped the stock to a 77 per cent gain last year. Walking away from Figma means Adobe can concentrate on building up Firefly, an AI tool that can generate images based on text description, and rolling out AI features across its suite of products.

There were fears that free text to image and video products offered by the likes of OpenAI would cut into Adobe’s market. But its most recent quarterly results give cause for cautious optimism. The leader in software for creative arts professionals raised its revenue forecast for fiscal 2024 as more users adopt its AI-powered editing tools. Adobe does not disclose how much of its revenue is related to AI. But digital media net new annual recurring revenue — a closely watched metric of new creative software business — is now expected to come in at $1.95bn this year, up from $1.91bn last year. Adobe’s ebitda margin, after falling for the past two years, is expected to recover strongly this year to over 50 per cent.

The FTC’s lawsuit threatens to disrupt Adobe’s trajectory however. Subscriptions accounted for 94 per cent of Adobe’s revenue in 2023 and recurring revenue is the lifeblood of the software business. Adobe for its part said its cancellation process is simple and it will dispute the FTC’s claims in court. Still, a regulator fight will cast a cloud over its hopes for a AI-powered future.

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