Bloomberg Analyst (2:59)

And okay, 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 an otherwise really good earnings.

Anurag (3:10)

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 than, let's say the older, you know, generation CEOs. Now I'm not saying that Shantanu 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 18 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 in and day out. Absolutely. In AI products.

Alexis Christopher (3:47)

Anurag I'm a little surprised that a succession plan was not in place. 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.

Anurag (4:07)

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, the leader, David Wadhwani, who is the head of 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.

Bloomberg Analyst (4:39)

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?

Anurag (4:53)

Yeah, the creative tools are already out there. I mean, you, 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 called Adobe Stock which is basically a repository of hundreds of millions of images. 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.

Alexis Christopher (5:50)

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?

Anurag (6:05)

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 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 framework, see 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, one product function out there.

Bloomberg Analyst (6:56)

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?

Anurag (7:06)

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 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 creating images, but the entire workflow is the most important aspect.

Bloomberg Analyst (7:56)

Stay with us. More from Bloomberg Intelligence Coming up after

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Bloomberg Host (10:04)

You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10:10am 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.

Alexis Christopher (10:18)

Alexis Christopher us in for Paul Sweeney Isabel Lee doing duty for Scarlet Fu on this Friday, we want to talk a Little housing market before we, we get to the top of the hour here because Lennar, the home builder out with earnings today, revenue and earnings per share missed the mark. But Lennar shares are actually up nearly 4% right now. So here to help us make sense of it is Drew Redding, Bloomberg Intelligence US Home building 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?

Drew Redding (10:53)

Yeah, thanks for having me. So keep in mind, Lennar 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 margin. 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. So all in all to earnings are about 15% below expectations. But it really goes back to how Lennar 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, with delivering higher volumes.

Bloomberg Analyst (11:45)

How much of that slowdown is being driven by higher mortgage rates versus just broader economic uncertainty overall?

Drew Redding (11:53)

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 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, 50% 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 Lenore 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 is not a great time to buy. So to your point that the uncertainty from the, the, the macro environment as well as the geopolitical environment more recently is certainly weighing on buyers, would you

Alexis Christopher (13:03)

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.

Drew Redding (13:18)

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 the, 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 Lennar pointed out on the call is just that, that broad uncertainty that consumers aren't necessarily certain, you know, about the employment picture over the next 12 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.

Bloomberg Analyst (14:06)

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?

Drew Redding (14:15)

Right. So Lenore 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, 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, for all the homebuilders. 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.

Alexis Christopher (14:55)

So does this earnings report from Lennar basically reinforce the fact that in this expensive housing market people need deals and incentives, you know, to get in the door?

Drew Redding (15:07)

Yeah, I mean, you hit the nail on the head there. Affordability is the issue. Lennar is offering incentives which total about 14% of the delivered home price. Now to to provide some context for that, in a normal market, incentives are typically about 4 to 6% of the home price. So you could see just how massively important incentives have 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 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. Lennard did tell us 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.

Alexis Christopher (16:02)

What are you expecting from pending home sales? In about 20 seconds next week we get pending home sales for February.

Drew Redding (16:09)

So I think it's going to be more of the same for the existing home market and pending home sales. Last month pending 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.

Bloomberg Analyst (16:26)

Stay with us. More from Bloomberg Intelligence Coming up after this.

Ben Walter (16:30)

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IBM Representative (17:27)

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Bloomberg Host (18:34)

You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10am 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.

Bloomberg Analyst (18:48)

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 in Jeff Friedman, she's he's CEO of the U.S. 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?

Jeff Friedman (19:16)

You're speaking my language. I can't take any more 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 across the country. One of the best things we saw coming out of COVID and you can't begin 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 that travelers are confronting.

Alexis Christopher (20:11)

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 shutdown. These TSA workers are working without pay for, I don't know, weeks now. What is the situation like at, at the airports?

Jeff Friedman (20:29)

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 50,000 TSA officers who go to work every day. Last year, they found more than 6,000 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 I. O. 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 10 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 $1 billion per week.

Bloomberg Analyst (22:02)

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 drags on, do you see it affecting maybe the airline costs and ticket prices? And, I mean, how will that ripple through?

Jeff Friedman (22:24)

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, who are going on their third, fourth, sixth trip of the month. I think the leisure traveler is generally more resilient. If I promise 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 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, I'll move it to, 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, there's some degree of 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.

Bloomberg Host (23:41)

This is the Bloomberg Intelligence Podcast, available on Apple, Spotify and anywhere else you you get. Your podcasts listen live each weekday 10am to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn and the Bloomberg Business app. You can also watch us live Every weekday on YouTube and always on the Bloomberg terminal.

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