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It's not a great time to be sued by US regulators. But for Adobe, the timing of the lawsuit filed this week by the Federal Trade Commission is especially bad. Adobe accuses the corporate of constructing it too difficult for its customers to cancel their subscriptions.
Due to regulatory scrutiny within the UK and Europe, the maker of Photoshop, Acrobat and Illustrator had already abandoned its planned $20 billion takeover of rival design software company Figma in December. Although Adobe, whose market value is $232 billion, needed to pay Figma a severance payment of $1 billion, the failure of the money and stock transaction was in some ways a blessing in disguise.
The deal was expensive, valuing Figma at about 50x annual recurring revenue and double its last private valuation. The world has also modified dramatically since Adobe announced the acquisition in 2022. Back then, ChatGPT and generative AI weren’t yet a part of on a regular basis vocabulary.
With AI now on the forefront of investor concerns, excitement over Adobe's AI strategy helped the stock rise 77 percent last 12 months. The departure of Figma means Adobe can give attention to constructing Firefly, an AI tool that may generate images based on text descriptions, and introducing AI features across its product line.
There were fears that free text-to-image and video products from firms like OpenAI could undermine Adobe's market. But recent quarterly results provide cause for cautious optimism. The leading provider of software for creative artists has raised its revenue forecast for fiscal 2024 as more users adopt its AI-powered editing tools. Adobe doesn’t disclose how much of its revenue is because of AI, but net revenue from digital media – a closely watched indicator of recent creative software business – is anticipated to be $1.95 billion this 12 months, up from $1.91 billion last 12 months. Adobe's Ebitda margin is anticipated to rebound strongly this 12 months, reaching over 50 percent, after declining over the past two years.
But the FTC's lawsuit threatens to derail Adobe's trajectory. Subscriptions accounted for 94 percent of Adobe's revenue in 2023, and recurring revenue is the lifeblood of the software business. For its part, Adobe said its termination process is easy and it can challenge the FTC's claims in court. Still, a battle with regulators will solid a shadow over Adobe's hopes for an AI-powered future.
