In this episode of Enterprising Insights, The Futurum Group Enterprise Applications Research Director Keith Kirkpatrick discusses the recent quarterly earnings from several enterprise application vendors and provides his take on how their results are reflective of some of the larger trends in the marketplace. Then, as always, he addresses his Rant or Rave of the week.
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Transcript:
Keith Kirkpatrick: Hello everyone. I’m Keith Kirkpatrick, Research Director with The Futurum Group, and I’d like to welcome you to Enterprising Insights. It’s our weekly podcast that explores the latest developments in the enterprise software market and the technologies that underpin these platforms, applications, and tools. So this week I’d like to talk about several enterprise application vendors that recently released their quarterly earnings over the past couple of weeks and provide my take on how their results are reflected with some of the larger trends in the marketplace. Then, as always, I’m going to move to my rant or rave segment where I pick one item in the market and I either criticize it or I champion it.
So wthout further delay, let’s get into this topic of the week. It’s earnings season for several enterprise application vendors. So the first company I want to talk to you a little bit about is OpenText. Now, OpenText is an information management software vendor. They actually recently released their fourth quarter fiscal 2024 and full-year results. Now, their results actually fell short of analysts’ consensus expectations. Their company’s total quarterly revenue came in at about 1.36 billion falling slightly below the consensus estimate of 1.37 billion. Earnings per share came in at 91 cents, missing the forecast. Forecast is $1.05 per share. So what’s going on here with OpenText? Well, there’s a couple things going on with this company. First is, of course, they actually have just completed in that quarter the divestiture of AMC. This is a company that they had acquired and then they decided that they no longer wanted it. So, of course, they completed a divestiture in May 2024, this quarter.
Now, the second thing that’s going on is they were undergoing a massive restructuring. So what does that mean? Well, in layman’s terms, it means they’re going to lay off a lot of people. I believe the number is around 1200 people. And then they were going to actually hire back 800 employees, but the idea was that they were going to lay off folks that were doing jobs that really were not as higher skilled or did not have the skillsets that matched what they really needed, which are people with AI skills. So as a result, they’re taking a lot of charge there to complete those layoffs in terms of either buyouts or attrition, what have you. Basically they’re taking charges there, and that is one of the main reasons why they actually missed on their EPS number. Now, that being said, it’s not all bad news for the company for several reasons. Number one, the company actually announced a number of key customer wins during the quarter. They had deals with the California Department of Employment Development, Export Development, Bank of Egypt, GS1 Australia, Johnson & Johnson, Nestle, and Taboola among many others. So that was actually a really good sign that they were able to go out and still actually get some deals done. If you think about what OpenText is doing, they like a lot of other companies are actually really working on deploying AI throughout their organization, throughout their software packages, largely around what is known as their aviator products.
So they’re actually incorporating AI into those which are designed to really help streamline workflows, make it easier for employees and others to work with the data and actually conduct various tasks, that sort of thing. So I think the real takeaway here is OpenText like many, many other companies, they’re going through some growing pains in terms of trying to adjust the way they do business. And by that I’m talking about incorporating AI. They are trying to really deploy AI throughout their application portfolio to make it easier for companies or for their customers to really leverage the benefits there. So I think that in terms of what’s going on here, putting aside any external factors, I think the company itself is exhibiting what we might expect to see, where they’re really trying to figure out a way to structure the company in such a way that they’re able to deliver AI and making sure they have the right skills in place with their own employees to deliver that to their customers. So that is OpenText. Now, I’d like to move to another company.
The next company is Twilio. Now, they actually are an interesting company because they have really a couple of key segments. One, is their communications business. So things like delivering messages through things like SMS as one of the big part of their business, their communications business. And then, of course the other one is their CDP segment, which is called Segment. And what they’ve been doing there is they’ve really been trying to incorporate Segment throughout the rest of their business. And why is that? Because as a CDP, that is where they hold all of this company data that really is important in making sure that when you’re deploying artificial intelligence or trying to deliver messaging through text and that thing, that it’s relevant and timely. That is the real value that that company has in terms of delivering strong customer engagement. So now this company, Twilio, reported Q2 2024 results. They actually posted revenue for the quarter of 1.08 billion, which was good for about a 4% year-over-year increase. In addition, their non-gap income from operations, that actually reached 175 million up from 120.1 million a year ago. So that’s a pretty solid number there. They actually helped or actually raised their full year guidance to 675 million up from 650 million.
So what’s going on with Twilio? Well, they are really trying to differentiate themselves in the market because of the fact they have so much data, both their data that they hold within their Segment CDP product, as well as all this data that they have that’s been generated from their communications business. So we’re talking about interactions that span voice, SMS messaging, email, and other communication modalities, including things like through mobile applications, that sort of thing. So they’re really trying to integrate AI across all of those channels to make it easier to engage with customers, make things more relevant and time. So let’s talk a little bit about what’s going on with Microsoft. So Microsoft, they reported their fourth quarter fiscal 2024 earnings as well, and they actually reported a 15% increase from the same quarter the previous year. Their revenue for the quarter was 64.7 billion, and their earnings per share number at $2.95 a share, which was slightly higher than the consensus estimate of about $2.90.
Now for the full year, Microsoft reported total revenue of 245.1 billion, which was good for a 16% year-over-year increase. And if you think about what Microsoft is doing is they are all in on AI. They’re really leaning into their partnership with Open AI and integrating AI across all of its products through Copilot within the office applications as well as Teams, and even, of course, within their Azure business, which is part of their Intelligent cloud segment. Now, one of the challenges, of course, is that if you dig a little bit deeper into their numbers, their overall cloud revenue came in pretty strongly at 36.8 billion, which met analysts’ expectations. But if you look at what’s going on in terms of their intelligent cloud revenue, which includes Azure services, it actually fell short of expectations a little bit. Their revenue reached 28.5 billion versus expectations of 28.7 billion. So what’s going on there is obviously they’re facing a lot of competition from other cloud providers; AWS, Google Cloud, and, of course, if you think about what’s going on, you look at external factors in terms of spending, you have a high inflationary period right now. You have uncertainty in the market. I’m recording this today on the 5th of August, and obviously we’ve seen a very, very strong pullback in terms of equities in the market.
We’ll see what happens over the next several days if the Fed decides to cut rates in response and whatnot. But clearly it’s a cautionary environment. One of the other things that is important to note is that Microsoft has been investing so heavily. I think the CFO noted on their earnings call, they spent 13 billion on CapEx up from 12 billion the prior quarter, noting that most of that spending is going toward AI. So it’s really creating a challenge for Microsoft in terms of making sure that they’re actually able to derive some revenue from all the spending that they are doing around AI. Now, I certainly believe that companies need to continue to invest. If you think of where we’re going, AI is not this nice feature to have. It eventually is going to become table stakes for any kind of application. We’re going to get to the point where it’s not going to be thinking about it as a separate thing necessarily like Copilot, but it’s just going to be embedded throughout the application almost like you’re not even going to know it. I mean, that’s down the road, but ultimately the point here is that Microsoft is spending heavily, and they realize they need to in order to keep pace with some of the other companies in the market. And I think we’re going to see that continue not just with them, but others as well.
Now, shifting gears a little bit to another one of the large SaaS players that reported earnings; ServiceNow. They actually had a very, very good second quarter of 2024. Really, if you look again at what they’ve done, they’ve been really leaning heavily into generative AI in terms of deploying it across entire workflows, and their generative AI plays really it’s called Now Assist, and the idea is that it’s using AI in very, very specific use cases and workflows that are designed to improve efficiency, enable access to information in a much more seamless way. And, of course, remove a lot of the friction involved with doing repetitive tasks. So if we look at what they’ve done, the really interesting number for ServiceNow is that the introduction of these generative AI capabilities within Now Assist, it’s actually doubled the company’s net new annual contract value quarter over quarter. So what we’re talking about here is 11 deals greater than $1 million in net new annual contract value in the second quarter alone. That’s really, really impressive. That’s showing that companies are actually starting to buy based on the promise of the incorporation of AI within software. I think it’s going to be really interesting to see how this plays out long-term in terms of, again, being able to promise AI as a real differentiator and seeing where that leads eventually where, as I said, I believe we’re going to get to the point where generative AI is just going to be par for the course.
Now, of course, the devil is in the details. How well do your models work? Which use cases are you actually trying to implement? And then, of course, what it really comes down to is the data that a particular company has and how well do they actually execute on linking that model to the right data sets and making sure that there are guardrails in place so it doesn’t hallucinate, all of that kind of stuff. But I think the ServiceNow earnings demonstrate that the message is getting through to customers or potential customers that generative AI can deliver value, and it’s what they’re looking for in terms of their large SaaS platforms. I’d also like to talk about Google or Alphabet, which is the parent company. They announced their quarter, the second quarter results 14% year-over-year growth to reach 84.7 billion in revenue. They were particularly strong in search and cloud, and I believe the Google Cloud segment surpassed 10 billion in quarterly revenue for the first time and achieved $1 billion in operating profit.
Now of course, if we think about what’s going on here with Google and AI, all of that kind of stuff, it really is all about leveraging generative AI or AI in general to improve the services that they have. Obviously, AI is being used to improve search. It’s being used to improve advertising obviously, which falls into that category to make search more effective, more relevant, more timely. It obviously impacts the quality of ad placement algorithms. So it’s clear that it is being used on that front. It’s also being used to deliver other services within Alphabet’s portfolio, certainly using AI to make it easier to use their productivity that is being used within their meet product. All of these things, all these algorithms and refinement of these algorithms is done to improve engagement, which, of course, increases the amount of activity and usage of the product, which is what everyone wants.
So it’s clear that it has been a force for driving revenue. Even if organizations themselves haven’t fully realized all of these benefits just yet, they’re certainly banking on it and certainly are choosing the products that they believe have the capability to deliver AI and its benefits over time. It might not be right away, but they certainly are banking on the fact that these large platforms are able to do that. Now, part of it, of course, is if you think about a Google or a Microsoft or a ServiceNow or whomever, part of what you’re buying is the fact that they are so large, they’re going to have that momentum. So as investments are made in the technology, if they don’t work as they should, they’re going to be able to refine that over time. And, of course, by having such a large base, they’re obviously collecting a lot of data that is being used to refine those processes to help make those algorithms work more effectively.
So I think that’s the key takeaway here is when we think about earnings and everything like that and how AI plays into it, it’s really about, again, I see it as customers out there are realizing that AI is not going away. They want their platform to be moving ahead, incorporating new features, incorporating new functionality. It, again, may not be necessarily generating a lot of ROI yet because you might be still in pilot. You might be in a more limited deployment, but they certainly are reaching out and looking to these large players to provide them with these tools to get them on the road to really recognizing some sort of ROI down the line. So with that, I want to move to another topic, and this is my Rant or Rave Segment, which I do every week. I actually have a rave this week. I want to talk about Atlassian, which just announced a little bit of news through a letter.
It was actually a share letter that they released. And basically what they’ve said is that they obviously have a stated goal of moving all their customers to the cloud. Why? Because obviously it’s more profitable for vendors to deliver services in the cloud. It’s easy to do updates, easy to do maintenance, all of that kind of stuff. We certainly know of reasons for that. But the interesting thing is that they’ve acknowledged that this cloud first approach they had used with smaller customers, that’s great, and that seemed to work pretty well. But for larger customers, that wasn’t necessarily realistic for these large on-prem customers that had a much, much more complex or integrated instances of their software. So what they’ve done is they said they have shifted their mindset from being cloud first to what they say is enterprise first. And what does that entail? Well, that means that they will be working with their customers to move to the cloud over a multi-year period instead of a quick lift and shift. And some of them may actually want to using a hybrid approach of having some resources on prem and some in the cloud. And the idea is that they want to be able to provide their customers with the option to do this over time. And to me, that’s really two things.
One, it is more realistic in terms of large enterprises that just the level of complexity and expense to a complete lift and shift in one motion just may not be realistic. And the other thing it does is it shows that they’re being very, very customer-centric in terms of acknowledging the challenges that their customers have and are basically readjusting their messaging to support their customers, which I think it’s a novel approach, and I think it’s one that should be applauded in the market, given that a move to the cloud is not simple. It’s not just flipping a switch for a large organization. So for this, I would like to give that a rave. All right, well, with that I want to just say thank you everyone for tuning in to Enterprising Insights. I’ll be back again soon with another episode focused on the happenings within the enterprise application market. So be sure to subscribe, rate and review this podcast on your preferred platform, and I’ll see you next time.
Author Information
Keith has over 25 years of experience in research, marketing, and consulting-based fields.
He has authored in-depth reports and market forecast studies covering artificial intelligence, biometrics, data analytics, robotics, high performance computing, and quantum computing, with a specific focus on the use of these technologies within large enterprise organizations and SMBs. He has also established strong working relationships with the international technology vendor community and is a frequent speaker at industry conferences and events.
In his career as a financial and technology journalist he has written for national and trade publications, including BusinessWeek, CNBC.com, Investment Dealers’ Digest, The Red Herring, The Communications of the ACM, and Mobile Computing & Communications, among others.
He is a member of the Association of Independent Information Professionals (AIIP).
Keith holds dual Bachelor of Arts degrees in Magazine Journalism and Sociology from Syracuse University.
