On this episode of The Six Five Webcast, hosts Patrick Moorhead and Daniel Newman discuss the tech news stories that made headlines this week. The handpicked topics for this week are:

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Disclaimer: The Six Five Webcast is for information and entertainment purposes only. Over the course of this webcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we ask that you do not treat us as such.

Transcript:

Patrick Moorhead: We are back and we are live with The Six Five Podcast. I’m here with my bestie, Daniel Newman. I rolled in at about 1:00 AM last night after being in an unnamed city for approximately 14 hours. So, 14 hours on the ground, 14 hours in flight. It is good to be back, but I would never miss the bestie pod, unless I had a really good reason. Dan, how you doing this morning, buddy?

Daniel Newman: I’m doing good, Pat, and it’s always good. I always tell my kids to pre-report any reason why you may stink today at your job, your life, your school, or your sport. And I like that you came straight away letting me know why you may not be the host with the most today, but look, it’s part of the job and I don’t feel so sad for you. I saw the PJ you flew out of. What was that, a G6, G7? Next generation plane, you got your own office. I’m just kidding, everybody.

This guy was in coach sitting next to the guy that wouldn’t put headphones in, so he didn’t even get to sleep because for some reason people aren’t, I don’t know, not doing their jobs on the plane, but what a week. You were up in some city and we were on a call together with a CEO and you’re like, “I’m not going to tell you where I am,” but you were wearing the badge with the strap on it and said exactly where we were.

Patrick Moorhead: You had to wonder, was Pat Moorhead doing a flex with that CEO or something… It’s probably not, because I think that CEO has probably been in that same city visiting that same company about 1,000 times.

Daniel Newman: Meeting with those same people.

Patrick Moorhead: I know, and hey, if you’re new to The Six Five Podcast, first I have to ask, what’s wrong? I’d love to know how you found about us but-

Daniel Newman: What’s your deal?

Patrick Moorhead: We appreciate you being here and we cover six topics, five minutes each, five to 10 minutes each, that’s the asterisk, but why rename the show. Dan and I just talk until we get self-gratification that we’ve been heard, because that’s really important to us. Now, actually we really appreciate you and we’re going to do an Earningspalooza today big time, and we do talk about these publicly traded companies. Don’t take any of this as investment advice. If you saw my portfolio, you would pretty much run away. So with that-

Daniel Newman: Come on, man, don’t be so hard on yourself. We don’t pick or buy or invest in these tech companies, so-

Patrick Moorhead: I don’t.

Daniel Newman: The reason sometimes that you and I can pick on ourselves, Pat, that we don’t do better is because we end up investing in the other industries that we’re not allowed to invest here, or at least we’re not supposed… I don’t know what the rules are exactly, but the safe rule for you and I is that we advise, therefore we don’t invest, right?

Patrick Moorhead: Exactly, no direct investment. So, all these stocks go up, and I gently weep in my Toyota Corolla. So anyways, we’ve got a great show for you coming up. We are talking Earningspalooza, Google, Microsoft, ServiceNow, Meta, Intel. It’s kind of crazy, you see the inflation numbers come in, you see the GDP numbers come in. We’ve got Middle East conflict. It had to be a miracle for investors to see good in this. Dan, I am calling your number, go.

Daniel Newman: Oh man, can I just make a quick comment about the GDP, Pat? You put a really great post out there. I wrote a piece about it. I was reading how uninformed I feel that most of the world is right now. We are just a world of headline readers. That’s why you really got to listen to The Six Five, because if you’re just a headline reader, you see, “Oh, unemployment’s great.” Well, they’re all part-time jobs. “Oh, interest rates aren’t that high. This is how high they were 20 years ago.” But wages haven’t gone up nearly enough.

What does it cost to own a home in most cities? People can’t afford it and gas is like five bucks… I saw a sign yesterday, Pat, in California, almost $8 a gallon. Now, again, is this trying to get people to move to EVs? Well, you can’t buy an EV because the interest payment’s going to be 12% if you want to take out a car loan. Anyway, so this is crazy-

Patrick Moorhead: But that’s 12% with good credit.

Daniel Newman: Yes, it’s nutso. And let me tell you something that’s really interesting, Pat, is the day before Meta had reported… We’ll talk about Meta a little bit on this and they had a good quarter, but had the guidance wasn’t good enough and everything fell and then that GDP number came in, everything fell. And then the question mark was basically more or less is, if Microsoft and Google don’t have a good quarter, what is going to happen? And so, let me just tell you that I was very worried, thank you, Sundar, thank you, Satya, for basically what our friend Dan Ives called as a Picasso of a quarter. I think Picasso was his term. That guy always comes up with some good ones and I saw his-

Patrick Moorhead: Hey, can I ask you, why were you concerned? Why do you even care?

Daniel Newman: What do I care about what?

Patrick Moorhead: Well, you said you were concerned that coming into this-

Daniel Newman: Oh my gosh, Pat, because I don’t know about you, but our businesses are fairly well tied to the tech industry, how robust it is and the robustness of-

Patrick Moorhead: Ah, I got you.

Daniel Newman: Everybody’s looking up, everybody’s looking at… Because not like the distribution of the growth of the market has been really, really spread out. It’s been pretty concentrated in a small number of tech names. Google, Microsoft, and by the way, NVIDIA, if NVIDIA doesn’t have a banger of a quarter, I just wonder if the whole market’s sitting on stilts just waiting and it’s hard because now what you’re starting to see is some of these growth on growth and Meta had that this quarter where it was not about… They’d had six great quarters, so now they’re starting to grow over growth.

But Google, let me just talk about that, because this is how we end up with 10 minutes a topic, because I spend the first four not talking about the topic, so Alphabet, for everybody out there, really hit it on all cylinders. Earnings, they blew it out, $1.89, versus $1.51 revenue, beat by more than $1 billion, 80.54 against 78.59, but I’m not news reading for you, but they generated $8 billion in advertising revenue from YouTube this quarter, beating that number and growing by double digits percent.

By the way, you know they only paid $2 billion total for YouTube, now it generates 8 billion a quarter of revenue for the company. Here’s the other one though, Pat, Google Cloud, 28% growth, $9.57 billion. This was a big one. Where were some other things that tie to the overall AI space? CapEx expenditure growth up by about a billion year-on-year end. By the way, the smallest growth year-on-year of all the AI companies, and we’ll talk about that throughout the show, but Pat, here’s another thing, they launched a dividend, Google a growth company.

Patrick Moorhead: No, I know, right?

Daniel Newman: Now here’s the thing though, that’s super interesting about that though, Pat, is this good or bad? Because when companies start to become dividend companies, the question mark is always, is that because you don’t expect to be able to continue growing at a fast enough rate, or is this kind of like the superflex of Ruth Porat and the financial engineers behind the company saying, “Look, you can invest in growth and get a dividend.” It’s not a huge dividend, it was like 20 cents a share.

But it was still something meaningful to say, “Hey, we’re going to pay,” and by the way, they intend to pay quarterly cash dividends into the future. So this was really, really big. They also announced 70 billion buyback. So, they’re saying we got more cash to put back into the till. So, they really hit it on all fronts. They’re growing in all areas. The cloud business, and we mentioned this a lot after Google Cloud next, their AI strategy is working. They’ve vertically integrated TPU, now they got Axion, so they’re going to get more margin.

And by the way, that was probably the biggest flex that Porat said was that… She basically said something along the lines of, “AI is actually going to accelerate our gross margin.” And I saw this, I didn’t hear if it was from her or it was a sort of a summation of something she said, but basically we don’t need to spend as much, because we’ve been doing this longer in terms of the CapEx expenditure in AI. And companies like Meta have to spend so much, because playing catch-up to what we’ve done because I think that the joke or the line was, because they were busy investing in virtual reality over there while we were investing in AI. But Pat, a banger of a quarter, got me back in the boat, feeling good about how things sit, rock and roll.

Patrick Moorhead: Dan, I am usually a big transcript guy and for Google, they don’t have a presentation, they don’t have an immediate transcript, and two hours even after the call, it wasn’t there. So, I sent out a snarky tweet talking about all the insights I got out about Google Cloud, but even though I got in at 1:00 AM, I did go in this morning and look at the transcript and here’s what I pulled. Obviously, on the income statement we had revenue at 9.6 billion, about a 28% increase and then almost $1 billion in profitability, so $9,900,000,000. They just keep getting more profitable.

Now, in the call, big call-outs as you would expect on AI. 60% of funded GenAI startups and 90% of GenAI unicorns are Google Cloud customers. They also pointed out TPU v5p, generally available, and of course NVIDIA’s latest generation of Blackwell GPUs. The company spent almost as much time on silicon as it did the overall cloud business, which again, semiconductors are eating the world here.

And they devoted a couple lines to Axion, the new ARM-based CPU, says it performs 50% better than compatible x86-based systems. That’s pretty amazing in this day and age to call out homegrown silicon here. Final interesting thought, they lumped YouTube and Cloud. I got to tell you, for the life of me, I don’t don’t understand this at all. So listen, some advice for Google, if you want Google Cloud to be taken more seriously, don’t lump it in with YouTube, a consumer property and ads, that’s one thing. And secondly, have a presentation or put out the transcript or your prepared remarks out there.

Daniel Newman: They should bring Thomas on the call, why not?

Patrick Moorhead: Totally. Consumer ad companies, I’m not just picking on Google here, consumer ad companies do this a lot. Consumer package goods, food companies, they don’t give a lot. They force you to go to the call. That was cool like 10 years ago. Some relations and CFOs, “Hey, you need to show up to the call to get to the good bit.” So rant over, Google crushed it. I’m trying to figure out… Listen, I’m a tech industry analyst, not an equities analyst. How much of the bump is related to the dividend and how much is related to perform?

Daniel Newman: Can I make a guess as not an equities analyst?

Patrick Moorhead: Yes.

Daniel Newman: It was all about the growth. They just beat it up. Actually, I think the div, if anything, maybe because that comes out of cash, so it impacts growth. Anyways, just my guess.

Patrick Moorhead: Let’s move to the next topic. I’m going to call my own number here and that is Microsoft. Dan, where do you start on this one? They absolutely crushed it. It reminded me a lot of last quarter, which was more of the awesomeness, but given all the reasons we talked about the confluence of issues, they had to crush it and they absolutely did, but what a lot of people focused on was that Azure number. And what I’m going to focus on is not the growth, which was good, but 40% of Microsoft’s revenue is Azure. And I had some people try to debate with me, “Oh, well, Surface is in there.” It’s like, that is such a minute spec, it’s not even funny. Surface grew 6%, and the other thing is scale. We’re looking at $100 billion a year scale company. That is literally the size of some of the biggest tech companies on the planet, infrastructure companies out there.

And I’ve worked with Microsoft almost 35 years and sometimes it’s easy to forget, they were the shrink wrap software company out there. Hey, it wasn’t all rosy. Personal computing not only missed the guide, it declined 19%. These are PCs, this is Windows, this is gaming. Watch this space. The AI PC market hasn’t really kicked off. Microsoft does not yet have an AI enabled operating system, but Pavan made some comments at a speaking engagement when I was in CES, and by the way, Pavan runs Windows and Surface, and he basically said, “We are going to change the underlying operating system to better take advantage of generative AI. And then if you read the cookie crumbs, even from Satya, the New York event that Six Five Media was at, and he even laid the cookie crumbs out there, I’m hoping we hear more about build that could be the growth catalyst, I believe it will, for the personal computing segment.

Final comments here, and this has been happening for almost a year. I like to go in and count the times that Satya or Amy says they took share and I think it was 22 times. They said, “We took market share across Dynamics 365, Teams Phone, Edge, and US Bing.” Pretty darn impressive. Now, how about Azure? I’d like to know if they believe that they gained market share in Azure. We don’t know yet, but I am kind of reading the tea leaves and I think that they think that they did.

Daniel Newman: Well, look, taking share in all those different areas is really important. Of course, share is a little bit retrospective to how much has the market grown and how much market, especially with AI, which there’s some uncertainty to how much AI is creating in growth. The company did come out after… I didn’t read in the initial report, but then I think it was mentioned on the call itself where Amy Hood mentioned that 7% of the growth was related to AI for their Azure number, so-

Patrick Moorhead: It was 8% last quarter.

Daniel Newman: No, it was six. So, it was actually a little better, so it went up. I think that was something I was worried about, because I didn’t see it initially and I was wondering if AI had actually stalled as an impact. So, it is making a bigger impact, Pat, what’s also interesting though is the day before when Meta had missed its guide just slightly, it absolutely fell off a cliff. Did you notice that Microsoft also missed its guide slightly and yet it still went up?

Now, that also just goes to show kind of the effect of some better performer around them with Google Ad, I think the overall sentiment, not to mention the market, was just looking for good news. You remember, market sold off a set down 700 points yesterday at its peak, it was a bad, bad day for people with a 401(k). Now having said that, even though the guide was a little low, they’re pushing for their belief they’re going to hit higher margins and therefore they would still end up hitting their EPS number, which I think was part of the reason everyone could shrug it off.

But Pat, the company showed strength in Azure. I think with constant currency was over 30%, which is again, I always hate bouncing between the constant and non-constant, because it just creates… I’m not a calculus major, but I like to talk about the calculus as often as I can. Now the expenditures, big time tied to the NVIDIA spend, and that by the way is a difference with Google and Microsoft is while Microsoft is starting the process of building its own AI accelerator, Google is much, much further along in that process and is doing as, Pat, both of you and I have tweeted about very popularly, they train their entire Gemini model on their own hardware, which is a different cap expenditure requirement.

Now, I also thought it really deserved a call-out and you said this, Pat, but Dynamics, what a great number. When they’re talking about taking share, they have to be talking about share from Salesforce.

Patrick Moorhead: I don’t know, it could be HubSpot.

Daniel Newman: Maybe I’m thinking more… That’s a possibility, but I think they’re talking about Salesforce. I think they might be talking about Oracle and maybe SAP because you’re talking about ERP and you’re talking about Dynamics, you’re talking about CRM. Those are the two areas, and of course they’ve got some specialties in supply chain, financial planning analysis tools, but Pat, that was very popular. The other thing that was really, really strong was the amount of GitHub Copilot subscriptions. They’re blowing everyone else out of the water on the developer side. It’s not even close. It’s like I think their paid subscription to GitHub code was like three times what AWS’s CodeWhisperer… I think it’s called CodeWhisperer is.

And by the way, that’s a really robust product with a lot of users. So, it’s not like bad, good. It’s like good, really good is what’s going on right now. Developers are turning to these tools though, Pat. So, good stuff overall from Microsoft. They had the second-best earnings yesterday.

Patrick Moorhead: I love it, man. Hey, let’s move to ServiceNow. You and I are both headed to the big conference for many, many days in our second home of Las Vegas, Nevada.

Daniel Newman: Absolutely, Pat. So look, I had the chance to spend a little time this week. I talked to Bill McDermott.

Patrick Moorhead: Of course you did. By the way, time out a second. You were everywhere. As I was on planes for 10 hours, and in a city for 14, you were just crushing it on there. Look at that smile. I love that.

Daniel Newman: Well, it’s funny, because you and I go in waves. There’s days I’m sitting at my desk, I’m not even traveling, and I’m not doing any commentary and I’m looking at it and I’m like… Because I see you and I see everybody else on them, and then there’s, like I said, it comes and goes. I’m saying that it really, really comes and goes. There’s days where it’s you, there’s days where it’s me. This week I was really busy. Next week, I’ll be doing a bunch of press, too, because by the way, next week’s another Earningspalooza, so tune into us. You’re going to want more of this.

But look, ServiceNow is really interesting, Pat. You’re talking about a mid-double digits growth company that’s achieving at the top of its expectations quarter after quarter, beyond just being a very, very positive cheerleader to the market, Bill McDermott’s executing, and he’s really got a vision that software and the way enterprise software is built and consumed is going to completely change. And so overall, you saw a 25% growth in the company’s subscription revenue. It trades at a really, really high multiple, because it keeps growing into it every quarter that passes, but they’re seeing big growth on big deals. They saw 100% growth of their $5 million+ deals this quarter. They saw 300% growth in their million dollar plus deals this quarter.

That’s a really big deal when you’re talking about a company that’s almost entirely subscription based. And what they’re basically doing is they’re infusing GenAI in every workflow across the business. So, they are really the company that meets what I talked about three years ago when I said deflationary technology would become the hottest thing in the next wave of growth. Because as we grow and we implement AI, what’s effectively happening is companies are trying to figure out first how to optimize their workflows, lower their costs, accelerate revenue and growth.

ServiceNow has the technology for HR, for digital experiences, for ITSM that allows companies to reduce those expenses, and then drive into growth, and they’re being rewarded. They’re working very closely across the board with whether it’s working with NVIDIA on the front end or working with the biggest SIs on the back end. ServiceNow is powering a lot of that. And so in my conversation with McDermott, he was really doubling down on the fact that companies are turning to them to build these workflows to, as I like to say, prune to grow with their businesses.

But Pat, they did guide, it was a little softer than the market had wanted, so it actually sold off.

So, even though the results were really good and the company’s numbers, once again, everything from their CRPO to their ACV all grew robustly, the market sold on the news, and so they are going to need to apparently grow even faster, but the results were really good, Pat, and I look forward to you and I both will be on at their investor day and Bill McDermott’s going to be the opening keynote speaker of our Six Five Summit, so tune in to hear more about that.

Patrick Moorhead: I’m really looking forward to… I’ve never actually met Bill before and I’ve never met a tech CEO I didn’t like. No, I’m just kidding. Is that selfie analysis, Dan.

Daniel Newman: Well, did you take a selfie?

Patrick Moorhead: Well, I will. Well, maybe, if he lets me.

Daniel Newman: I just posted that. So, there’s my opinion about ServiceNow, everybody.

Patrick Moorhead: I love that. No, ServiceNow is an incredibly interesting company. They literally started doing what you would expect, hence their name, which is service. It was customer service and they were the backend glue for multiple companies, even infrastructure providers, folks like Dell.

Daniel Newman: Or ITSM.

Patrick Moorhead: Exactly, and then you take that to the next level, which is you expand the definition of service, which is we can service our field, we have FSF, we can service IT. Oh, there’s ITSM, and then you keep doing that to the nth degree where ServiceNow is very quickly transforming themselves into a CX play for a variety of audiences, by the way, for human resources, and then even basically a strategic dashboard, strategic portfolio management.

So I’ll be honest, I look 10 years ago what the company was and where it is now, and sometimes they say leaders are leaders at the top are the absolute key to some sort of change, and sometimes they aren’t. Bill has absolutely turned this company into this next generation company and quite frankly, with an AI opportunity. I hear about ServiceNow with my conversations with senior management all the time, and I got to tell you, in at least customer service management and IT management, they’re going to be the de facto AI driver for those enterprises. So again, look forward to the upcoming conference. Man, I’m going to just soak myself. I’ve never been to their conference before and I’m really looking forward to it.

Daniel Newman: Strap in. It’s always a good one, very high energy. I expect AI be a very popular topic this year. Don’t be surprised, because beyond AI, what I’m thinking is there might also be a little bit of coverage of generative AI while we’re there as well, and then there’s possibly some stuff like machine learning, AI workflow as in automation, AI-empowered… Oh wait, that’s all AI.

Patrick Moorhead: Hey, Dan’s being very sarcastic right now, for those who don’t know Dan.

Daniel Newman: Part of being in our community is you do have to kind of start to get to know the personalities. I shouldn’t have to explain that to you people, but that’s what you get.

Patrick Moorhead: I don’t know, man. Getting to know us better is kind of a scary thing, Dan.

Daniel Newman: You’re a hard person to love, Pat.

Patrick Moorhead: I’ve been told that many times. Hey, let’s move to the next topic. SAP, ERP, Giant, SCM, HRM, a lot of M’s there, if you recall, SAP got a little bit of a slow start on the cloud and was a monkey on their back for many, many years, and there’s two ways to look at this. One way is ERP is one of the most strategic workloads on the planet. You do not want to mess with that. You mess with the ERP and you break something, you shut down your factory. That is not a good thing. You mess with the ERP and you can’t close your books, your stock goes down 25%. I worked at a company where we had SAP in the early days and yep, we transitioned, couldn’t close our book, and our stock went down 15 points.

So, you just don’t want to mess around with it, but if you don’t cloudify things and that’s private cloud, public cloud, hybrid multi-cloud, and getting into that rhythm and method, it’s going to be very hard for you to move to AI, your agility goes down. So, SAP absolutely crushed it on cloud record, cloud backlog growth of 28%. Again, if you don’t go to cloud and have the new bits from SAP, you’re not going to be able to leverage AI. A new breakout called Cloud ERP, now we can finally compare to Oracle, Fusion, and NetSuite. I like that, because we like to compare, because it’s easy. 32% growth, and it’s a 3.2 billion euro business, which means it’s big. The company also announced has 27,000 customers using “business AI”. I think that’s pretty impressive.

And of course, because everybody needs to talk about Jensen and NVIDIA on their calls, we got a watch this space from Christian Klein, so great to see cloud growth as that’s about the AI. Good to see the Cloud ERP call out. What I would’ve liked to have seen a little bit more of was some more details on customers and the benefits they’re getting from AI, X percent improvement, X percent efficiency from AI. A little bit more on data management, like we heard from Mark Benioff lean into on his Salesforce calls. Mark talked 75% about his data cloud. I want to hear more about that. Final comment, unlike the US where we have this awesome non-gap EPS, SAP accelerated some restructuring charges from 12 months to one quarter, and it hit their IFS and hit their profitability. Had there been a US company, we would’ve ignored it and moved forward.

Daniel Newman: All right. Look, I think SAP, the IFRS stuff is tough, because it made it look like the company didn’t make money, just note that in the US, the way they would do adjustments to that, you would never have probably seen or even heard about it. It would be some line item buried deeply inside of a 30, 100-page disclosure, and it would’ve looked like some sort of multi-dollar or whatever cent beat of EPS. Having said all that, the situation related to SAP, I do want to see a little bit more of a base to which to compare the Cloud ERP. So, one of the things I have enjoyed about Oracle has been how prescriptive it’s been with its numbers and its disclosures, but I do like the fact that we’re getting closer. I’ve put my asks in.

You and I have both had interactions with both CEO Christian Klein and Dominik Asam, the CFO. Dominik was great. We’ve got to spend some time with him. He was very approachable and I like the fact that you have someone like that in a CFO role. The thing though, Pat, about SAP, and you covered off a lot of what I would wanted to say as a whole is AI transparency is going to be critical. And by the way, part of the reason you may not be getting it is also IFRS, it’s also European reporting is in the US, these numbers are what you have to report and how much you can validate this. I really do wonder, I really do, because like I said, I love that Amy Hood reports the 7%, but how is that? Would you like to see how that’s actually calculated, how they determined that AI actually created demand in a workload that maybe would’ve been used, what, for machine learning in the past or some sort of accelerated compute requirement that was already…

How are we really deterministically creating… With NVIDIA, it’s easy. It’s like every GPU is for AI, but with a Salesforce AI or with a Microsoft AI with Google, if they’re using it for many different things and AI is part of it, does it count? Does it count partially? Does it count entirely? But at the same time, the market’s unapologetically going to move dollars in concentration into companies that can declaratively explain the role that AI is playing.

So, it was a good quarter, it was some good growth in the cloud space. That’s the number to watch. I continue to say that’s the number to watch. That’s what’s all about the transformation of the company. They’re also going to continue to push their best AI features into the cloud. So, companies that are on SAP that want benefit of SAP are going to need to move to the cloud or they’re not going to be able to get the best AI capabilities. So good quarter, good quarter, good quarter, good quarter. Am I always so positive?

Patrick Moorhead: I don’t know, you’re generally a positive guy and you like to look at the cup as half full, which I think I do, too. I think we also point out what things we would like to see that we think would improve a company, either in their products or how they talk about their company and their roadmap. I’m just being an analyst. So, let’s move on to the next topic here. Unlike these enterprise companies we’ve been talking about, Google’s kind of a consumer company. Let’s dive into Meta. First of all, Dan, we usually don’t cover Meta. Why are we covering Meta?

Daniel Newman: Well, we’re going to cover seven today, right, we’re cheating?

Patrick Moorhead: Exactly, it’s the Six 10, so we got-

Daniel Newman: Well, it’s a Six 10, 7 and a half, but we wanted to get Meta in there, but we still got IBM and Intel to do, so rock and roll. Oh, am I going first? Sorry.

Patrick Moorhead: Man, you’re Meta, dude.

Daniel Newman: I am Meta. Well, listen, so Meta had a really good quarter, Pat, as a whole, and overall they came off beating on the top, beating on the bottom, and at the same time the stock absolutely tanked as a result. I’m not talking about a little bit, I’m talking about double digits. At its worst, it was down over 100 bucks, wiping out all of the company’s gains year to date or within the last several months. It was incredible, but at the same time, the results of the company were, Pat, my take very, very strong. So, Meta grew its business, it grew its top line, it grew its advertising, it beat its earnings, but what did they do wrong? What did they do wrong? Can I-

Patrick Moorhead: Do you want me to answer the question?

Daniel Newman: Of course I want you to answer the question. I was having fun.

Patrick Moorhead: They basically talked about how much money that they were going to spend on stuff that the street’s not convinced will generate short-term returns like AI and the Metaverse.

Daniel Newman: Once again, Mark Zuckerberg talked about some big vision. He had to spend money and everybody lost their freaking minds. And by the way, are you starting to see kind of the cycle here though? It’s like for a period of time he’s going to invest and then the growth will come. Now, Reality Labs has been nothing but a dump right now. It’s billions and billions of spend, but the rest of the business is so stinking profitable that it just continues to absorb it. The company delivered 4.71 a share of earnings on 36 billion of revenue… Like I said, an average guide, by the way, just a slight off-guide, and a lot like Microsoft, just slightly off the guide, mentioned a huge plan to spend more money, which means buying lots and lots of GPUs. Now, you do know they are building XPUs as well.

So, some of that spend may not all be on NVIDIA, for those out there that want to make that correlation, a lot of people do, but they’re going to buy a lot of NVIDIA, no doubt about it. The company basically saw such a rampant growth in value over the last several quarters, because they cut a lot of costs. They got rid of a lot of people. They cut 21,000 jobs in the first half of 2023, but having said that, the company also has some benefit coming from a potential TikTok ban. Nobody really wants to talk about that, but I have to say that in my mind there is not a bigger beneficiary if TikTok actually gets banned… And now again, we’re not going to talk about that in its entirety on the show, but we’ll talk about that philosophically on the show. Does anyone benefit more than Meta if TikTok… Meta Reels and Instagram and regular Facebook, where do the kids go? Snap? Is that even still a thing? I’m kidding, I think-

Patrick Moorhead: My kids are off Snap.

Daniel Newman: Are they? But your kids are like adults. All your kids are old, you’re old, boomer, you boomer. But anyway-

Patrick Moorhead: Dan, we call it experience now. I will never hold your lack of experience against you, Dan, at your young age.

Daniel Newman: I don’t believe that. I’ve seen you do it already. It’s happened.

Patrick Moorhead: I’m pretty sure you’re a vampire. I saw a picture of you from 15 years ago. I think that’s what they use on Bloomberg, and you look exactly the same. Dude-

Daniel Newman: I would argue I look better. I fixed my teeth. I got my teeth fixed.

Patrick Moorhead: I was very different 15 years ago.

Daniel Newman: Well, I jokingly tell people all the time is you looked 40 at 20, then you still look 40 or 40. I said, “I’m not sure how the next 20 years will go,” but when you lose all your hair so young, it aged me superfast and now I’m just growing into it.

Patrick Moorhead: Having kids early will age you.

Daniel Newman: Yes, and by the way, Botox can do all kinds of wonders. I’ve only done Botox once, but it can get rid of some of this crinkling I’ve got going on up here.

Patrick Moorhead: I just sandblast my face, so it works.

Daniel Newman: What’s that Kardashian stuff they inject? They inject your blood, they cycle it out, and anyways, if you want to really go off-topic, I read a thing that some New Mexico clinic was doing that for its customers, and they actually gave people HIV, because they didn’t treat the blood. There’s like two cases now. I was reading about this yesterday. So anyways, be careful with what you’re doing out there in cosmetic and where you do it. Maybe it’s cheaper to do it in El Salvador, but you might want to go ahead and pay to have it done… Maybe not in New Mexico either.

All right, but back to Meta. Hey, Pat, here’s the biggest thing I just wonder is really is Mark Zuckerberg does need to tell people how he actually plans to make money from AI. The only thing I thought he really missed, because the people I think were frustrated about the continued expense and the growth and they wish that the AI expenditure was all there, but we’re going to keep spending and they’re going to keep growing and that’s fine. And I listened to parts of the earnings call, he was fumbling to kind of explain where we make more money.

And I think where you make more money is you create a lot of efficiencies, you get more targeting, and you can charge more premiums for ads. Now, the last thing I’ll say is I love what they’re doing with Llama 3. I love that on a 70 billion parameter model, they’re competing with the top GPT models and they’re open sourcing everything. Who freaking thunk that Meta would be the company to go all open? They got the horizon now. They’re going to be the open company for AI and they’re going to be the open company for VR? They are the un-Apple. I guess Zuck and Cook are… I guess maybe we’ll see Zuck in the octagon. Did you see that? Was that a real picture of him, by the way, with the chain and the curly fro or was that like… That’s real?

Patrick Moorhead: No, no, that was real.

Daniel Newman: I didn’t know if that was AI generated, but anyways.

Patrick Moorhead: He did one with a fake beard, that was, but his hair in one of them was real.

Daniel Newman: Oh, it was real?

Patrick Moorhead: Yeah.

Daniel Newman: Dang. All right, looking good, Mark, looking good. All right, I’ll pass it back to you.

Patrick Moorhead: I don’t cover them as a consumer play, but there’s a couple of things I want to point out. I freaking love Zuckerberg thumbing the nose at Wall Street. And by the way, the way his shares are spec’d and the voting rights, he runs that company and investors are along for the ride. And my gosh, we saw the stock plummet when it was doing the Metaverse. He pulled back, laid off a ton of people. He didn’t pull an Elon with X, but he realized the efficiencies he could get and the lights still were on, and they crushed it on ads and his stock went up and then he was out of the dog house and he’s a freaking genius.

So, the play that he’s running with AI is a long-term play. It’s very similar to what he did with open compute project, which was let’s get the entire industry to standardize on hyperscale infrastructure and what did that do? It democratized designs and it meant that the big players wouldn’t have even a bigger advantage over everybody else, that was one point. And then there’s PyTorch, which essentially Facebook invented, and what that did is it gave you an open source option versus what was going on in a closed environment at Microsoft and Google. And so, here we are in generative AI where you might have to spend $1 billion to train a giant LLM.

And here we have Meta coming in and democratizing that, so OpenAI, and Google, and Microsoft’s proprietary models, they don’t run away with everything. So, let’s get a ton of developers on PyTorch, let’s get a ton of developers on Llama, and away we go, and that is not cheap. You’re talking about 30,000 NVIDIA H100s for an extended period of time to train this bad boy, prune the data in the right way, and deploy it. So here we are. I got to tell you, I’ve got to give the benefit of the doubt to Zuck on this. The guy’s a builder. He’s not a politician, he’s a fricking builder, and I love thumbing the nose to Wall Street, and if I could direct invest, I’d probably go along.

Daniel Newman: He did sell a lot of stock recently though, so I wouldn’t say insider, but he maybe knew what he was going to say this quarter.

Patrick Moorhead: He’s got to schedule that a year in advance-

Daniel Newman: No, he does, I’m not saying he sold it. I’m just saying he knows the ebbs and flows, so he’s finding that out.

Patrick Moorhead: So hey, let’s jump into IBM. Oh, we both hit that at the same time.

Daniel Newman: I was so excited. I finally did my job. Finally, first time ever, and I hit-

Patrick Moorhead: No, what do you mean? We have a full production team here in the scenes.

Daniel Newman: All 13 producers in the background.

Patrick Moorhead: Producers, your job is on the line right now. No, IBM, great start, good start to the year. And Dan, I’ll-

Daniel Newman: Do you want me to-

Patrick Moorhead: HashiCorp, I’m going to put HashiCorp HashiCorp onto the side right now. They had a good quarter. Let me break it down. Software on the high end of the model, open ship bookings are freaking on fire, 40%, that’s huge. Red Hat, Linux, and Ansible Automation of double digits. I love hybrid multi-cloud fabrics, Dan, which is why I think I’m going to HashiCorp, but I said I wasn’t going to talk about it, so I’m not going to talk about it. Infrastructure is cool now, baby.

We’ve got Google talking about chips. We’ve got Microsoft talking about chips, and we’ve got IBM, who started it all, with an integrated system with the mainframe, everything included, single stack, and yep, IBM z16 on chip AI acceleration above the bottles. I thought this was interesting, 100 clients are using unchipped Telum AI. I think that is strong. We probably won’t hear about the use cases, because a lot of them are financial institutions, probably doing credit scoring, security, all that jazz. Storage came up.

I don’t remember the last time IBM actually talked about storage on a call. There’s got to be some special IP bits in there, something they’re doing, the spectrum that gives advantage to AI workloads. We’ve got pure storage, we’ve got fast data. They don’t operate really in the big scale system markets, but I’m interested to learn more. Do you hear that, Matt, our storage analyst? Consulting… Down. I’m, sorry, below expectations, but outperform the market.

Probably the most interesting thing that I thought was the call-out for Microsoft Copilot. It was cool and unexpected. We’d heard about how much business they do with AWS and Azure, but the Microsoft Copilot comment was interesting. We got a cumulative number for Watsonx and generative AI, $1 billion, interestingly enough from consulting was a lot of that, but that makes sense. Enterprise IT, C-suite, where do I start and how do I do it? You go to IBM Consulting, which is an on-ramp to IBM software and infrastructure. Really looking forward to IBM Think, and I’ll leave the HashiCorp oxygen in the room for you.

Daniel Newman: So first of all, just as a quick note on the results, because I know we’re coming on the end of our hour here, and gosh, thank you all for spending this time with us. I just couldn’t think of anything you would rather do than be with us this morning. All right, and I’ll say I talked to CFO Jim Kavanaugh for a while, and he was super excited about the HashiCorp deal. He was all lit up about it. Look, when you’re a CFO, you’re a deal maker. I like making deals, too. There’s nothing that puts a little bit more adrenaline in your system than an earnings-day deal of over $6 billion.

Now, the growth was a little short. The revenue, low single digit, 3% in constant currency, 1% growth. I’m dying to see how the market would respond to a 10% quarter. The generative AI business for Watson’s in total are now over $1 billion, so that’s really great. I think what they’re doing for the enterprise AI space continues to be very unique, very robust, and the commitment it’s made to the hybrid AI, hybrid cloud, and AI strategy continues to be very consistent, which is the key. The leadership under Arvind is focus, focus, focus.

And so the company is focused, it’s maintained a growth path, which remember, for a long time it didn’t under previous leadership. Its growth is a little slower than the model, but it sees a path to the model. Kavanaugh and his team have been amazing operators, by the way. Finding margin where margin doesn’t exist, continuing to grow the EPS, and even when the revenue doesn’t quite meet the need, the profit always does, which is good for investors, especially when you’re kind of a value/growth company. I would like to see some accelerated growth across it. It felt like everything, it was like 1%, 3%, 6%, 4%, 9%. Where is the big growth coming from? Even Red Hat-

Patrick Moorhead: Software- with the call-outs on software were-

Daniel Newman: Double digits, and then the backlog on Red Hat was pretty phenomenal, but the strength is there. And then of course HashiCorp, in my mind, is a really great opportunity. Look, Hashi extends… It’s a couple things. One is I see the HashiCorp deal as an opportunistic moment for Red Hat/IBM to play on the sort of continued uncertainty that exists in the IBM VMware space. It further ties together this multi-cloud automation, security, multi-cloud infrastructure requirements. And of course, HashiCorp has always been in many people’s opinions, not fully tapped into its potential.

Now, again, folks on our team, Keith Townsend, Matt Kimball, these are the people that we’re going to be looking for for some really deep analysis on the deal coming up. But as far as I see it, Pat, this ties together the company’s multi-cloud strategy and it increases the dependency that hybrid architectures require some IBM, meaning whether you’re using AWS, whether you’re using Google, whether you’re using Microsoft at the hyperscale public cloud level, the reliance on IBM for that hybrid layer with Hashi only gets more entrenched.

Red Hat plus Hashi is a very sticky sort of relationship that’s going to exist between hyperscale cloud providers and IBM. So, IBM’s in on every deal, and despite the fact that it’s public cloud operating tends to be very vertically focused for financial services and specialty cases, this will tie together and create more need for everybody to be doing business with Big Blue. So, I’m encouraged by the deal, Pat, I want to sort of understand more how it works. I think from Kavanaugh, he told me it will sit in the software business unit under Rob Thomas’ eyes, and the CEO of Hashi will work for Rob. And so, that was a little bit different than Red Hat’s CEO Matt Hicks, which works for Arvind.

So, I’m interested in seeing all that ties together, because in my mind, to some extent, the Red Hat Hashi could almost operate as one bigger, more powerful entity. So, seeing how this works is going to be something to keep an eye on, Pat, but I love the fact that it created additional stickiness for companies that are trying to make their full multi-cloud deployments work, and AI is only accelerating that.

Patrick Moorhead: I’m just going to end anything hybrid multi-cloud fabrics, been talking about it forever. This essentially enables on the side that some people look as less sexy. Infrastructure lifecycle management, security lifecycle management, and essentially being able to jockey workloads between any cloud you want, you want on-prem, you want sovereign cloud, AWS, Google, Azure, Oracle, whatever, and even Terraform was a big part of this, which essentially does code provisioning, depending on which cloud you’re on.

And then you have to have some element of connectivity and networking, which I think is interesting and obviously security that goes in there. There were some snarky comments that I saw that’s showing customer growth had trailed off. I need to double-click into all of this, but I do like the fact that IBM… Any time you can have a hybrid multi-cloud fabric and take a toll, regardless of where you’re running the workload, I love those. I love it for Cisco with what they’re doing on the networking and security cloud. I love it on Red Hat. I like what VMware is doing as well across workloads, storage, networking, and security. So, let’s move on to the last topic. I am calling my number on this Intel, baby. You clicked it and gosh, you got to stop clicking this, man.

Daniel Newman: I didn’t click anything. You’re doing this yourself.

Patrick Moorhead: Oh, you didn’t?

Daniel Newman: No, I’m taking a nap over here. I got so bored of listening to you talk.

Patrick Moorhead: It’s the producers. No, I know. So listen, Intel’s in a tough spot. There’s the show me states and there’s the show me companies, even a slight twinge or tweak of anything out there, and people, at least the day traders want to pile on Intel, really good Q1. EPS beat improved gross margins, lower than expected top line with a lower forecast, and the forecast just… Are they down double digits this morning? I haven’t checked, deep single. Anyways, it was weighing on it in after hours and I got the chance to talk with Intel CEO Pat Gelsinger before the – when the numbers went out, and as you would expect, he focused on positive execution. I think that’s fair. Intel, it doesn’t have flawless execution, like we saw Sapphire Rapids push out. Man, that architecture was nailed three years before Pat came on. Talk about a stronger second half than first half.

That’s an Intel reality, that just is the way Intel works. And on a market share side, even when you might not have a good forecast, believes he did take share in market servers, his market share in servers, that’s x86, NR, and client PC. So interesting part, Pat said he could have sold more Meteor Lakes, the upsides from his customers came in, but he just couldn’t make it fast enough. There’s two ways to look at that, which is on the plus side, hey, there’s all this increased demand for Meteor Lake, that’s a plus. That’s the first AI PC platform that Intel announced. But on the negative side, why wasn’t the company ready with the backend? I don’t think it’s wafers, I think it’s backend. So, positive to see client computing group at 30%, data center group, for this exploding data center market, not impressive. It’s single digits, like how? You can’t just buy an H100 and not have a new CPU that goes with it.

That’s just not the way this works. So, I don’t fully understand how that number can be so low. We’re going to have to wait for AMD to see what happened. I’m pretty sure ARM was down this quarter, because they had built a lot, not ARM, but obviously Graviton and folks like that. So, EdgeMarket in the toilet, not surprised that the EdgeMarket, Mobileye, and Altera were not good, and I’m going to end here positive to see Intel III, high-volume manufacturing, the most sophisticated process being run in the United States today. This to me bodes well for 18A. I know the tech is different, I know the machines are different, but this is just a good sign, because this means the engineers are not fixated on fixing Intel III. They’re focused on 18A, which that’s going to be the difference maker. At least that’s a thesis, 18A or Intel III and Foundry.

Daniel Newman: So here we go, it was a good quarter, very close on revenue, slightly above expectations on earnings. I happen to possibly be in the room where you were in the room and heard from Mr. Gelsinger as well. I might’ve been the fly on the wall, I don’t know, whatever, but the point is that he really did reiterate, Pat, “We’re a second half company.” So, for the second quarter guide sort of maybe should have been expected, because he already was saying, “We’re a second…” By the way, this isn’t this year, this is just historically speaking. They’ve always had a very, very strong back half of their years for somewhat obvious reasons.

Pat, the 31% client growth was outstanding. That was a really great result. I don’t think anyone saw that coming. The data center growth, it’s just unexciting to people. You got to acknowledge, Pat, you got these NVIDIA growth numbers, these AMD expected growth numbers on MI. You’ve got Broadcom growth numbers, you’ve got these really strong growth numbers on all silicon for the data center, and Intel just hasn’t found its mega growth. It did have some early growth a couple years back that was really, really big, hasn’t seemed to catch up yet again from that. Pat, I want Signal 65, our testing and lab performance playing with the Intel Gaudi 3, Xeon combination to show that Intel does have the software and the hardware to do this. Of course, the abstractions and the software and in OpenVINO, and not having one API, not having… What’s the code name of the GPU? I always forget.

Patrick Moorhead: Falcon Shores.

Daniel Newman: Falcon Shores. Not having Falcon Shores is always going to bring up questions, but ASIC is not… It’s a little bit more flexible than just a pure… This is more XPU architecture and with Xeon it can do a lot of the AI stuff and does it very efficiently, and there’s some papers out there on it, and I’m hoping our team can get more around this. What I’ve really come to the conclusion is everybody wants it to be just NVIDIA, but there are a lot of players. Intel will be a player. The AI race is not over, but this is also a multi-year front to fight a battle on, because the Foundry business is exciting, it’s necessary, it’s a redundancy, the US needs for resiliency, but it’s going to take three or four years.

And so, this is a long game. If you have a decade and you want to take a risk, this could be a really exciting play, because if the Foundry business lands… And by the way, Pat, I read an article yesterday about TSMC and their toxic culture. I don’t know if you saw it, because we always get the same feeds. I don’t know if you saw this, but the toxic culture of TSMC and how poorly that’s being received here in the US and that basically they can’t hire and they can’t build and they can’t get anywhere here in the US, because no one wants to work in a company that basically competes to see who can send the most emails overnight. I don’t know, I’m just saying, so maybe that’s an opportunity for Intel, like the culture, it’s a US company and it is a company that people at least in the US should want to win. I know there’s a lot of people that don’t, but they should.

Patrick Moorhead: I’ve said this many times, I’m going to say it again. Here’s the way I think this is going to work out. I think 18A is going to be good. Will it be as amazing as Intel says it’s going to be? I don’t know yet. PDKs look good out there, but watch this space. US defense industry has a program that you have to go through what’s called RAMP-C. And by the way, Intel I think got a word at the third version of that.

My expectation is that if and when Intel can show traction on 18A, we’re going to see all infrastructure… What are you smiling at, buddy? Who are you grinning at? All critical infrastructure will be flipped, and if you’re a carrier, if you’re a potentially university, if you’re a financial institution, you might have to fab that leading edge at Intel. That is my prognosis. And if that happens, just imagine the value creation, because right now Intel is getting negative valuation on Foundry, and I get it. The numbers are ugly, but gee, who thought that investing four years ahead, $50 billion before revenue was going to be pretty? It’s not, and it’s tough. So here we are, dude. There we go. We did it. Anything else on Intel? Are you asleep?

Daniel Newman: Sorry.

Patrick Moorhead: I’m the most important and interesting thing about this show, Dan?

Daniel Newman: Yes, I am. Now, listen, I turned on the self view and I was having a lot of fun with them myself for a minute there, so I was getting a laugh out of it, but no-

Patrick Moorhead: I just stare at myself the entire time. I wish I could turn the camera off, but I’m just-

Daniel Newman: You really should because you are-

Patrick Moorhead: Make sure my hair is working.

Daniel Newman: Don’t you sometimes entertain yourself with the thing… Sometimes, I’m so sarcastic that I, and people say I’m dry, that I become not dry, because I’m actually laughing so hard at my own jokes. I don’t know, that’s how it goes.

Patrick Moorhead: I crack myself up often, Dan.

Daniel Newman: Wrap this thing up, man.

Patrick Moorhead: People are just asking.

Daniel Newman: I don’t know, I heard that people only sit on shows for like 15 minutes.

Patrick Moorhead: We got-

Daniel Newman: For the 700 of you watching the show right now, we appreciate you sticking with us for the whole hour. So, I think we’re pretty-

Patrick Moorhead: We appreciate you. It was a great show. It was the Seven Eight here. We covered Google, Microsoft, ServiceNow, SAP, Meta, IBM, Intel. Thanks for checking in. Give us some feedback. Give the good feedback to me, complain to Dan. We’re on social media way more than we should be. We love doom scrolling.

Daniel Newman: Not more than we should be. We got to have an opinion about everything.

Patrick Moorhead: Shouldn’t we be writing research reports there, Dan?

Daniel Newman: The economist, selfie-taker, doom scroller.

Patrick Moorhead: I do prefer selfie analysis to all other forms analysis out there. Thanks, take care. God bless you and have a great weekend.

Author Information

Daniel Newman

Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.

From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.

A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.

An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.