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:
- IBM Q4 2023 Earnings
- Intel Q4 2023 Earnings
- Intel IFS and UMC Deal
- SAP Q4 2023 Earnings
- Apple Makes Changes Based on DMA
- ServiceNow Q4 2023 Earnings
For a deeper dive into each topic, please click on the links above. Be sure to subscribe to The Six Five Webcast so you never miss an episode.
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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:
Daniel Newman: Hey, everyone. Welcome back to another episode of The Six Five podcast. It’s Friday morning. We’re back on schedule this week, which is good. You got two from us in one week, which is better than last week, where you didn’t get any, at least not our regular Friday show, but we’re committed. We always figure a way to get it done and we show up. On Monday, we were celebrating ourselves, our 200th episode. Well, I got to be honest, Pat, 201, nobody gives a darn. 201… now, we’ve got at least another 49 to go before we can do any hand clapping and back patting for all the success we’ve had doing this pod. Pat, it’s been a busy week. We are back in the earning season, it’s the beginning of the earning season. I saw you on CNBC last night looking super smart, talking about Intel. It’s going to be like that for the next couple of weeks. We’re going to be busy because there is a lot going on. Pat, I want to do the quick disclaimers on this show but before I do that, how are you doing, buddy? How’s it going?
Patrick Moorhead: Man, I’m doing great. It’s been an up-and-down week and really just unbearing from traveling for three weeks. Had to get some real work done, some corporate meetings, but I’m really excited. I’m feeling really good about this week. I’m feeling really good about delivery to the customers and I just love giving good advice. That is my jam. I don’t know where that comes from. I’ll let my therapist explain it maybe on another episode, but I love doing that.
Daniel Newman: You have a therapist?
Patrick Moorhead: Yeah, for the past 15 years every week. I joke he’s my paid friend.
Daniel Newman: Well-
Patrick Moorhead: You’re my unpaid friend.
Daniel Newman: … You only have a couple of besties, you’ve got to make that happen. We might want to call your therapist, tell them that I’ve pulled a real boneheaded move today, locked myself out of my car and I need to publicly criticize myself. Feeling very human today. The whole Dan Machina thing that I’ve always lived by thinking I could be a machine. It’s amazing how things like this can bring you back to size. I’m feeling very much at size this morning.
Having said that, that’ll solve that problem later because right now, we’ve got a lot to talk about on this podcast. We got six important topics today. We’re going to talk about Intel, we’re going to talk about Intel, then we’re going to talk about IBM, we’re going to talk about Apple, SAP, ServiceNow … like I said, it’s the beginning of the earnings wave, which means there will be a little bit more of that in the next few pods, but we’ll try to make it interesting because we are not financial analysts. Our goal here is not to give financial advice. Our goal is to try to read between the lines to tell you what all of this means, which is tough.
Quick disclaimer, this show is for information and entertainment purposes only. While Pat does like giving advice, this is not to be taken as financial advice. Don’t do any investing based upon what we say here but hopefully, you will know a little bit more about what we’re thinking about these companies and their performance because that’s what we do. Pat, we’re going to jump off. First topic today is going to be … is it IBM? It’s IBM.
Patrick Moorhead: You got it.
Daniel Newman: IBM. I’m going to call your number, buddy.
Patrick Moorhead: Net, net, beat, beat. Beat on top line, beat on the bottom for the quarter. It was also a wrap to 2023, but there were a few highlights that I was impressed with. First of all, the generative AI and Watsonx, we’ve seen a literal doubled quarter on quarter. A third of that business is through software and two thirds, as you might expect, is consulting as these enterprises are trying to figure out what is going on, what should they be doing. From a revenue comparison, they said Q3 was low hundreds of millions for Watsonx and, if you double that, I guess that’s low 200s of millions. I mean honestly don’t know how to do that. Maybe low hundreds of millions … it was 200, which should mean 400 million, but we’re going to see. They talked a lot about the demand of the areas that they’re targeting for: code modernization, customer service, digital labor … Cited two banks, Citi and NatWest, plus Lockheed Martin, which I thought was really interesting.
Overall, that 3.3% that isn’t swinging around the room super-duper growth. I like to focus on the businesses that are really bringing double digits. Generative AI and Watsonx, You had some pretty good highlights. We’re on the tail end of IBM Z, and I’ve got to give Ross Maury and crew a shout-out here: 8% growth on … I think it’s the seventh quarter of z16 and usually, that’s like a desert and we’re going to be waiting for a z16. Consulting … AWS and Azure up 50% year-on-year. 40% of consulting business gets back to strategic partnerships. IBM doesn’t talk a lot about the competition but on the call, they went after it and made their case about how they’re differentiated. They’re the largest consulting group that’s a tech company and I think that’s fair. Accenture is not viewed, as an example, as a tech company, they’re viewed as a consulting firm. Software, the highlights for me: Red Hat, 17% bookings increase across RHEL, OpenShift, and Ansible.
They gave a 2024 forecast. Revenue was in line. Cloak words like $3 billion productivity target … that’s likely going to be AI related and people optimization but man, that cash $12 billion target and final comment: highest stock price I believe in 10 years, strongest cash generation since 2019, the Arvind Krishna team and the new team is working.
Daniel Newman: It was a really good report, probably one of the best the company’s had in many, many years. This is a continuation of the Hybrid Cloud and AI focus and, when you’re focused as much as Arvind Krishna is and his team, you get the results. You and I both had a chance to talk to CFO Jim Kavanaugh. Jim also reiterated just the strong operational management, the company’s ability to generate cash flow. There were some really great indications about the meaningful impact that AI is having on the business, specifically watsonx. The watsonx business was quoted in the low hundreds of millions. Let’s just put the number two around that and then say they doubled it between Q3 and Q4. It went from 200 to 400, roughly. Again, that’s me adding an assertation, but low hundred, one, two … if it was three, it’s six, but the point is that ramp means IBM’s on its way to generating a billion dollars in revenue from its generative AI technology, watsonx, which was one of the early GA’d enterprise generative tools. That was really one of the things that stood out to me.
You caught onto what’s going on with Z. That was very, very good. The Hybrid Cloud business … look, it’s interesting, but their ’22 to ’24 guide was all about this low, mid single digits and that’s what they’re delivering. It’s interesting that that’s caught fire, but there’s something about stability, consistency, growth and focus that I think makes investors happy, which is part of the reason it’s driving to new highs. Also, that margin expansion, that cash flow creation, those are things that people love to see. It sits really well. It shows that things like the Kyndryl spin-off really did make a lot of sense. I’d like to see more acceleration in the Red Hat growth. I think that’s a really important part of the business. It’s growing a little slower than I would think, in the high single digits. I think it should be double digits, if not higher. Well, not higher than double, but higher double digits.
Then, of course, I’d like to see, and I’ve been saying this for several quarters in a row, I’d love to see cybersecurity pick up a bit. I think that’s a great opportunity for the company across its consulting as well as its technology. Then, I do think it’s made big, big bets on observability. That’s another area, the Instana, Turbonomic investment … with all this AI, we’re going to need to monitor all these systems. You see Cisco making the bet on Splunk. You see companies coming up in this space. Observability’s going to be a big one in the future. It’s not the cool AI, but it’s the important AI, so that is definitely going to be in focus as well. Really, like I said, you’ve got to look for things not to in this report and there wasn’t much to not like. Congrats Arvind, Jim, team. Thanks for the time this past week and good job to IBM.
All right, I’m going to call my own number here. Let’s go on. We’re going to talk about Intel. Intel was an interesting one because you had … it’s a tale of two pieces of news. The first piece of news is, “Well, how’d they do this quarter?” This quarter was good against the expectations they had set. They beat. The problem was, and this is often a problem, a beat in this quarter is old news and the guide is always what sets. If you can’t hit on all three, you’re never … a beat, beat, miss may as well be a miss, miss, miss in this era, and that’s why Intel saw a 10% drop. Look, I’m going to give it two sides. There were some things that would’ve been very indicative that Intel was going to have a harder quarter and there were some things that needed to … just Mobileye, for instance. You saw that their guide going forward was going to be a huge miss. Now, Mobileye’s not a massive part of the business, but Mobileye’s been one of the growth vectors of the company over the past several quarters.
Pat, the big thing, though, that everybody I think is really questioning right now is all about the data center and AI business. You see the flourishing businesses of NVIDIA. Even on the software side, you see Microsoft, you see all the investment in growth. You hear about AWS Inferentia. The question mark about how Intel, between its CPUs and its GPU … well, not GPU business, and of course it’s ASIC, Gaudi 2 and the oncoming Gaudi 3. What it’s got going on there is when is that going to start to get momentum and help data centers start to show growth year-on-year? It was another down quarter and again, now we’re into that period of time where you’re down year-on-year against down quarters. A couple of years back, it was like, “Well, they’re down, but they were having these remarkable quarters. Now, they’re down.” Now, we’re supposed to be seeing it pick up.
We also know that there’s this really important AI PC trend, but that was actually really pretty positive. You saw client computing picked up off the bottom. I think it was 33% up on a year-over-year basis. You and I got to talk to Pat Gelsinger. He was pretty realistic about it. He mentioned some of the forces, some of the cyclicality, he mentioned Mobileye. All these things came at once and it caused the guide to be a pretty substantial miss. I think it was more than a billion off the miss. Having said that, Pat, I’m still pretty positive about what the next four quarters … Gelsinger said to us, “Every quarter end on a year-over-year basis, we will see improvement on the company’s earnings.” We’ve seen really good growth in founder services, 63% up year-on-year, not just 63% up but more winning some really great packaging deals and starting to get its process deals underway. I think with Intel 3, we’re starting to go to market with that. Confirm me if I’m wrong on that one. A lot going on here, Pat, but I’m optimistic. I’m optimistic they … AI is not over. They have a shot of catching up. I saw you wrote a great paper on their overall AI strategy, had some good comments on CNBC.
Patrick Moorhead: I think you wrote one, too.
Daniel Newman: I did and that’ll come out later, but it’s process, it’s in the making. It’s been a good turn under Gelsinger. It’s not going to happen overnight and I think people think a ship like this could turn in a day. It’s not going to turn in a day. It takes time.
Patrick Moorhead: I’m going to spend a little time on the quarter and then you spend a lot of time on the future. They beat on revenue and they beat on profits, so they had a beat, beat. Gross margin is the best way, I believe, to measure a chip company because it gets into its design, your design, it hits the fabrication and it hits the pricing. Intel years back was at 70% and then they went in the 30s. Their gross margins were up 3% sequentially and 6.5% year-on-year. That’s huge. I think it also hit its $3 billion OpEx savings goal. That was the year, obviously not for the quarter. They’ve got the first Foundry offering, EUV offering, in US and Europe and on track five nodes in four years. The reason why I always get back to the five and four is because it will determine Intel’s cost, competitiveness and performance competitiveness. Super interesting.
2024 … overall, I put this quarter … I wouldn’t say a mulligan but, when I look at how bad Mobileye 5G telco biz and FPGA when and those were usually things that help the business, the core business was definitely at the low end of what you would expect for seasonality. I would’ve expected a little bit more bullishness on Q1 on the PC side.
On the data center side, they’re a challenge. They’ve got a ton of homegrown stuff coming after them, you’ve got AMD that’s perpetually strong and you also have, as … Dan, you and I have sat with enterprise OEM number one people and they’ve had a consistent theme of, “Hey, we’ve got chassis with CPUs that are waiting for GPUs that we can’t ship.” There’s also been this huge requirement to bring on generative AI in the CSPs, and many of those CSPs have found ways to get NVIDIA and AMD’s latest and greatest and just stick them in the same chassis. There’s not a need to ship a new server with an Intel CPU. Now, if AMD comes out and they have an amazing quarter, that will tell us a lot.
I went into earnings looking for gross margin improvement. We saw that. I looked at a lift from Core Ultra, didn’t see that. I still stick to my guns, that I do believe that, industry-wide, we’re going to start seeing the real AI, the bigger AI PC action in the middle of the year when Qualcomm comes out. I believe that there will be operating system support, then AMD and Intel after that. I think Q4 is the big lift on PCs.
On the server side, Intel has some really interesting stuff coming out. You’ve got Intel 3 with Sierra Forest and Granite Rapids. You’ve got 18A, which is the second half thing for Panther Lake. Those are some pretty exciting stuff. 18A is already in the fab which, yeah, I usually give it a year between that, but it was in the fab in the fourth quarter. We’re going to see servers in the second half and I’m going to put that at Q4.
A lot of interesting stuff going on here. I don’t view my long-term prognosis of Intel any different after this quarter than the long-term. I’m not an equities analyst, I’m an industry analyst, so I do look at things in a different way and I want to remind everybody: for all the haters of Intel, Intel still has 80% of the PC market and around 80% of the server market.
Daniel Newman: I feel like I’ve got to say that all the time to people. Yes, they’ve ceded some market share, but people trade them like they’re Blockbuster Video sometimes, or they’re Radio Shack. It’s far from that and they’ve got an incredible distribution in channel, too, which doesn’t … it’s not easy to unwind that. It’s going to take a lot of work and the competitors have made great strides, but Intel’s directionally … I think it’s finding its sea legs. I think it has found its sea legs, Pat. Again, it’ll take some years to make up for the years that it wasn’t hitting on all cylinders, but I think Pat’s got it going in the direction he wanted it going. Big Pat, not Little Pat. Little Pat … you’re Little pat. All right, let’s keep talking about Intel because why not? Let’s talk about some news from this week. Intel made a big announcement with IFS, its foundry business, and UMC on 12-nanometer.
Patrick Moorhead: First off, I really appreciate the time that we got with Stu Pann, who runs IFS, to break this deal down for us, answer some questions. Let’s go back to when Pat Gelsinger started, IDM 2.0. One part of that was, “Hey, we’re going to use external foundries more,” read: TSMC, but that they were going to stand up IFS because if you remember, when Bob Swan, prior CEO … that there seemed to be some consternation with the leadership team and the board on, “Hey, should we just punt, get out and become a designer like AMD and NVIDIA?” Then, Pat came in and doubled down, he tripled down, on building a foundry capability.
Then, we had the failed attempt, thank you, China, of Intel trying to buy Tower, which would meant they would’ve been full service, which means they could do all the way from bleeding-edge to mature nodes and specialty nodes. Then, once that Tower thing got kicked back, what was Intel’s strategy? How do they stay full service without being able to buy global foundries? Now, they’re doing partnerships. They’ve got a partnership with Tower and this news … this was a partnership with the MC.
Now, Tower was primarily specialty and, as we’ve talked about on the show many times, there’s the balkanization of foundries, which is we have the West, we have Asia and then we’ve got Western Europe, who wants that. That’s based on national security. That’s based on getting the right supply chain and therefore if you’re UMC and you don’t have fabs in the United States, how do you fulfill those, let’s say, US government? Carrier? I do believe that we are going to see beyond defense balkanization in here in the United States once IFS Columbus and Arizona gets moving, where you have to buy … for critical infrastructure, those chips have to be foundried here in the United States. Intel had availability in fabs, they had equipment that’s ready and they jointly went all in on a 12-nanometer to target mobility. Think smartphones and modems, comms infrastructure, think Cisco and networking. It’s actually a very interesting relationship here.
One of the keys here is … let’s look at TSMC as an example. 50% of TSMC’s prior quarter, as we talked about earlier in the week, the revenue is bleeding-edge and leading-edge, three-nanometer and five-nanometer. The rest is everything below that and TSMC margins … imagine when all that capital equipment is completely amortized, it’s basically printing money. Intel … that’s not necessarily their specialty, but that is UMC’s specialty. I like this arrangement and I’m really interested to see how much revenue it can drive. I didn’t see a lot of details about that, but stay tuned. Listen, time from announcing a deal to getting online takes a long time. The number was floated out there … the year was 2027, so there we go. I said three years. Sorry, I just pulled up the press release and it said 2027, so three years.
Daniel Newman: I think you covered this one pretty good. Look, it’s a market expansion. It’s a good use of capacity. It’s two companies that can benefit by partnering up. Obviously, it’s growth areas that Intel isn’t necessarily fully capitalizing on, so I look at this one, Pat, as a pretty sound move for the company. Like you said, I think the biggest thing is, while these announcements are great, it takes a while and it will be a while before this is really meaningfully accretive to the revenue and to the business, but foundry’s the long game for Intel. I’ve been saying for a while one of the biggest opportunities the company has is in foundry. With geopolitical and national security requirements in focus these past few years, I think the desire to have Intel as the national semiconductor company on the manufacturing side is somewhat visible in terms of policy decision making and, of course, investment that’s been already committed. We’ll have to see how this plays out, Pat. We’ll have to see how things change over the next few years, but I think it could be a good move. Partnerships like this can definitely work. All right, let’s pivot off of semis for a minute. It’s good talking about Intel for a while.
Patrick Moorhead: Isn’t it amazing? Dan, semis-
Daniel Newman: …the world.
Patrick Moorhead: … there’s so much interest. It’s just amazing. Again, you and I have joked about this. I was so into semis, being at AMD for 11 years, and that’s where I started the practice. I was trying to get away, but half of my revenue is non-infrastructure now, which I’m pretty pleased at. Then, you just get sucked into the conversation. I remember about 10 years ago, where even CNBC wasn’t going to cover semiconductors and Reuters actually got rid of their beat reporter for semiconductors. Isn’t it crazy how times have changed?
Daniel Newman: Look at what the last couple years … the supply chain shortage, a couple of massive wars, the advent of AI at scale and knowing that the next global economic winners will all be built on how semiconductors can power AI technologies, so…
Patrick Moorhead: Well, look at … you’ve got AWS, Google, Oracle-
Daniel Newman: Microsoft.
Patrick Moorhead: … Microsoft all doing their own chips, then how Synopsys and Cadence come in.
Daniel Newman: You’ve got companies doing $35 billion acquisitions to just be able to design better chips, not even making chips, just designing them. It’s been a wild ride. Many of the biggest M&A deals in the world have all been related to semis, some of the biggest that didn’t happen are related to semis and some of the biggest that I’m glad didn’t happen were related to semis even though at the time, I didn’t see quite … Remember the Arm deal. You didn’t quite see how big of a deal that actually could’ve been. Probably best that it ended up going the way it went. Let’s talk about SAP, then. Let’s pivot. They don’t make chips. We can talk about software, right? Actually, I saw Christian Klein. I had a chance to talk to them a little bit when I was in Davos last week.
Patrick Moorhead: Nice.
Daniel Newman: It was good to see him, always good to chat, but this is another company that’s in a transformational story. SAP is by far one of the most implemented and deployed software stacks on the planet for companies’ ERP and operationally running their businesses. Of course, they have a lot of diversification in other areas but best known, of course, for ERP.
The company did well. It beat what the street was expecting and it had a good outlook. It was a mostly positive quarter overall, but the numbers, everybody’s been watching and the numbers I’ve been telling people to watch for the last several quarters have been in the cloud. Is the company growing their cloud revenue? Are they building a cloud backlog? Are they making more profit in the cloud? Are they accelerating their cloud? Then, of course, how are they tying and being able to complement the AI innovation that it’s making to winning more customers? The key for SAP is going to be getting their customers to S/4, getting their customers running on a clean core so that they can actually build and expand on their business.
Now, having said that, probably the most interesting data point of their earnings this quarter was their note that they’re going to be making some transitions on personnel. I think there’s about 8,000 people affected. I do have to call that out because, when I put that out as a tweet and on LinkedIn, I had a lot of people commenting on that. Over the last couple of years, companies have been looking at technology, looking at how to optimize their businesses and this is one of those things where, behind these conversations, there’s always a balance of people and technology. I think 8,000’s not all displaced, it’s not all about … I think some of them are going to get different roles. They’re looking at how to re-skill people, how to change roles for people and some of them will be bought out packages. That was very interesting, but not surprising.
Having said that, that was a footnote that I think over the next few quarters, you’ll see new ways of growth in SAP coming from their AI investments and AI technology. As the company gets their customers over to S/4, running on clean core, this is going to be where the opportunity comes for the company to expand. It’s going to be where their newest and best AI innovation will be visible, not just Joule, their overall business AI strategy. It’s the ability to take data, deliver to insights, do it very quickly. Of course, the company’s also very focused on operationalizing and streamlining workflows. This was something I’ve heard a lot on the earnings call, this is something I’ve heard a lot through the readout, is that SAP end-to-end is becoming more and more capable and, if you are on S/4, it’s more and more capable to deliver what the enterprise and the enterprise of the future needs.
Pat, you saw 20% revenue growth in cloud, 25% for the year, sorry, and 25% for the quarter, so it’s accelerating. Saw the backlog grow from 25 to 25% and you saw the profit grow up 23%, so good numbers overall. The operating profit was down a little bit. Something to watch but like I said, Pat, I think if they can keep accelerating cloud revenue, the company will be in good shape.
Patrick Moorhead: Dan, great breakdown. There was so much richness in this, you didn’t take all the oxygen out of this room. On Q4, if you remember years back the critics, and I was one of them, that SAP really didn’t have a cloud strategy and here we are: for the fourth quarter, they had 20% growth. They have a 25% cloud backlog. They have a growth of 20% in cloud revenue, 55% growth on S/4HANA. Largest growth in five quarters, so accelerating. SAP got a slower start but man, are they making up for it right now. It reminds me of Oracle. SAP doesn’t do IaaS, but they do SaaS and PaaS. I really did appreciate the breakout and I don’t know if this is a new breakout or maybe I just was asleep at the wheel, but I appreciated the 19% growth on SaaS and the 42% growth on PaaS services. 2023 net net, Dan, they did what they said they would do and they’re being rewarded for that.
What does ’24 and ’25 mean? Revenue growth is going to come. Their plan is to come from RISE with SAP and GROW with SAP, expanding through BTP, Flywheel, cross-selling all of their PaaS, SaaS and software capabilities, generating revenue through business AI. They talked a lot about strategic M&A partnerships. Interesting, strategic M&A. We could probably spend an entire session on that. Their plan for profitability is transformation, which is a combination of rebalancing heads. I feel awful for anybody who ever gets laid off but I have to tell you, I’ve been laid off at most companies and it always ended up being a much better opportunities. For the record, it was never for performance. I had a business unit shut down at NCR. AltaVista offered to move me from sunny southern California to Palo Alto. I said, “Ehhh, I’m going to AMD.” AMD had three months of cash left. They needed to get rid of people like me who aren’t an engineer or in sales.
Anyways, I digress. Profit also driven by cloud ERP. Interesting, interesting. Do you hear that, Oracle NetSuite and Fusion? I’ve got to tell you, one thing I really appreciated about what SAP does on its earnings: it seems to be more strategic than … I don’t know if that’s because it’s a German company and that’s what the requirement are, they just have more wiggle room or they don’t get whacked by the German SEC for this, but some really good insights that they brought out.
Daniel Newman: All right. Here we go, Pat. The DMA. We’re going to talk about no earnings. We’re going to talk about a company that we love to give a little… problems to.
Patrick Moorhead: That’s called love, Daniel.
Daniel Newman: Only because they’re so successful, but Apple … a big European moment. Pat, are we going to side load this app onto our phones or what?
Patrick Moorhead: Let me give a little bit a background on it. The EC issued what was called the Digital Market Act, hence DMA, that they say will ensure fair and open digital markets. One of the premises of it is that there were these gatekeeper companies, I’ll call them monopolists for short. By the way, it’s not against the law to be a monopolist, it’s against the law to use monopolistic power to decrease competition or, as we’ve seen, the theory of you could sometimes tenure in the years in the future to it, but who’s a gatekeeper? Strong economic position, big impact on eternal market, very active in EU companies. That’s one. Strong intermediation position, large user base to a large number of businesses and third, an entrenched and durable position market that’s stable over time. Boy, that sounds like Apple, Apple and the app store there.
What this means, and we saw this with Meta which, I don’t know, maybe we’ll talk about in the next episode. They had to unlink different properties between WhatsApp, Instagram and Facebook but essentially, they wanted Apple to be more open market with the app store, meaning they wanted companies to be able to offer applications that users didn’t have to pay 30% because Apple has a 100% monopoly position in that right now. The second thing of it was payment: have an alternative payment methodology here. There’s a couple more, but essentially what that meant is that Apple … you will be able to sideload applications. They’ll have third-party stores.
Now, it’s interesting. Apple is … you can just read in their press release how angry and bitter they are on this. They’re finding ways that I think some people would say is slimy, which is adding side loading … new commissions structures. Essentially, you have to use a certain scale of bank if you want to put an app store in there. On one side of it, I can see that keeps slimy companies from coming in there, but it looks like Apple, instead of opening it up, it actually just put up a smaller wall. I know here in the United States they’re talking about even if you make a transaction … Dan, listen to this: on a Safari browser, you will get hit if you’re a developer with this.
Here’s my final comment. People bellyaching about any of these changes in the spirit of security and I don’t know, some people like censorship … we wouldn’t be here if Apple hadn’t been so greedy. Think about it. If you’re a developer … not just a developer, 30% to buy the software but, if you’re a video streaming company, a music streaming company, I have a subscription for 10 years to an health app. Pay you 30%? Apple, what were you actually doing for that 30%? You had some edge networking, you have servers that put, I don’t know, 100 megabytes of code that you can download. You have a payment facility that’s in there. For some apps, you even have to pay extra if you want to put the data on Apple servers. 30% across tens of billions of dollars in revenue. There’s a reason, folks, that Apple never disclosed gross margins for the app store and that’s because they were huge. By the way, nothing wrong with making money but at some point, you have to align value with your pricing, otherwise, you’re going to get into a mess like you got in here.
Apple, I hope you learn a lesson here. US regulators, you’re wasting time on Amazon buying a vacuum cleaner company. I know you’ve opened up a ton of investigations on this, but you need to bring this to the US and you need to also stop these smaller walls, like charging 10% for me buying something if I’m using an Apple browser.
Daniel Newman: All right, I want to move quick because we’ve still got another topic and I’ve got a call at the top of the hour. Sorry, everybody.
Patrick Moorhead: We’ve got 12 minutes, Dan.
Daniel Newman: Being on all day … this is a good one, though. First and foremost, I think you covered a lot of the specifics of it, Pat. Here’s the reason I don’t think it’s bigger news is because Europe. All right, I’m just going to pause there. Europe is the ultimate tax for any technology company and by the way, when it comes to things like privacy and security, they tend to be more on the right side of where I think we need to be going. Having said that, they’re also notorious for just loving to tax companies for innovation. There’s always a grain of salt taken when the first fines come down from Europe. Look, Apple plays dirty, it’s always played dirty, but it has great technology that people like to use and for the average user, they don’t really care.
I think this is one of those things where you have to separate the consumer harm and the competition harm. From a consumer standpoint, I don’t think most users care about having more marketplaces, I just don’t. From a innovation and from a competition standpoint, it’s problematic. Apple, like you said, I think you put it really well, Pat, very, very greedy. I think along the way, had they been a little less greedy, they probably could’ve kept the monopoly because they could have said, “Look, I get it, but we’re only charging 18%, not 30%.”
Patrick Moorhead: Well, they threw out some bones to smaller developers and we now know based on the disclosure between Google and Apple they cut special deals with some of the bigger companies, but not with others.
Daniel Newman: The bottom line is … it’s weird because here in the US, I know it’s a different case, but the Epic/Apple thing fell on its face. I hear what you’re saying. “Let’s bring it here.” I don’t think Lina Kahn has the gall to take it on. She’s batting .000, so she’s spending all her time trying to figure out any case she might be able to win which now, she’s shutting down the Roomba. “Oh, God, I can’t get my vacuum from Amazon.”
The bottom line, Pat, is what’s going on here is really complicated. You’ve got multiple ecosystems. If you actually read through this thing, I just feel like Apple’s just going to find new ways, because there’s no way they’re just going to walk away from all this revenue, they’re going to find new ways to… Hey, you were talking about the smaller walls and the smaller fees. It looks like they’re just finding new ends to charge rather than this very blunt, big fee that they charge all the developers and all these different transaction costs. They’re going to find new ways because there’s no way they’re going to just let this revenue run away.
Having said that, Pat, I think it’s a good start. I think it’s a good start. I think it’s good to see somebody had the guts to take them on and win. Then, the other thing, Pat, is if they don’t do enough, there’s a lot of risk out there for them. They could have to pay up like 10% of their annual turnover potentially if the EUEC says, “This is not enough,” Pat, but this is good. Here’s what I say about this: this story ain’t over. This is not over yet. This is going to be a continued story but, until the US actually takes meaningful action, I think it’s always going to be a bit of a sideshow in Europe. Let’s see what happens, Pat, but it was a step in the right direction to finally make Apple at least have to chew its own cud and swallow it. You could see in that press release it came out, it came back out in a less than a desirable way. All right.
Patrick Moorhead: Hey, just to loop back, the EU has 448 million people, the US has 300 and change. It’s a sideshow for B2B, but not a sideshow for B2C.
Daniel Newman: Here’s where it-
Patrick Moorhead: Or maybe I completely misunderstood your point.
Daniel Newman: … No, you’re right. What I guess I’m saying is that, when Europe comes and slaps a big tech company now with a fine and makes them change something, everyone’s like, “Yeah, they do that four times a year and they make people pay.” What I’m saying as a whole … Wow, you got some fan. Secret fan.
Patrick Moorhead: A lot of fans today, we’ve got-
Daniel Newman: …yeah…
Patrick Moorhead: … but I don’t even know who it is. We must not be connected, but Matt Hamblin, John Hedgwick, and Mohammed is a dedicated watcher. We appreciate you, Mohammed, coming in every single week. Thank you.
Daniel Newman: You know what, Pat? I’m not downplaying it, I’m just saying Europe … it’s like a merry-go-round: Google, Microsoft, Qualcomm. Every year, it’s a merry-go-round of just…
Patrick Moorhead: They’re very similar to China in that they do a lot of the taxation, but the difference is that China’s very open about it. We saw the documents on China with Qualcomm and they’re like, “You’re charging too much. We need you to charge this.” Qualcomm did and everything was fine.
Daniel Newman: Absolutely. Let’s wrap this baby up. Let’s talk about ServiceNow. Enjoy the opportunity. Each and every quarter, I get to talk to CEO Bill McDermott on earnings day. This company is … it’s a lightning rod. It just continues to attract business, attract growth. It’s got some really exciting key metrics that it was able to hit this quarter. The company saw … I think it was 10 billion of annual RPO backlog … sorry, 8.6 billion, but almost 18 of total RPO. It’s at a pace to ACV, your annual contract value, of $10 billion. The company’s got these amazing new partnerships with Visa and Ernst & Young basically built on its generative AI platform.
What Bill was able to share with me was that effectively, the company’s gen AI has picked up and monetized at a rate that was much, much faster than what was expected. This has led the company to beating, beating and beating quarter over quarter and year over year. It’s going to be a $10 billion annual contract subscription business. It’s heading on that pace. He’s had really, really bold ambitions for the company’s growth, but they’re growing on margin. Oh, and by the way, something he said, and he really pointed this out: no layoffs, not ever, throughout the whole thing. He committed to it. Didn’t lay off a single person over the last couple of years. Hit all the metrics, won the customers. It’s one of these situations where it’s almost hard to not be cheering for it. It’s-
Patrick Moorhead: No layoffs ever?
Daniel Newman: … No layoffs since … he made a commitment in the beginning when the market turned and all the companies were turning to layoffs this last, what, two years ago, about two years ago, when the market in the end of ’21, when it started to slow, that he would not lay anybody off. The company did not … actually, he told me that they had a million applications for one position.
Patrick Moorhead: What? It must’ve been an AI programming role for a million bucks or something like that.
Daniel Newman: He said that there was a million applications for an open position. Just incredible numbers. At Futurum, we only get 100,000 per position that we open up, so he’s 10xing me. No, I’m kidding. Like I said, you’re seeing 25% growth. The company’s focusing on these vertical industry LLMs. What are they doing with Visa? A transformed payment service experience LLM. They’re working together. To offer… it launched a five-year strategic. Now, again, this is the biggest payment rails on the planet, Visa. They went with EY, one of the world’s largest consulting company, to build a governance and responsible AI LLM that they can be able to offer AI enhanced and it’s a built on ServiceNow assist. The platform approach has gone very vertical. They’re saying payments vertical, they’re saying governance vertical, they’re saying, of course, workflow, digital experience, employee experience, left to right. It’s an anomaly, Pat, but it’s like all they’re doing now is they just continually win and surprise, outgrow and outpace.
Also, probably one of the most prolific things or prophetic things that he said is that he believes there’s a whole new enterprise SaaS platform software that’s going to come to market in the coming years meaning, basically the enterprise software as we know it is about to completely be turned on its head. The companies that we know that tend to run the businesses end to end he believes could meaningfully change. It was a very, very positive quarter. Pat. It was all about gen AI, though. All about gen AI, new software workflows, great partnerships, strength in terms of beating the numbers. It was weird because I always try to find at least one thing that’s like, “Ooh, this is the thing I want to put my finger on and turn to poke at a company.” There really wasn’t anything in this particular quarter that I could poke at. That’s hard to do. I’m going to keep looking, I’m going to keep digging because I never like to give anyone a free ride, I always like to at least find …
My biggest concern is this: as they keep growing, they’re going to start butting up to bigger companies and they’re going to butt up to new competition that eventually, they’re going to have to say, “We’re not as aligned.” ServiceNow always aligned everything, ERPs and CRMs, but now, they’re doing more. That’s going to be the thing to look out for, but it would be hard to bet against them being able to grab market share if they can build the software and meet the customers where they are.
Patrick Moorhead: A little background on ServiceNow. Their stock’s up 68% in the past year. It’s on a rocket ship. I’ll tell you, before CEO Bill McDermott came in, it was a company that was just, I don’t know, buried, or at least that’s the way that I view it. It’s hit an all-time high, as well, which is very impressive, so they’re doing something right.
Daniel, one of the things that I always try to figure out, and I just need to do more research on the company … is there superpower technology or is there superpower sales and marketing? Now, it has to be a good product and it has to be delivering but if I do a cross section of how they sell and talking to people how they sell, they’re a sales and marketing machine. The other thing … if I think they want to go broader, and you talked about this, they don’t describe what they do very well and it seems like a hodgepodge of service management, HR, delivery, FSM… What is the binder that pulls it together? Getting to that next big shelf, I think they really need to do some work on packaging up the company to be able to describe it to folks but, man, hats off. Their stock’s at an all-time high.
Daniel Newman: Workflow it, dude. Let’s just workflow it.
Patrick Moorhead: Bill McDermott coming in … it was interesting. When he came in, I was thinking, “Gosh, you leave … ” It was SAP before this, right?
Daniel Newman: Yeah.
Patrick Moorhead: “Why leave that and get on a company that a lot of people don’t hear about?” Now, I get it. Dan, I’m going to give some more cycles to learning more about ServiceNow. For instance, which one of my analysts would I put against this? I’ve got HRM and HCM. I’ve got a lot of people tools. Who would I even put against this? Anyways, that’s more of a way to ask a question of, “What does this company do?” I guess I could put four or five of my analysts against this and who knows? Maybe you might know some people, Dan, who can make an introduction.
Daniel Newman: I might, we may and there may be something more and something big from ServiceNow coming to Six Five sometime soon. We’ll have to keep our heads down for now. We’ll come back to it. All right, everybody, that’s it. That’s our show. That’s our week. We did it. It’s the Six Five. I want to thank everybody so much for tuning in and joining us for this show. Hit that subscribe button, join us for all of our episodes. We appreciate each and every one of you, but it’s time to go. It’s time to say goodbye. See you all later.
Author Information
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.
