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 six handpicked topics for this week are:

1. IBM Earnings
2. Broadcom Announces Jericho3-AI
3. Oracle HCM/SCM AI and Automation Updates
4. Microsoft Getting Default Samsung Galaxy Search?
5. Infoblox Combines DNS Networking and Security
6. SAP 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 everybody. Welcome back to another episode of The Six Five Podcast. It’s Friday. It’s Episode 165. I’m back, baby. Took the long haul over the pond. Made it to London. I saw mi padres. I was in London. I don’t know why I’m speaking Spanish. But anyways, Pat, how you doing today buddy?

Patrick Moorhead: Doing great. It’s great to be here. It’s my favorite thing to do of the week and we made it almost. While some analysts take off Fridays, we decide to work. And there’s nothing better than to kick off a podcast with my bestie.

Daniel Newman: Hey man, look, some of us, what do I like to say? Some of us start late and make up for it by leaving early. That’s the other analysts. And there’s you and me. We start early and we make up for it by leaving late. We’ve got a lot of ground to cover each and every week. And here on The Six Five, we try to look for the six best stories of the week across the technology sector. And we don’t give you the news because that’s easy to find, although the tech press has been battered over the last decade, so it’s not as easy as it used to be. But we like to give you the analysis, the insights, the things that you really need to know about each of these topics. And we’ve got a great show for you this week. Now, before jumping in, I do want to say this show is for information and entertainment purposes only.

And while we will be talking about publicly traded companies, please do not take anything we say as investment advice. And Pat will always like to say, do the opposite of what he says. I’m a little smarter than that, but still don’t take it as investment advice. We got a good show. Like I said, we’re going to be talking IBM, Broadcom, Microsoft, Samsung, Oracle, SAP and Infoblox. Pat, this is the beginning of another wave of earnings. And I know you and I have mixed feelings about earnings because we know how important it is. The financial press loves to get our industry take on earnings. So that ends up being a way that we end up on TV and end up quoted in the press a lot. But at the same time, we’re not equities people. That’s not our main thing, but we kind of look at this earnings thing as ground truth.

So while this week we got a couple earnings to talk about. We’re going to talk about IBM, we’re going to talk about SAP. I think in the next couple weeks, we’re going to end up with some earnings paloozas. I know, I know, you’ll have to bear with us, but we also have events and stuff, so we’ll be mixing that in. But Pat, one of the companies that we’ve been really admiring a lot and a company that’s done really well, the darling of 2022 in the tech industry with a high yield, has been IBM. While other companies got crushed in late ’21 and ’22, IBM actually was the best held up stock in the market across the big tech companies. But how’d they do this quarter?

Patrick Moorhead: Yeah, so you nailed it. I mean, IBM is durable in terms of demand. You just can’t turn IBM off unless you want your bank to stop running, if you want your retail store to stop running. And if you want to stop your hybrid multi-cloud rollout with Red Hat. So IBM had a good showing. I mean, if I look at this environment out there where business has been going down for a lot of digital transformation projects, the company did well. I mean, it beat on EPS. It was slightly off on revenue. But what it did do is it narrowed the guardrails of its guide. And to me, that exudes more confidence in the company. It really does blow my mind though how much kind of the makeup of the IBM business. I mean, listen, the IBM Z series is iconic.

It’s infrastructure, it drives a heck of a lot of profitable revenue dollars. But what a lot of people don’t understand is it pulls through a lot of services and software as well in addition to some consulting. And over 50% of IBM’s revenue this quarter was recurring and over 75% of revenue was software and consulting. Consulting was off. And on the call, CEO Arvind Krishna talked about the softness in terms of that sector primarily related to digital transformation. And what people shouldn’t confuse is digital transformation with upgrading your core infrastructure, kind of your bedrock. So when it comes to infrastructure, when it comes to software related to things like containers and the cloud, ERP consolidation and stuff like that, that is doing the basics. I almost don’t consider that digital transformation, which is, hey, let’s do something radically different. So 54% growth at 54% gross margin, I think, is really good.

I’m not concerned with infrastructure being flat because infrastructure number is all based on Z series. And Z series had a two year surge and that surge is winding down and that’s just natural. Now, the fun part is that typically the Z surge is followed by a software and services surge, which I’m expecting to see. So overall, IBM did well. I did like Arvind hinting some things on the call related to AI. And I’m hoping that the company at this upcoming think down in Orlando that both you and I are going to be coming to will lay that out. IBM is already very strong on the data side, and you have to have a strong data platform to have a good AI platform. IBM has integrated machine learning acceleration right in at z16 and they have a ton of things that they’re going to be, I’m hoping that they’re going to be bringing out at think.

We already saw their AI supercomputer for foundational models and generative AI. Hopeful we’re going to see a lot more because Daniel and I really brought this out in my AWS piece last week about what they did with generative AI. There’s this huge difference between what the folks in the consumer world are doing and then what the folks in B2B world are doing. The roles are different, the risks are higher, but the payoffs as we’ve seen in B2B generative AI can just be huge. But it does require that you take a little bit of a slower role than throwing out Bard and Bing Chat as an experiment. I mean, literally we both use Bard. It says experiment in the upper left-hand corner. You do not want to subject your P&L, your revenue stream, your customer interactions to an experiment.

Daniel Newman: Well, I don’t know. Samsung did it. They’re a pretty big company. I think the allure of some of the AI technologies is pretty great. Now, I mean, I’m getting sucked into the vortex, but I think it’s getting sucked in intelligently. And I think this is where IBM has a really strong position. When you go back to the Watson machine winning Jeopardy, that was basically your early iterations of generative that you were seeing there. This is not new. And IBM’s been at the forefront of this. And I’m actually working on a paper right now. We’re going to look a little bit at the foundational models and some of the things that IBM’s doing and how it’s going to basically build and position the company really well, especially at the enterprise level. Because enterprises are going to have to, you don’t have to talk about this a lot, combining that proprietary data, both real time systems of record, ERP, all the different datas that they have with that sort of open sort of GPT experience to create these fast moving generative AI capabilities.

But let’s just for a minute reflect on the earnings here. Had the chance to talk to CFO James Kavanaugh on the evening of the earnings. It’s great to get kind of another perspective. And he said the same thing we’ve been saying, Pat, that the strategy and investment thesis is playing out across the business. Now look, the growth was not overly impressive. In fact, revenue missed by a bit from where it was expected, but earnings were very strong. You can tell the operational decisions, the streamlining of the business. They did make some overhead cuts. And I think that’s important that they’re continuing to deliver in this current macro environment. You saw some strong numbers from systems, especially with z. I think you mentioned that Pat. But there were parts of the business that performed really well and then there were parts of the business that didn’t perform as well.

A couple of standout things to me was margin expansion, both on the top and bottom. So the margin was up on the gross side by almost 80 basis points and the operating margin’s up by 130. They were above the guide there. They’re also continuing to return to shareholders strong dividend on the stock. And I think there’s been a bit of a flight to safety among a lot of investors that want to get exposure to AI. They want to get exposure to cloud, but they don’t necessarily want the high volatility of some of the more typically growth oriented names. Now, Red Hat’s overall growth was a little bit concerning to me. I think it came in at 8%, something like that. And there was some pressure from the strengthening of the dollar again. And so you saw something between about three and five basis, three and five points against each of their different results.

So it made things like flat on revenue, but it was really four to five at constant currency. That’s going to continue to be an issue. Global companies, a lot of headwinds with currency, a lot of uncertainty with the economy and a looming recession. But the good news, Pat, and I don’t know, I think you said this, but sorry, I was tweeting about the podcast. But 40% on OpenShift, 40% growth on OpenShift, which is the real product indicator of the adoption of hybrid cloud. Huge number and now it’s over a billion dollar run rate business, all AR. And the company’s also announced that close to 50% of its business falls into kind of that AR more predictable group. And that’s really important too for a company like IBM getting away from those big one-off sales and getting to a point where their software and other subscription models are really high.

Now, I’ll make two more points to keep an eye on. One is the automation and the growth was a little low for me. I’d like to see that growing faster. And the second was security also. Actually saw the number go down. And when I talked to James Kavanaugh, I said to him, I said, that is an area that I’d love to see IBM growing. With RSA coming up, we did some really exciting interviews. IBM’s security portfolio is really compelling, Pat, but for whatever reason in a market where security may in fact be one of the most exciting opportunities other than AI right now, I’d like to see IBM’s numbers growing in security. So overall though, tough macro, good result, strong company and their thesis is playing out. I think that’s the thing to watch. Now, what happens next? Well, you’ll have to wait and come back to us in a quarter, but we’ll let you know.

So let’s move on and talk a little more AI. Let’s talk about Broadcom and AI. Now, interesting, right Pat? We’ve been covering Broadcom a lot more closely over the past few months because of, a lot of it had to do with the VMware deal. You and I have been watching this deal, talking a lot about its stature, trying to help the market understand. I would say that we’ve both, after getting under the hood, looking at the innovation thesis, talking to a lot of executives, including your time with CEO Hock Tan, I think we’ve probably come to the conclusion that Broadcom’s fairly misunderstood.

Patrick Moorhead: Totally, totally. Yeah. And the company’s been a lot more communicative as well, which I mean it has to go both ways, right?

Daniel Newman: Yeah. And I’d say it’s more misunderstood by its customer slash the overall IT community that consumes its product than it is by its investors. I think it’s a bit of a darling among investors because Hock Tan and the leadership team run that business for the street. I mean, they definitely understand the return on investment capital, the return on the acquisitions, they run lean, they run mean, they know how to invest in products that are growth oriented and they know how to maximize profitability of products that are sunsetting. And a lot of people don’t love that. But you know what? In the end, you have to run a business to be successful and that success means businesses have to make money. Now, Broadcom well known for a lot of things like routing, switching chips, network. Doesn’t necessarily get a lot of conversation around AI though. And in their high end switch family, they do have the Jericho line.

And this past week they came out talking about Jericho3AI ethernet switch. And the company came out with a somewhat bold position that they have some advantages in their technology over NVIDIA and the InfiniBand product. And as a very, and Pat, I’m not as familiar with cost, but what I understand is they have a lower cost, higher performing option and they offer something like a 10% performance improvement enabling the network to pay for itself. So they talked about a number of fabric innovations including load balancing, congestion free operation, zero impact failover and ultra-high rates were the things that they focused on, but they basically looked at the workload against the throughputs of InfiniBand at a number of different message sizes and a number of different speeds. And basically, what they found was the fabric that they’ve created was more performant at all of the different message sizes than InfiniBand.

And so it’s a really interesting sort of inflection because the other thing they’re also claiming, Pat, is power reduction. Now, I put out an article this week on MarketWatch where I talked about some of the interesting competitors coming up against NVIDIA. And while I still think NVIDIA, the thesis that they have the most opportunity in AI because of their positioning, I did call out sustainability as a big focal area and something that they’re going to have to watch because GPUs are a bit of power hogs. But on the networking side, I didn’t really reflect on that very much. But with a Jericho3AI, Pat, they’re saying that their fabric offers something like a 40% power reduction. It’s saying lowest power and cost optical interconnect, 25% system power reduction against pluggable optics. So they’re coming out and making some claims of some very strong performances on that side.

So while Broadcom isn’t making GPUs or ASICs right now for AI training and inference, we can’t forget about the fabric, how fast data can move, as such a key and critical part of success for this technology. And Broadcom, if they can offer a more efficient lower price product, will be very attractive to a number of different companies that are going to be getting in the game. And this could be a really exciting product for Broadcom and another competitor that NVIDIA’s going to have to be watching out for.

Patrick Moorhead: Yeah, Broadcom is an absolute connectivity beast of a company. And if I’m looking at their wired, I mean, they go all the way from the front haul to the back haul, enterprise access, they do metro aggregation, part of the metro core, the core, the DCI and the data center, and inside of the data center, they connect fleets and they also connect racks together. So they really are incredible. One of the important parts about doing training at an inference is that you have to scale. You can’t do that on a single GPU or an ASIC. The workload has to share a common memory plane, right? We talk about these 65 billion parameter models. You have to have a common data plane, sorry, common memory plane to be able to do that. And the way you can do that, the only way you can do that, is by networking the racks together that have the GPUs in them.

And it’s very rarely that somebody goes after a NVIDIA, and this is to me which made this so exciting. And essentially what they said is, hey, use our much lower cost ethernet connectivity to connect your GPUs than this super expensive InfiniBand. And the case they made was, hey, we have superior port speed, reducing the tiers in cluster sizes, load balancing, congestion management, telemetry, job completion time, multi-vendor support, I.E. Ethernet, and TCO, which is related to cost. So definitely looking like a little mini skirmish or a mini war of skirmishes is coming up on the network side. And it makes perfect sense also why, reinforcing one of the reasons that NVIDIA bought Melanox, which is to essentially partake in the revenue and be on the edge of creating training and inference clusters.

We hear AWS talk when they’re talking about their AI solutions as much about their super clusters as they do about the actual chips themselves. So this is a big deal, something to watch. And yet another example of Broadcom innovating out there in the market, right? Higher performance, lower cost, and a lot of other better attributes than InfiniBand. And by the way, the InfiniBand ethernet debate is only 10 years old, but the increase in performance and capabilities of ethernet are kind of a new thing. So, fun stuff.

Daniel Newman: It is. And we couldn’t make it to the list today, Pat, but it’s been a bit of an, I think NVIDIA’s doing fine, but I got some press calls this week about Microsoft building an AI chip. We’re not going to talk about that here today, but I’m saying the competition’s on the rise here, companies are looking to do it more efficiently. They’re looking to find ways to network cheaper, to do it with lower power, to build ASICs to run certain models. So the era of just the all-encompassing big powerful GPU is also in a bit of a flux. We’ll come back to that one probably at some point in the future. But let’s talk about Oracle. Let’s talk a little bit about some updates. This week you had the chance to talk to executive vice president Steve Miranda at Oracle about some exciting AI focused updates in their supply chain management and in their HR focused tool. What’s going on there, Pat?

Patrick Moorhead: Yeah, it was a great conversation last week I had with Steve. And so, as just some background here, Oracle has a suite called Fusion. It’s an end-to-end enterprise SaaS offering, which connects the front end to the back end. Daniel, I put that in just for you.

Daniel Newman: Thank you.

Patrick Moorhead: And it has a quarterly update, which if you follow enterprise SaaS market, that is just what they do. And I think the highlight here was, and again, no huge surprise here. Oracle is adding AI and automation capabilities to its HCM, to human capital management, and SCM updates, supply chain management. And we have been talking about on the show for years the value that AI can bring. And it’s not just bringing AI for the sake of saying we’re AI. It’s solving real customer problems. So one of the examples I thought was super interesting was the ability to have higher accuracy in terms of lead times.

And if you’re a manufacturer, that is a big deal, because many times, if you have a diversified supply chain, one of your attributes is going to be, how quickly can I get that product, right? And what this capability does, it cuts through the BS to get to a higher probability of theory becoming a reality. And I think that is super important. So, it also helps in planning upfront as well, not just kind of reactionary, I need the goods. The second part where they added it was in HCM where HR’s monitoring skills and looks at gaps across teams. The organization identifies the skill needed to complete a project, to achieve a business objective, and automatically adds these skills to every employee’s profile. So it’s not only helping you figure out who might be best for, let’s say a project or a team, but also adding those capabilities to the database to have a much better idea.

It’s not like you can rely on your employees to have perfect LinkedIn profiles talking about every project that they ever worked on. And one of these big modules inside of Oracle HCM is called Oracle Grow. And that cuts across talent management, learning, succession planning, employee growth. And this employee Grow gives employees even a clear vision of skills that they need. So I like this because it gives a 360 degree perspective to the employer and to the employee on the skills that are required to be successful, either in a project or overall in a job. So my final thought here is, no longer are we talking about Oracle Fusion updates, can customers take it? That is somewhat fading to the background from its customers. And I attribute that in part to how low the risk has been to do this. And I kind of relay this to the good old days of even desktop operating systems when it’s like, wait, wait, wait, wait, you’re going to update this on a consistent schedule?

I have to test this thing for a year. So no longer are we seeing those massive debates out there. The only weird chatter, and it’s to be expected, is those people who just never wanted to go to Fusion, they’re okay using a piece of software that’s 10 or 15 years old, probably picked up from one of Oracle’s acquisitions. I get it. But Oracle cannot, does not put the center of their investment on that. They’re really doing this on the future. So I had a good conversation with Steve on, how do you pick the futures that you put in there? You can read that in a Forbes article that I’ll probably publish next week.

Daniel Newman: Yeah, you hit this pretty well. I mean, look, it’s all about continuous improvement in the apps ecosystem, Pat. If you’re a business leader owner and you’re not looking at your critical tools, your ERP, CRM, HCM, SCM to optimize right now using things like automation and AI, you are likely to be missing a massive trend that could give your business a competitive advantage. Now, the key is going to be, in the competitive landscape, is that these companies need to be rolling these out to not basically expose themselves to attrition. So if you’re a smart business leader and the types of capabilities that you’re looking for are not being improved utilizing the capabilities of AI, ML, and automation, that’s going to be opening the doors for people to look for other solutions. And lift and shift is painful, but it’s even more painful to know that the business tool that you have doesn’t match the capabilities.

So what I like is that the company is really focusing on a number of iterative and important updates where ML and AI can be applied to make things better. Subscription management, quote to cash, configuring price, order management, and of course the overall ERP. Fusion has been sort of well known, and Oracle’s kind of touted for how quickly it’s able to close its own books on a quarterly basis, because they basically apply the tool themselves in their business. So the application of AI based upon the company’s current dataset is a pretty substantial and meaningful set of data, and it’s an opportunity for companies to keep improving and keep delivering better outcomes in their businesses through the implementation of these capabilities. The Oracle Me stuff, the HCM side of the house, was even more interesting. You and I have talked a lot about upskilling and how people can enhance their careers, re-skill based around current business priorities.

It’s very hard as a manager when you’re often doing a job because very few managers are just managing people. Generally speaking, you have a job, you’re a player and a coach in most companies. So it’s having the time to sit down with employees, figure out growth opportunities is something that is really difficult. But the tools and technologies that can give visibility into this and then help companies find ways to enable their employees to grow and improve and find career paths inside of companies is something that I think people will be looking very closely at. So the utilization of AI and ML to support this to me is really exciting. I think there’s more opportunities longer term with AI to even help make better hiring decisions up front, finding profile matches and persona matches across a database. Using anonymized data that a company like Oracle has probably could help other companies, even if they don’t have the same exact sets of experiences. That’s going to take more time to play out.

I did ask Steve about it. That’s not a focus right now, but what they’re doing right now, I think, is going to be very, very valuable, like I said, especially because it’s not another product, but it’s just the continued improvement of the product that exists. So good set of updates from Oracle. Let’s keep moving. Let’s talk a little bit about some news that’s been going on this week, Pat. We know Microsoft has been spending incredible amounts of dollars to win this early AI race. It started with the $10 billion investment in Open AI, and then in what, a matter of weeks, the company rolled out GPT or their version of ChatGPT using Open AI into Bing Edge. It went into 365, Teams, and basically the whole product mix.

And of course, that’s been a massive differentiation in dynamics, by the way. So we just talked about the attractiveness of potentially having these capabilities inside your tool set. And if you’re a Microsoft environment, Microsoft has made it very compelling very quickly by putting this capability, experiment or not, usefully wrong or not, into all of its products at such a fast clip. But here’s one thing. Microsoft has single digit percent of the search market right now. During the event you and I went to in early September, the early announcements, September or February. I’m just making up times now. I’m Dan Bot GPT.

Patrick Moorhead: It’s okay. You’re getting in your 40s, Dan. That happens to us.

Daniel Newman: Memory starts to bleh. Anyway, we went to the event, and one of the things that they did, they did a financial call on that day. And they talked about how it would be worth almost $2 billion a year in revenue for every 1% of search that Microsoft could win in terms of its growth. The first iterations of GPT and ChatGPT in Bing were on the desktop. The thing I said immediately is, what about mobile? Well, that came next. Now they have it on mobile. But the one challenge Microsoft has, and this is kind of one of the things that was really criticized Steve Balmer’s era, was they just didn’t win mobile. They just missed the opportunity. And now the apps have improved and Microsoft certainly has a better mobile experience with the apps, but they’re not native. They don’t have an OS.

They were not able to penetrate the OS market on the mobile device. They tried a couple times without much success. And now you’ve got a little over half the market in the world worldwide on Android, and you’ve got the other, what’s a little less than half, on Apple. And so there’s an opportunity right now to potentially put Bing as the default search on Samsung devices. And that would be a major pivot from Samsung natively running Chrome. And so, the question mark right now is, should Microsoft pay big for the opportunity? And I think Samsung, Pat, you probably might even know it better than me. In the 20ish percent of all the devices in the market, it’s a significant number. It’s not all the Android devices, but Samsung, if they were able to be the default search on the Samsung device family, which is a large family, even bigger on a global scale than it is domestically here, could that help them become a de facto search?

And long story short is I think there’s a very compelling case to be made that Microsoft needs to go all in on this opportunity. I don’t know how it wins search, especially if Bard catches up quickly and becomes embedded in Chrome anytime soon. They won’t miss the opportunity to win a large swath of mobile search with generative AI if they don’t look at these kinds of opportunities as moments to lean in. Now again, look at that 1%, $2 billion. There’s a fairly easy set of math for them to do based upon some assumptions on how much market share they think they could gain in terms of default search. Are there risks? Yeah. Spending billions of dollars where people can still go ahead and load Chrome and decide to stay with Google is certainly a risk for the company. But here’s my take, Pat, and I’ll pass it to you. I don’t think people will actively go out and download Bing onto the Samsung devices if Google’s already there when they buy it.

Patrick Moorhead: Three words. Competition is good. And we would not be having this conversation if there weren’t some healthy competition. And whether it’s innovation, whether it’s pricing, having three strong players in each market is paramount. I would say we have two at this point on the search side, but Google dominates all over the place. We have Apple who’s paying tens of billions of dollars to Google for this. And you have Samsung, I don’t know what the math there is, but it would be really interesting to see, if this went through, if nothing else, it’s either going to lower prices or increase competition. There was a lot of speculation on whether this was even possible. There’s this thing called Google Mobile Application Distribution Agreement, which says that Chrome and Google Search needs to be the default. So here’s all I have to say is there are standard agreements and then there are agreements with the largest Android provider on the planet, and that’s Samsung.

If you remember, Samsung was working on an alternative operating system, and that went away. And then there was a strategic alignment between Google and Samsung where Samsung and Google agreed to do certain things. We don’t know exactly what was in there, but I guarantee you Samsung does not have the standard NADA out there that the number 27 Android handset provider in some nuanced country would be signing. And this looks nothing but good for Microsoft and what it’s been able to do. I mean, no matter how many billions somebody would pay, a device maker isn’t going to put something on there that its users are going to hate. So I’m going to leave it there, Daniel, but competition is good and this is good for Microsoft.

Daniel Newman: Well, there you have it. So let’s get a little technical, Pat. Let’s talk about Infoblox and what they’re doing right now with DNS networking and security.

Patrick Moorhead: So first off, as we’ve discussed on the pod and in our papers, in our blogs and on social media, there are many different ways to do security. First of all, you have the argument of perimeter, which is dead because we know people can get in. And then there’s, how do you get them out once they’re in? And then if they screw with your data, how do you get that data back with ransomware? We have companies like Cohesity specialize in that. But then you have different layers of securing things. L0, L1, there’s different methods. So Infoblox is the leader in DDI service. And DDI is short for the integration of DNS, DHCP, and what’s called IPAM into a unified service. It used to be during the good old days that each company would do this on their own.

Now the challenge with doing DDI yourself is that it takes a bunch of time. The least automated area is security out there, right? Compute, storage, data, check, and then you’ve got to wait a month to get your networking in order. That’s because we’re still using CLI and there’s not a lot there. So with that said, Infoblox with its new CEO that I had a chat with, Scott Harrell who used to work at Cisco. The company is really leaning into extending the networking part to security, and it totally makes sense. So the company introduced, well, first of all, we’re about to go into RSA and they’re getting a jump on the news, but what they’re making the case is that DNS and DHCP and elements like Microsoft Active Directory are very insecure. And the proof point on that is how vulnerable DNS services are to DDoS attacks that we see all the time.

So what Infoblox has brought out this week right ahead of RSA is lookalike domain monitoring, which helps you with perimeter security so somebody’s not trying to spoof your DNS. So it’s really as simple that the company also brought out kind of in a classic thought leadership way its new security white paper. And apparently, I saw some breaking news. They also have found some huge exploits related to Trojan horses. So, very interesting company that started off as a DDI service provider, which by the way, billions of these go through the company on a daily basis, but they’re headed into security. And this is an overall theme that, Daniel, we’ve seen before, which is networking companies that are leaning into security and we see security companies that are leaning into networking. So this makes total sense.

Daniel Newman: Yeah, Pat, I didn’t have a chance to get too close to it, but I have been watching with a lot of interest Infoblox come up under the radar consistently. With the growth of demand around security, you heard my comments with IBM. It’s becoming more and more critical. Right now, companies have two lines that they need to be spending on beyond cloud. Cloud’s a well understood operating model, but it’s AI, and not just generative, but really AI as a whole to automate, to help maximize utilization of data, streamline. And by the way, AI is a huge opportunity for security. And the other is security. Right now, things like ransomware, cybersecurity attacks, intrusions are on the rise. You can bet AI is going to be used to create it. So finding companies and technologies that are being the most innovative and creative and capable to help you secure your business from Edge to cloud is critical.

So I’m interested in continuing to watch the Infoblox story, Pat. Look forward to getting briefed on them soon. So let’s hit the last topic here. So last night, or I guess you could say early this morning, SAP reported its most recent earnings. And the company, I want to focus my commentary on the company’s transformation to cloud. So SAP is a German company. So while you and I generally talk about things, if we do talk in accounting, we talk gap and non-gap. In Germany, they use IFRS, which is an international standard for how they report. And so just as we talk about it, that’s what I’m talking about.

But Pat, the long story short is that the company is doing really well in its cloud transformation. And when you and I met with Christian Klein, I think you even met with him again more recently, that was really the story that he was focusing in on is that this is a company with a history, a traditional sort of software licensing business that knew it needed to make a big pivot to cloud subscription. SAP has one of the largest customer bases in the world for running traditional business software systems of record, ERP, lots of acquisitions the company’s taken into other areas like supply chain procurement. But they had a pretty strong result on the cloud revenue, growing 24%, which was up sequentially.

And for S4HANA, its cloud revenue was impressively up by 77%. So for a lot of people that are making comments like companies aren’t converting to S4 in the cloud, it’s wrong. Clearly it’s wrong. They’re also seeing their backlog grow. Their cloud backlog grew 25% and their cloud gross profit was up 28%. So this is really, really interesting. But Pat, the company is executing on what it’s committing in terms of its performance right now. Now, this is another area where the company has some convincing to do. Okay? And what do I mean by that? So here, you hear me basically rattling off some really good results. And by the way, the results are global for SAP. Their cloud revenue growth, just quickly across America, AMEA and AsiaPac, all 23% or higher. So they’re seeing strong growth across all of the different markets. They’re seeing their cloud and software revenue growing by 10%.

They’re seeing their, as I mentioned, the S4HANA, 77%. And so, Pat, I guess here’s kind of the question mark. You got the old and the new, and so you’re in this inflection point. And the company, if you’re thinking about as an investor or you’re thinking about as a customer, about whether or not to get further behind SAP, it’s where’s the momentum? And I think if you look at the numbers, the momentum are the vast majority of SAP clients are in fact either exploring or in process right now of moving their workloads over to SAP. Now, probably the most, I guess you could call it negative of the earnings report came to it kind of sounds like the company softened its guidance a little bit. In my opinion, it was probably being very pragmatic about the market conditions. Now, we continue to see, I would say, better results than expected given the horror stories that we were hearing that the market was going to endure.

And so the question mark kind of comes down to if you’re a leader is, do you under-promise and over-deliver or do you over-promise and under-deliver? So my sort of read on this thing is, SAP has seen good results, especially in the cloud business, which I’ve already reiterated a few times here, but there are some concerns about macro headwinds that are going to continue and I think the company’s playing it cautiously about what’s coming next. Having said that, I think there’s a good opportunity if the macro stays a little bit better as it has, surprisingly, that the company could continue to outperform.

Also in a tougher environment, companies are going to try to make more of what they have, do more with those current investments, and doing something like a migration to SAP cloud as opposed to a full lift and shift to another platform is going to be more realistic in these current times, which could be a sticky factor for SAP, which could add value to the company as well. So overall, like I said, good quarter focusing in on the strengths here. Certainly would like to see the guide going the other way, but I also appreciate when a company can be realistic about its situation and then work hard to outperform.

Patrick Moorhead: Dan, this SAP is like the other durable companies that we talk about, right? You can’t just decide to turn off your ERP system. That just doesn’t happen. It is at the center of your entire business if you’re in manufacturing, logistics, transportation, other types of businesses out there. So you’re just not going to do that. The fact that they’re cranking out, they have a 25% backlog increase, says everything to me that I need to know. And I think that 25%, albeit greater than the 22% in revenue in Q4 for cloud revenue, that’s huge. And I think they are cranking out numbers that are super, super good. So, I’m not concerned at all about that. I talk to a Fortune 500 enterprise probably once every week. Then I would say every other week is a conversation with somebody who is doing ERP consolidation, changing their ERP vendor, or taking it to the cloud.

And what they tell me is, hey, don’t put this into digital transformation. This is not digital. This is me getting my bedrock solid so I can do digital transformation on top of that. So yeah, I’ll be interested. Yeah, the guide was lower than you would’ve expected, but I don’t see this being some major event where it goes significantly lower. I do like some of the things the company is doing though. The SAP data sphere, right? You and I covered that a few pods ago, really offering one place for customers to keep their data and then leveraging best of breed data companies to access that. I’d love to see Cloudera in there, by the way. And then I talked with CEO Christian Klein about Grow with SAP, which is taking this into the mid-market. When I talked to him, I really felt like, and he was saying the right thing. Because when it comes to median business, it has to be simpler.

There have to be less switches that the customer has to be able to turn on themselves and there have to be a lot more integrations. And I am going to do a deep dive on this when I get the time, but I do know that he knows what the company has to do to compete, let’s say, more closely with somebody like a NetSuite. And the interesting part is if you’re a medium sized business and you start with SAP, it’s going to be, if you turn into a big company, it’s going to be a lot easier to keep using SAP. The alternative would be using a NetSuite and then moving to Fusion if you’re on Oracle. So I think their value proposition is compelling. I think they’re going to have to do a lot of work convincing and maybe picking up some different channel partners who know how to seamlessly integrate it and work with smaller businesses who just don’t have the resources to be able to do something like an ERP. Also talked about business AI, right?

I need to dive in and get more of the details on this. But again, they’re saying the right things, which is taking AI across the portfolio. And I think very similarly to let’s say an IBM or an Oracle, you don’t want to do this willy nilly. You don’t want to put experiment on it. Do you want to shut down your manufacturing? Do you want to shut down your logistics and warehousing? Probably not. So it’s got to be right when it comes out. And there could be no leakage of data related to the training. So the message that I got was stay tuned.

Daniel Newman: Well, there you have it buddy. And we did it. Another week. 49 minutes. So, The Six Five has definitely found a new lifeblood. We should start calling it the Six Eight. Then I can be the eight finally because I’ve been the five for too long. But another great week in the books. When we started planning this week, we said, I don’t know if there’s much to talk about, Pat, but you know what? There was plenty.

Patrick Moorhead: We found stuff to talk about, didn’t we?

Daniel Newman: Always stuff to talk about.

Patrick Moorhead: And maybe we added it. Maybe we added two of our topics 15 minutes before we walked on stage.

Daniel Newman: Well, the good news of being able to be flexible and agile, Pat, is we are easily digitally transformed in fact.

Patrick Moorhead: Do we actually understand this stuff too? I mean-

Daniel Newman: I think so. I think so. Rumor has it, now there is a question we have to ask the audience. Is this in fact Patrick and Daniel, or is this Pat Bot and Dan Bot and both of us are actually out on the lake right now enjoying a nice Friday afternoon? You’ll have to figure that out. But the Pat Bot and Dan Bot may be coming soon enough. Now, I do want to say thanks to everybody for tuning in. Hit that subscribe button if you like what you hear. We’d love to have you as part of our community. Share this liberally with all of your friends and anybody that you think would have value out of all this deep, thoughtful analysis. Now, we do have the Six Five Summit coming up June 6th through 8th. We’ll put something about that in the show notes. We hope you’ll sign up. Hock Tan, CEO of Broadcom, will be kicking it off. But we’ve got a star-studded group of speakers that are going to be talking about everything from chips to SaaS and kicking some -beep- behind.

Anyway, all right, I got to stop doing that. I’ll end up with the label on the show. We’re not a family focused show here on The Six Five. So for this week, for this episode, for Patrick Moorhead and myself, we thank all of you for tuning in. We appreciate you very much. Got to go. Bye now.