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:
- SAP Q2FY24 Earnings
- Google Q2FY24 Earnings
- Rumored NVIDIA B20 For China
- IBM Q2FY24 Earnings
- Another Day, Another Apple Booting Qualcomm Rumor
- ServiceNow Q2FY24 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 225. It is Friday. It is guns blazing day. It’s Patrick Moorhead’s revealing of his brand new guns right here. Don’t show them off. Oh, my God, look at you, man. Thin and strong, just like I like it. What a week it’s been, Patty. I tell you something. I don’t have the discipline of you. What I would say is I’ve had the long-term discipline of consistency in workout, but not the short-term of being really good about eating, and food, and stuff. I went on vacation. I got off my better diet Pat. Even though the food was really good, I ate all day long, all night long, and I did the whole gain 10 pounds on vacation thing that people do. And you know what? Probably the hardest thing was coming back this week, I had a really hard time adjusting to a normal workday. And even though I was on vacation, and I still was getting work done, the getting up at 6:00, and being in meetings all day, and being structured, God, I tell you, dude. I know why I haven’t taken a vacation in 10 years. It’s really hard to come back, and get adjusted. How are you doing though, man? You look great, as always.
Patrick Moorhead: Buddy, I appreciate that. And listen, the great thing about being besties is we motivate each other on different elements.
Daniel Newman: Sure do.
Patrick Moorhead: When I was basically a fat pig looking over, and looking at your arms that were about as big as my legs, I was getting a little bit of FOMO going on. But no, we go back and forth. Listen, that’s the important thing about friendships, and great thing is we have a real personal friendship, but also business alignment that we did together. And hey, I want to thank you for the big dinner that you sprung last night, and allowed me to come in, and watch over. So as everybody might know, Dan and I have 2, possibly 3 joint ventures together. One of them is Six Five Media, which is our video analysis. The other one is Signal65 Labs, which is benchmarking, and we also have a Signal65 Economics, which is not benchmarking, labs benchmarking, but it’s more economic benchmarking. And then Dan has this empire of companies, and he allowed me to come into his strategic, long-range planning meeting, which I appreciate, and at dinner where I drank more than I’ve drank in a month. I think I had 2 glasses of wine …
Daniel Newman: Somebody stop you.
Patrick Moorhead: … maybe 1 1/2. I’m not too sure. But anyways, Dan, thank you.
Daniel Newman: Yeah. No. Listen. Appreciate you calling that out. I can’t really bring everybody out there, all of the community here into the room. There’s a lot of really important strategic things, and you’ll see it in the work that we do. You’ll see it in the analysts that we will hire. You’ll see it in the events that we’re going to have. So these things happen. I’ll be candid. I don’t know how to do both my jobs well, and I really have to swing between the job of being the analyst on the podcast, talking about the market, talking about the technologies. And then I have to swing back to being the CEO of The Futurum Group. And we made 9 acquisitions. We’re running 7 different operating companies. We had, what, 18, I think 17, 18 people in for the leadership meeting. Talented group.
If you look a year ago, because you stopped by our planning meeting a year ago, the team we have now, I think we’ve drastically improved, and same thing out there. And look, I know my team’s listening to me. So I’ll say. I look and I still see chances to get better, and improve. And that’s one of the things I kicked off the meeting. I talked about this analogy. You know I love soccer. I wore my Arsenal socks yesterday. I pulled up my socks, and I showed them to the team, and I said, “Look, it’s the coach’s job every week to put your best 11 on the field.” Now, if you don’t watch soccer, there’s 11 players on the soccer field. That goes for me, and the team that I work with. That goes for my team, and the people they hire. And that goes all the way down through the chain.
And that’s really hard. It’s really, really hard to build products, deliver services, and be thinking about talents all the time. But the one thing is you look at the field, Pat, and I know you like football. It’s like if you don’t have all the right players on the field, you walk into every game wondering if you even have a chance to win. And every company starts with the talent. And maybe that’s a little bit of free advice to all of our clients out there, that are asking us what’s the biggest things they can do to drive success, and drive product, is besides building great product, is hire great people. So something we all can work on every single day. But anyways, we’ll get off this soapbox for a minute here. And let’s just say-
Patrick Moorhead: I don’t know if it’s a soapbox. Hopefully people can get some inspiration out of it. I’ve been really impressed at your leadership skill growth. It’s just amazing. It’s funny. I’m this old mid-fifties guy, and you’re this young early forties guy. Through life experiences, you just get better at it. I can tell you that I’m much wiser, and hopefully better at my stage in life. But man, you’re just on a frickin rocket ship on this stuff, and it’s really impressive. It’s fun. It’s fun to see.
Daniel Newman: Thanks buddy. I really do appreciate that. So listen, we’ve got a great show. It’s the beginning of the earnings cycle. And Pat, you and I always have to do this quick disclaim for everybody out there. We aren’t equities guys. We’re not setting price targets. We don’t pretend to be when we go on TV. And we do. We talk about the tech. We talk about the market. We talk about the influence, but we don’t make buy ratings. We don’t do sell ratings. We don’t set price targets, but we are here to talk about what we see in these earnings, what we think it means from a standpoint of what these companies are doing, the products they’re building, the impact of these products. So we’re going to hit that today. We’re going to hit that for IBM, and Google, ServiceNow, SAP. And of course, we love rumors. So we’re going to also talk about a couple of different rumors about a new NVIDIA chip in China.
They’re going to try to figure out a way around all these chip controls, and what a huge market that is, and we’ll talk about that. We’re also going to talk about some more Apple nonsense. Apple still continues to be pumping out rumors that it can build a 5G modem. I don’t know about you, Pat. I struggle to believe it. It hasn’t panned out in the past. Anyways, maybe it does, maybe it will, maybe it won’t, but let’s get the party started right now. Oh. And by the way, my disclaimer about our disclaimer about equities wasn’t clear, not financial advice. I feel like I don’t even need to do the whole disclaimer. Guys, don’t do anything with your portfolio based on anything we say here. Please talk to a professional if you think you want to buy stock, or do anything. We are tech guys. We are all about the technology. Pat, let’s kick off. SAP once again doing its thing. How did it pan out for them?
Patrick Moorhead: Yeah. I feel like they absolutely crushed it. I gave on X, I said a solid quarter, but the more I dug in, and the conversations I had with the folks in IR at the company, the better it looked, and the numbers speak for themselves. And listen, compare it to some overall company growth rates by the Mag Seven, 10% might not seem like something that gets you excited, but what I think people should get excited about is the growth in Cloud, and whether it’s Cloud Revenue, Cloud ERP, Cloud Backlog, Non-IFRS, which is Non-GAAP EPS, just up, up, up. And the star of the show, even free cash flow know, 114% improvement. On EPS, it was up 59%, right? And then on the Revenue side, and Cloud, you’re looking between 25 and 33% depending on which number you go into.
And why is Cloud such a big deal? Well, there’s two reasons. First of all, the big SAP growth comes from when its clients move from the old bits, to the new bits. And there’s a couple of different implementations on it. It’s a hybrid multicloud capability. But the other key element there is you have to do Cloud to do Generative AI, and customers are absolutely moving. I remember when Christian Klein, when he started the numbers, and the 2024 estimates that he gave, people really didn’t fully buy in, or investors really didn’t buy in. But as we see right now, they had a 7% stock bump by the way, that’s been very durable since their earnings came out. They had this initial pop, and they’ve kept it.
Investors are starting to believe. One thing that the street liked was an increase in the amount of job cuts. Let’s just be fully transparent here. The initial number was 8,000, and it got moved to 10,000. So a 25% bump in the amount of job cuts. And by the way, when Christian peeled that onion back, it wasn’t that those people aren’t going to be backfilled. The key message here is getting the right people doing things that matter. I’m sure there are going to be some efficiencies from Generative AI, and AI internal there, but I like the way that they’re playing this. So great job Christian and team. And by the way, if you go and look at the annual, that stock, SAP is up 60% in the past year. That is absolutely astounding, and I dial back. When Christian first started, people were not viewing SAP as a serious next generation technology company.
And that doesn’t mean it’s not critical, because it is, more factories, more businesses. It is your ERP system goes down, or your supply chain system goes down, or even your HCM system goes down, well actually HCM can go down, but you got to make sure people get paid. But ERP goes down, you’re pretty much dead in the water. So congrats to the entire team. More people are becoming believers. My final comment for 2025, the company increased what it calls its ambition by 2%. They increased 2025 profit by 2 percentage points, in addition to reiterating their 2024 outlook.
Daniel Newman: Yeah. Look, Pat, you hit a lot of the important data on the head. I want to double click a minute on the restructuring, and that’s the word that they’re using. But let’s be very clear about what that is. That was a turnover. We are in an inflection point where you actually, if you’re evaluating a company, and they aren’t making some pretty fundamental changes in their personnel right now, they’re probably going to be falling behind substantially. The talent that’s going to be required for this next iteration of transformation in the AI era is going to be different. And I’ve talked a lot over the last, I don’t know, 100 podcasts about this idea of prune to grow. And I’m going to continue to reiterate this idea of prune to grow. During this era, companies are looking for efficiencies. Guys, the economy’s not that good.
It’s just not. We are in a very interesting moment. We’ve got AI as a tailwind for the tech industry, but it’s only really helped a small number of companies. We are looking for this digestion period to move into something more substantial, more palpable, that is going to impact more companies, more industries. And by the way, we’ll release some data on that at Futurum Group really, really soon when we put out our new chipset data. And ultimately, these are smart plays. You’ve got to get to the right size, and then you add back very strategically. But the market is tough. The actual number of jobs in the Silicon Valley right now for technical roles in these big tech companies is back to pre-COVID levels. So we had that huge spike, and we talked about all the hiring. It’s back to. So we’ve added all this earnings growth, all this revenue growth, and then companies found out they didn’t need as many people to do it.
And I know it’s an unpopular sentiment, and when I say this, people are going to be like, “Oh. You don’t care, and you don’t want people.” It’s like, “No. It’s just that companies came to realize Elon Musk when he did this, and everybody can hate X, but X has been pretty successful, and he did it with 80% less people.” Now is that the norm? Probably not. But most companies, whether it’s been the IBM best practice of the longest time, of that 10% of the bottom get cut every year is companies need to prune to grow. It’s good, what we talked about at the beginning, the talent, the best 11 on the field. The only other comment I’m going to make about SAP is look, Cloud growth is there.
They’re growing in the area that they said they would grow. And they’ve got the Cloud backlog. They’ve got the Cloud growth. Customers are moving over, and they’ve done a pretty good job of being customer friendly, not really upsetting the apple cart too much, but at the same time making sure that their best features, their Generative AI features are dependent upon the utilization of their product in the Cloud, and not allowing people to customize their prem-based instance of SAP to death, which a lot of companies will do. They’re still running 10 plus year old SAP instances. So that update is going to be good. And it’s a big opportunity. It’s a big opportunity for SAP. It’s been a big opportunity for its competition, Pat. So overall a good quarter for the company. You want to bounce over for a minute, talk a little bit of Google?
Patrick Moorhead: Yeah. Let’s do that man. What happened?
Daniel Newman: So yeah. I love that. I love that. So look, the market for whatever reason is selling off tech right now. So it’s one of those where the numbers are good, but the reaction wasn’t particularly good. But all of tech is-
Patrick Moorhead: I don’t know. SAP did pretty well.
Daniel Newman: Actually, it’s a great, great call out Pat is that SAP did well, and IBM did well, and we’ll talk about that. But it’s these older enterprise –
Patrick Moorhead: Mag Seven.
Daniel Newman: … tech value companies are getting a bit of a tailwind right now, and the Mag Seven companies, we’ve seen NVIDIA on a two week, three week straight downturn. Google put out good numbers, downturn, and it doesn’t entirely make sense. But you also have to remember what a run up that we’ve had. And there’s been a lot of sell the news, but if we want to just stick to the we want to try to not guesstimate why the market does what the market does. Gosh. There is some crazy political things going on right now. We’ve got a lot of uncertainty for the White House. We’ve got a lot of uncertainty about legislation, law, policy, inflation, interest rates.
There’s a lot of things that impact the market other than just the earnings themselves. So if you want to just look at the earnings, look, good growth on the revenue, strength in net income. It was up 28% on net income. You’ve got YouTube revenue up, but it didn’t hit the mark. But Pat, this is where I’d like to double click. Cloud revenue, 28.8% growth, they’re killing it. They’re absolutely killing it over at Google in the Cloud. They’ve completely been reborn in the era of Generative AI. Google had that. We talked about it for the longest time with the AI, and data, and ML capabilities that they’ve had out the gates. It was that moment they needed to reboot. They’ve won a lot of unicorn customers. They got a lot of the big customers using their parts and pieces of their platform.
By the way, something you and I want to spend some time better understanding is how every Cloud provider has every unicorn, because I think multicloud’s a real thing. And AI has actually accelerated the move to multicloud, and that’s been a great thing for Google because of its strength in AI. And now they’re not only growing really fast Pat, but they’re really profitable. They delivered a billion dollars of bottom line profit to the company, which two years ago, they weren’t delivering anything to the bottom line. It was one of those things where quarter after quarter, Pat, you and I kept saying, “The good idea, they got some good revenue, but are they ever going to make money for the company,” and now they’re making money. So they’ve got innovative products. They’ve got a good growth of customers. They’ve got strength in Cloud. I want to leave a little oxygen in this one for you. The only thing I want to kick back about Google that’s interesting is the fundamental technology that’s going to power Google between the TPUs, and the actual technology on the silicon side, and the technology for search itself. Are you in here twice? Am I seeing you twice?
Patrick Moorhead: Yeah. I got no idea why.
Daniel Newman: That’s pretty cool.
Patrick Moorhead: Just ignore it.
Daniel Newman: Okay. Cool.
Patrick Moorhead: This has never happened before. My browser decided it wanted to update.
Daniel Newman: Great.
Patrick Moorhead: That is amazing.
Daniel Newman: You look good.
Patrick Moorhead: Thank you Microsoft Edge. I do appreciate that.
Daniel Newman: Well, you got to keep you secure. No BSOD today. So what I was getting at though is the fundamental technology. I think you maybe heard. We didn’t have it on the docket this week, and we probably should at some point is this new SearchGPT product is the whole search business is just ripe for disruption. And we thought this when this whole Bing thing, and OpenAI, and ChatGPT came out, and it didn’t really move the market. So there’s this really strong fundamental pivot going on that is the search business, which is the core business of Google, which is super important. Is it safe?
And I’ve been saying for a while. They’re changing the business. They’re moving to Generative. The market and economic models are so different. I do think there’s going to be a lot of thought about that, because Alphabet Google’s wellbeing. So it got its Cloud stuff together. It’s got really good technology, and the TPU, and its generative tools to build capabilities. It’s had some questions around some of its GenAI product, throughout the launch periods of time, but it continued to get better. And that’s showing up in the numbers, but what the future of search looks like, that’s an interesting discussion, Pat, but let’s maybe have that another day.
Patrick Moorhead: Yeah. So sorry for the technical glitch there, but yeah. To me, the big story was Google Cloud, and how it’s doing. So I completely agree with you Dan, and quite frankly, I don’t really care a lot about the ad business, or the YouTube business, or anything like that, because it really doesn’t relate to what I do for a living. I think Google has this immense opportunity even in the future to move beyond some of the whales that they bring in. And that’s the seminal challenge for the company there is most of their revenue is driven by very large SaaS companies, and who don’t do their own infrastructure. And that doesn’t mean Google doesn’t get what I would consider classic enterprise, that just get less than AWS, and what Azure get. I do think, and this is going back three or four years, if you remember, Google’s Land and Expand was all about data. Right?
This is before the Generative AI craze. And they had some of the best data management tool. Just even Spanner and stuff like that was really world-class. And AWS was really the machine learning darling, and Azure, heavy duty PaaS, and a lot of SaaS. They’re just starting to, in my humble opinion, get super aggressive on IaaS. But now that we’re in this age of Generative AI, even though they had some major stumbles, Bard one, wow, Bard 2, wow, Gemini 1. And most of those were consumer punches in the face, and controversial from that point of view. But it bleeds over into the Google Cloud part. And they’ve done what I think is a very fine job. If you look at Vertex AI, Vertex AI to me is one of the simplest to understand, and what I hear from enterprises, one of the simplest to operate.
That doesn’t mean that Azure AI and Bedrock are not fine products, but that’s the feedback that I’ve been getting. I really do think at some point the TPU will show to be an incredible investment. Let’s just say that a TPU on a per token basis is 1/2 as expensive as NVIDIA. Think about the cost savings that you can put in there at the potential advantage, at a minimum on a cost basis, even if you look at Google SaaS versus Microsoft SaaS products and product lines there. And it also to me, if done right helps solve their potential the doom of Google search declining, which is really the funnel for most of all of their profit dollars, maybe with the exception of YouTube, but yeah. The risk, it’s so funny. Initially when these GenAI tools came out, they were so bad, and you had to check every single source to see if it was accurate.
If you wanted it to help you do a week in Spain for $200 a day, it was amazing. But to do things like even financial analysis, and even Perplexity, and I forget.
Maybe you, or maybe Ben Baharin, I forget who first started talking to me about that. I don’t start any of my searches Dan on Google search or Bing. I want to go right to the source down my type of searches. I’m not looking for a website typically. For simple queries like when was somebody born, or how old are they, I’ll stick with Bing or Google. But for anything, God, 99 out of 100 searches right now are on Perplexity, and yeah. I am interested to see this new ChatGPT search capability, but I think it could start to get very risky for Google. And it’s funny. When you are the dominant player in anything, you’re going to have something out there that is able to do better than you for many reasons. First of all, there’s no legacy with the GAI, Generative AI search. The second thing is you don’t necessarily need to make money. What did people say? How much money was OpenAI going to lose this quarter? $5 billion?
Daniel Newman: I think it’s the year, but yeah. It’s a lot.
Patrick Moorhead: For the year. So you don’t even have to make money. You can lose a boatload of money, where Google search, that is where most of their profit dollars are coming from. And the other thing, and this is a subtle thing, but Dan, I’m a product guy, I can’t help myself, is it’s also the implementation. There is not a specific application. As an example for iOS, for Gemini, Google Gemini, there is a Google app that you have to pivot, or press a button to get to Gemini. And I am aware that you can do a Google search, and sometimes it will leverage Gemini for one of these snapshots, but they’re not even anywhere nearly as good as that. So hopefully those were some insights and adders to what Dan had been talking about.
Daniel Newman: Yeah. That was quite a bit actually. So we’ve got a lot left to cover, and we got to move quickly. Pat, let’s talk about NVIDIA B20.
Patrick Moorhead: Yeah. We don’t typically talk about rumors unless they go into the talk track stuff we’ve talked about before. But a lot of things happened over the last couple of weeks. I did two broadcast TV appearances to talk through NVIDIA, and things like China, but if you recall, there were some comments that Biden made, and Trump made about Taiwan, and that sent a lot of the stocks crashing that were related to TSMC. TSMC came out with just an amazing earnings report that we covered on the last pod, but here we are. The State Department has put export controls, this was about 18 months ago, a decree that’s saying, “Hey. If your GPU density, performance density, and total performance is in with a certain matrix, you have to ask for permission to be able to sell it. Hey. If it’s in the green, you don’t need to ask us. If it’s in the red, which is called the License Zone NAC-Ineligible, don’t even try. Don’t do this.”
And there were rumors that NVIDIA was doing this on a prior series, which I wrote an analysis on, that takes you through all the limit, and the process that the Commerce Department goes through, but net net the rumor is a cut down Blackwell 200, a B200 called the B20 that fits into this green or yellow area where NVIDIA would need permission to sell that inside of China. So a lot of different conversations going on around there. I believe this is likely true, and I don’t believe that NVIDIA is trying to skirt some export law out there. They’re a smart company. They’re not dumb. They’re not going to try to skirt this stuff. Now there’s a lot of stuff coming in through the back door. I’ve made this comment. H100 is about the size of a carton of cigarettes, and you can very much easily bring that into to China through about a zillion different ways. Again, NVIDIA is not condoning this, but there’s no way to phone home to know that it’s being used in China. So I think it would be a positive sign for NVIDIA to be able to do that. Keeps NVIDIA still in the game in China, because the last thing you want is the indigenous companies like Huawei who has a capable accelerator out there. And this, by the way, none of this is unique to NVIDIA. AMD and Intel have to abide by all of these rules.
Daniel Newman: Yeah. Pat, China’s a massive market. Every one of these companies would be foolish to not be thinking about how to build a product to support the interests of Chinese companies that want to benefit from AI. It’s a fine line, because it’s like not every company in the US is affiliated with our government, and not every business in China is affiliated with the Chinese National or Communist Party that runs the country. And the reason I point that out is because I think we conflate those things sometimes. The controls have to do largely with defense-related items, where they don’t want them to get the most powerful compute capabilities that could be used in some way, both for actual defense and military activities, as well as what I would call hacking, and cyber, and other things that powerful AI chips could do to create chaos. Having said that, there’s businesses in China like there are here in the United States that are banks, that are healthcare organizations, that are manufacturing, that want to build next generation technologies with AI, and they need GPUs to do it. And not having access to the China market is an incredible miss for any of these companies. And of course, NVIDIA with its current positioning wants to get in, seed the market, win customers, get them on NIMs, get them on CUDA, do it now. Seriously, do it now though-
Patrick Moorhead: No. I’m smiling, because that’s a really, really good point.
Daniel Newman: … while it’s red-hot. Once they’re in, what we do know is once this market has been seeded, the unseeding, in our data showing almost 93% enterprise GPUs are NVIDIA. And the bottom line is that if NVIDIA doesn’t mess up, no one’s going to leave the platform. They’re going to keep writing code to NVIDIA hardware. And literally at this point, if NVIDIA doesn’t mess up, and now can seed one of the other biggest economies in the world, it just puts them in the driver’s seat for the long term. And by the way, that leaves Intel, AMD, all these companies building accelerators, the Cloud instances, about 7% of the market to go fight after. Now the market will get bigger, but everything else is going to be really hard work. You did a good job on Yahoo Finance, Pat, when you went on, and talked about this. I thought it was a good overall perspective, but that’s mine. Got to go get that market. Foolish not to. And to your point, one other thing is export controls aren’t stopping gray market. Never have, never will. Just being candid.
Patrick Moorhead: Dude, I remember I was at AMD in 2001. I know we’ve got 20 minutes and 3 topics, but there were export controls into Iran, and there was a picture on the front of the USA Today Business, and in the background was an AMD chip in a box, a bunch of processors in a box that were basically banned from Iran.
Daniel Newman: Oh. Yeah. This is the thing. It just is what it is. You would think with things like blockchain, and other technologies, this stuff could be tracked. But I also have said to a certain extent in history, Pat, this isn’t a weird conspiracy theory or anything, but I just don’t know that people want to. It’s like we don’t really need cash anymore, but I think there’s just these some odd reasons that we actually want to have the ability to buy things, and have no one know about them. It’s the way the world goes. Right. All right. So let’s move on to IBM. Pat, you and I had the chance to talk to CFO Jim Kavanaugh on Earnings Day. A couple of quick comments on his comments was, Jim is really been steadfast with us. We talk pretty much every quarter with him about the company’s incredible operational excellence, and the stock really did run on the news, and Pat 2% growth.
So it’s like it’s not the growth. This isn’t like some huge growth number, but when you’re talking about really excellent management of a business, again, another company that has been very cautious about hiring, has been consistent with expense management, is pumping out cash flow. I think it was record cash flow, free cash flow, and doing it all the while building some interesting pivots, hybrid Cloud AI, hybrid Cloud AI. We’ve been saying this so much for so long. I know I feel like a broken record, but it is what it is. And then you look at the business overall beyond, software revenue, 7%, consulting revenue down infrastructure revenue, up 1% with a surprising outperform by Z. But the margin, the operating margin, the cash flow, all really, really solid. Pat, the highlight for me is the $2 billion Generative AI business.
Now it’s about 3/4 of it running through consulting, 25% of it running through software. I gave some feedback. I’ll continue to give the feedback to the market that I think it’s a little hard to discern their AI impact in the numbers. You’ve got all these different categories that are showing single digit growth, and up and down. It’s consulting is making up most of the Gen AI, but the revenue is down, and then software revenue’s up, but only 7%. And you’ve got this, but they’ve doubled, doubled, doubled, doubled. They’ve done the Futurum thing with Generative AI every quarter. They’re pushing forward. Now they’ve got a $2 billion a year run rate on Generative. They had the first enterprise platform in Watsonx, very powerful. And I think that’s the big story for me is they’re hitting it. They’re one of the companies that’s actually delivering through consulting and software meaningful implementations into industry of AI.
And I give them a lot of credit for that. I’ll keep beating the drum. I would like to see it grow faster. I can’t look at the situation, and be like, “God. You’ve added $2 billion around this, but yet you’re only growing 2%.” But having said that, this is a company that has a complicated distributed business, with everything from transaction processing, to mainframes, to consulting, to IoT, and automation software. And this AI stuff’s peppered and sprinkled throughout it. But Pat, you have a business that pays a dividend, puts off a ton of cash, is growing albeit slowly, it’s a good, especially in an area when you’re seeing more rotation to value. It’s a good combination, and the market’s rewarding it.
Patrick Moorhead: Confidence is growing in the company, and people aren’t looking at IBM for revenue growth. Right? That’s not, and therefore, if you’re not trying to be in 25% growth every quarter, it’s all about profitability. And my gosh. The ultimate arbiter of profitability and financial management is cash. And the cash, the cash they are generating is absolutely bonkers. I think it’s the highest FCF they’ve had in a decade. It’s hard with some of the spinoffs to get that number exact, but it’s super impressive. The other thing, it’s funny. While some people don’t like to talk about infrastructure, infrastructure is sexy. For Z to be up, with a platform that’s been out there for that many years, and is absolutely astonishing. And one thing by the way that we saw the OpenShift numbers Dan that were super impressive, what the company doesn’t talk about is OpenShift and Z. And I have this hunch that that is a very impressive number. And what I really like about that is it probably includes Services. It includes Z, which is super high margin, and OpenShift, which is a super high margin, and it’s Cloud, Cloud on the mainframe baby, and containers.
Daniel Newman: By the way, we need to do a whole nother time to explain how that can work, and all the technology from a security standpoint, that enables a mainframe in the Cloud to have a relationship. With everything, with CrowdStrike and Microsoft, there was a lot of proud mainframers going last week. Because there’d be a lot of applications, and a lot of transactions that could have happened that, sorry. I didn’t mean to butt in on you, Pat, but I just mean you make a really good point.
Patrick Moorhead: No. I was actually done. So you didn’t interrupt me at all.
Daniel Newman: Great.
Patrick Moorhead: Anyways, by the way, looking at IBM stock over the past year is up 30, 35%. And isn’t it interesting how there were those wave one pops from Generative AI, and the Mag Seven, and then now we have a lot of companies, a lot of history, like IBM and SAP moving up there. I think that’s pretty cool.
Daniel Newman: Well, look, we do need to see some rotation into small caps, into value. You can’t build an entire market on 7 stocks. You just can’t, or 10. It doesn’t work.
Patrick Moorhead: We’re trying hard.
Daniel Newman: The house of cards, well, it’s safe. It’s been safe. It’s been safe bet. And I don’t think you and I, we don’t give financial advice. If we did, I don’t think we could ever say, “Don’t invest in NVIDIA.” There’s a lot of reasons to. Having said that, there are some important considerations for people that need to look more broadly at where AI and value is going to be created. We’ll keep talking about that Pat, but I got 14 minutes, 15% battery life, no power. So we’re going to charge on through this. We got 2 more topics. This one’s a good one, Pat. I tweeted something about it. I couldn’t help myself. I saw. I think another big rumor busted out this week. Came out on Apple Insider, CNET. One of the big Apple Insider rumor starters said, “It’s happening. It’s final. Qualcomm is out at Apple. Apple’s done it. They’ve built the most incredible 5G RF system, and you’re going to see it in their next generation of phone. Farewell Cristiano, Akash, team.” What do you think, Pat?
Patrick Moorhead: I was going to wonder if you were taking my topic here.
Daniel Newman: No. I don’t ever do that. I’m only-
Patrick Moorhead: Listen, listen this is the fifth rumor I think of Apple taking out Qualcomm. If you recall, Apple tried to put Qualcomm out of business by not paying them for their intellectual property. They had pulled in Intel as their modem provider for 4G LTE modems, and the chaos that ensued. When you don’t pay a company like Qualcomm, and you’re trying to drive them out of business like Apple tries to do with its suppliers, it’s very hard on a company. They had to do layoffs. Their stock crumbled. They had to get out of markets like the data center. It was total chaos. And then once it gets to court, I think it was the second day of the trial, and I think it was San Diego, some real damning evidence came out about Apple literally, and its strategy to destroy Qualcomm. A day later, Qualcomm, and Apple wants to settle with Qualcomm. They do a multi-year licensing agreement, and a technology agreement. They recognize that Intel was not ready with their 5G modems, and Intel decides to get out of that market. And I think maybe Intel decided to sell that maybe a week beforehand, but they were all very similar.
And then it seems like every year. By the way, this is 2019 that Apple bought Intel’s assets for their modem. And every year, “It’s coming. It’s coming. Qualcomm’s toast, toast,” and then they do an IP agreement, and then they do another modem agreement. And I think, by the way, every successive year that Apple fails to get out of modem, their chances likely go up in the ability to pull it off. The hard part that Apple’s having, from what I’m hearing from thank you Apple employees, is the integration of the IP into the SOC, right? Apple uses what’s called a thin modem. It’s not integrated into the SOC. It’s a separate chip, but integrating that under the SOC, and getting the power right, and how to get work effectively. By the way, Intel never figured out how to do that either. They couldn’t pull it off either. Only Qualcomm and I think MediaTek has been able to do this. So net net, another day, another rumor. My guess is by the way, remember I used to be a supplier to Apple. Every time big negotiations come up, Apple will leak a rumor, typically, there are supply chain folks like this to get the supplier to lower their prices. Anyways, Qualcomm hit on the stock price. These silly gullible investors, we’ll see.
Daniel Newman: They are silly, and they are gullible, and they don’t see the big picture. And there’s a few different forces at play, and we’ll talk about this next week when Qualcomm reports. But of course, TSMC raising prices is another rumor that’s floating out there. And that rumor of those price increases are certainly going to hit bottom lines, and forecast guidances of all the companies that potentially have big. This is the reason that it’s a problem that we’re so dependent on TSMC. There is no competition right now. You talk about NVIDIA not having a natural predator, neither just TSMC. Now Intel’s doing its damnedest. Samsung has, what’s that?
Patrick Moorhead: I love that, natural predator.
Daniel Newman: I know. I know.
Patrick Moorhead: Did you create that-
Daniel Newman: I did. By the way, in fairness, I actually was quoted in Fortune talking about that a while ago. And I’ve used it on TV a bunch of times. It’s my little thing. There’s no natural predator, and we actually need it in the market. We need competition to drive it. But that’s a sidebar from the Apple rumor. Here’s the thing I’ll say is everybody, including Qualcomm knows Apple will do this. It’s not never. It’s just when, and if it’s real, and it’s all nonsense, because Apple has been saying it. Qualcomm’s already been readjusting and diversifying its business for the expectation. Apple’s not a big moneymaker, or a big dependency anymore. And if you actually hear, it’s low single digit impact on the company, and frankly, to some extent, and I know this is cynical of me to say Pat, but when they finally are done, really done, you know that part in the meetings we’re talking about where you look at some of your customers, and you’re like, “… them.” Honestly, and I can’t believe I said that on the record, but where all they do is soak you, that relationship is not symmetrical. It’s of course great to say, “I’m a supplier to Apple,” but all they’ve tried to do is destroy Qualcomm for the better part of 10 years now.
Patrick Moorhead: I know. It’s crazy.
Daniel Newman: And what I’m saying is this is not a partnership. This is not symmetrical. This is one of convenience, and it’s good for both companies, and the size of the relationship’s big enough that I understand why Cristiano does it. And the technology is good enough that I understand why Tim does it. But at some point, you just have to recognize where your time goes. And I think when they get that time back, and they get those resources back, there’s a good chance they could put it towards something more valuable. They could actually end up driving company growth elsewhere.
Patrick Moorhead: Yeah. Qualcomm if Apple thinks they can do it, they will destroy you. Hey. Can I put an adder on this? Do you mind?
Daniel Newman: Yeah. I’m sorry if I by the way, added. I think I’ve said “COVID, conspiracy theory,” and “…” on this podcast. This one may get no views. I’m just being candid. We may be censored like crazy, but I don’t know. I just want everyone out there, I want them to get to know me.
Patrick Moorhead: Fine. … it. I don’t care. Let’s move forward.
Daniel Newman: All right. What’s your adder? What’s your adder?
Patrick Moorhead: So IEC came out with some interesting information, and for the first time in I think four years, Apple was booted out of the top five in China, and oh, the top six.
Daniel Newman: No. I think they’re six. I was telling you. I think they’re six now.
Patrick Moorhead: Yeah, booted. Booted out of the top five, which would make them number six. Thanks Dan.
Daniel Newman: I was just helping, math.
Patrick Moorhead: No. I appreciate that. And by the way, I think this is a positive sign for Qualcomm, and you might say, “Well wait a second. Aren’t Qualcomm modems and some RF inside of Apple?” Yes. But on a per unit basis, they make more on the SOC and the mode, which includes the digital part of the modem, and then RF. They made a lot. They make a lot more profit dollars on that, and ASPs went up. And if ASPs goes up, that means that there’s going to be more Qualcomm, versus let’s say a MediaTek. So we’re going to have to wait for the Qualcomm earnings report, but I think could be a very positive sign for Qualcomm. We’ll have to balance that against costs going up for TSMC, right? But anyways, okay. Sorry. Sorry for that.
Daniel Newman: No. Last topic. Calling my own number, one more earnings, a pretty big banger, and the market and the street liked it, and that was ServiceNow. Had the chance to talk to CEO Bill McDermott. I usually have that wonderful opportunity on Earnings Day. He was fired up. I don’t know if you’ve ever paid any attention to Bill. He’s always pretty fired up. He’s a charismatic one, and he’s excited. And look, that company’s been banging on the drum of Generative AI with Now Assist. It’s been talking about its premium customers upgrading. It’s been giving lots of numbers. And what I probably love the most about this earnings, besides the fact that it beat on revenue, it beat on earnings, it delivered a strong guide, it showed a ton of proof points was the announcement and the focus, when something that’s just not been discussed a lot, Pat and that it’s RaptorDB, and what it is doing there.
Bill has been talking about the let’s just talk it about, you could use the word elimination. I might use the word in his spirit, evisceration of a whole lot of software that companies use, to in turning a bunch of really big important software platforms. I won’t name names. You can figure it out yourself, and turning them into databases for a ServiceNow to run on. And the whole idea of what they’re doing with RaptorDB is really a rapid ingestion platform, that can take private, public data sets, merge them together, create immediate role and industry-based dashboards, using custom AI LLMs that are being built by ServiceNow, to basically deliver value. So when you hear the a16zs, and the Sequoias, and these companies coming out saying, “Nobody’s going to make money on AI,” I think ServiceNow is like, “Hold on a minute here. We have a platform that you can buy right now, that you can ingest all your data, can remove lots of the complexity.”
Now again, I’m excited to talk to some of these customers. That’s the plan. I’m excited for Signal65 Economics to do some tearing down of the actual customer time to value, and the economic validation of this within different industries. But they’re building these vertical-based, LLM-capable, Generative AI tools, that can give dashboards across industries, and Pat, they can make it consumable right now. And I’m pretty fired up about this in concept. Again, I want to see it work. I want to talk to customers. I want to hear proof points. But what they’re doing is they’re basically saying, “Maybe that’s everyone else’s problem, that they can’t get value, and can’t start delivering revenue.” But I’ve talked about these multi-network effects, First network being the OEMs, and these servers. Of course the Zero network is your chip makers, your chip manufacturers, your IP companies, and you got your server, and infrastructure companies.
Then you have your ISVs, and this is where it’s all broken down for Generative AI. Everyone’s like, “Well, is there anyone actually consuming software, using it, and getting value?” Well, ServiceNow is saying, “We’ve got that. We make it available. We can bring it to industry, and you can start to deliver value and efficiency in your business immediately.” That was the hidden thing. You and I, think both called it out at the event. They didn’t spend a lot of time talking about it, but overall, they did Pat. So it was a strong quarter, lots of growth, good guide. They did have a transition of their president out. There’s a lot of speculation there. I’m going to hold on that for now. They got a new chief product officer they’re bringing in, but Pat, look, what that guy does, what Bill and his team do is they tend to hit their numbers, and beat their numbers, and did it once again.
Patrick Moorhead: Yeah. This is a company that is on the rise. They’re crushing it, and why are they crushing it, right? First of all, they make in their words, or paraphrasing it, bad software work well, right? Whether it’s an aged ERP, or SCM, or system that has a UI, that doesn’t work very well. And I’m going to put FSA, and IT operations on the side here, but that’s one play. But the big play here with Generative AI is to make things work better together, and actually have a transaction system to make things happen between the systems of record. And they are good at this. They’ve shown. I don’t know if anybody uses the bare Workday UI. They typically put ServiceNow in front of it, but with GAI, it’s connecting all those together. And Dan, you said it. Data, there are a lot of questions I had about its data strategy, and the company is bringing out more information about its unique database, vector database capabilities, to be able to do this. I also love that it has its own infrastructure. It might be able to connect to the Cloud, but it is all hybrid on-prem Cloud.
Daniel Newman: A lot of Dell over there, huh?
Patrick Moorhead: A lot of Dell over there. And that is money savings that just passes through. You are not paying the 1, 2, 3X multiple for public Cloud. So pretty exciting. I think it was a beat, beat, beat, beat, but there were some things like subscription forecasts that people were looking at. And also the stock has been high-flying for so long. It’s any type of a burp or something like that gets people concerned. Stocks up 45% on the year, and it’s just absolutely crushing it.
Daniel Newman: Don’t you wish we could buy and invest in the companies that we tend to see as good companies? I really wish I could.
Patrick Moorhead: Yeah. Totally.
Daniel Newman: Our money people can do it in a passive way, but we don’t get to jump in like we should. And just an adder, we got to wrap up. I’m at 5% here. This computer is old. It’s running battery quickly, but the SaaS space has been beaten up. ServiceNow has of course outperformed, because they’ve just outperformed. But software is where it’s at. Software is where it’s going to be at with AI. I’m just being really clear. The infrastructure and the chips they’ve gotten their bit of a moment.
Patrick Moorhead: Exactly.
Daniel Newman: Someone has to start using, consuming and implementing, and this stuff has to land in industry. The entire tech industry needs to come together, and start to show value with this, or the naysayers, pundits, bears, shorts will come out guns blazing. This is not VR guys. This is not VR or XR. Not to say that’s not a thing. It’s just not really a thing. AI is transformational. It is going to change every business. Believe us. Don’t believe us. I don’t care. But I promise you I’m right, and if you don’t believe me, you are wrong. Pat, it’s been a great show. Excited to get on with you on Friday. Always a great way to start my day.
Patrick Moorhead: Same bestie.
Daniel Newman: We know you’re moving today. I know you’re moving today, and this isn’t something you really want to talk about, but I am wishing you the best on your moving day. I’ll say a little prayer that-
Patrick Moorhead: Thank you.
Daniel Newman: … everything gets done. The place is spic, and span, and clean, and welcome home, man. I know you’ve been out of your house for quite a while. So make it a great one. Crush it today. I promise you. I’ll do good stuff here. I’ll represent well for the JVs we have together. Have a great day everyone. Thanks for tuning in, being part of our community. We’ll see you all later.
Patrick Moorhead: Bye-Bye.
