Enterprising Insights: – Earnings Season for Enterprise Applications, Episode 34

Hello, everyone. I'm Keith Kirkpatrick, research director with the Futurum Group, and I'd like to welcome you to Enterprising Insights. It's our weekly podcast that explores the latest developments in the enterprise software market and the technologies that underpin these platforms, applications, and tools.

So this week I'd like to talk about several enterprise application vendors that recently released their quarterly earnings over the past couple of weeks, and provide my take on how their results are reflective with some of the larger trends in the marketplace. Then, as always, I'm going to move to my rant or rave segment where I pick one item in the market and I either criticize it or I champion it. So, uh, without further delay, let's get into this topic of the week.

It's earning season for several enterprise application vendors. So first company I wanna talk to you a little bit about is OpenText. Now OpenText is an information management software vendor.

Uh, they actually, uh, recently released their fourth quarter fiscal 2024 and full year results. Um, now they actually, uh, their results actually fell short of analysts, uh, consensus expectations. 37 billion.

Uh, earnings per share, uh, came in at 91 cents. Uh, missing the forecast by, uh, the forecast is $1 and 5 cents per share. So, what's going on here with OpenText?

Well, there's a couple things going on with this company. Uh, first is, of course, they actually have just completed in that quarter the divestiture of A MC. Uh, this is a company that they had acquired, and then they decided that they no longer wanted it.

So, of course, they completed a divestiture in May, 2024 this quarter. Now, the second thing that's going on is they were undergoing a massive restructuring. Uh, so what's, what does that mean?

Well, in layman's terms, it means they're gonna lay off a lot of people. I believe the numbers around 1200 people, and then they were gonna actually hire back 800 employees. But the idea was that they were going to lay off folks that, uh, were doing jobs with that really were not as higher skilled, or did not have the skill sets that matched what, what they really needed, which are people with AI skills.

So, as a result, they're taking a lot of charges there, uh, to complete this, um, those layoffs, you know, in terms of either buyouts or attrition, uh, what have you. Basically, they're taking charges there, and that is one of the main reasons why they actually, um, you know, uh, missed on their EPS number. Now, that being said, it's not all bad news for the company for several reasons.

Number one, the company actually announced a number of key customer wins during the quarter. Uh, they had deals with the California Department of Employment Development, uh, export development, um, bank of Egypt, uh, let's see here, GS one, Australia, Johnson and Johnson, Nestle and Tabula among many others. So that was actually a really good sign that they were able to go out and still actually, uh, you know, get some deals done.

Uh, if you think about what OpenText is doing, they, like a lot of other companies are actually really working on deploying AI throughout their organization, throughout their, uh, software packages, uh, largely around, uh, uh, what is known as their aviator, uh, products. So they're actually incorporating AI into those, uh, which are designed to really help streamline workflows, make it easier for employees and others to work with the data and actually, uh, conduct various tasks, that sort of thing. So, I think the, the real takeaway here is, uh, OpenText, like many, many other companies, they're going through some growing pains in terms of trying to adjust the way they do business.

And by that I'm talking about incorporating ai. Uh, they are trying to really kind of deploy AI throughout their application portfolio to make it easier for companies or for, for their customers, uh, to really leverage the benefits there. So I think that, you know, in terms of what's going on here, um, putting aside any external factors, I think the company itself is, is exhibiting what we, we might expect to see where, um, you know, they're really trying to figure out a way to, to structure the company in such a way that they're able to deliver AI and making sure they have the right skills in place, uh, with their own employees to deliver that to their customers.

So that is OpenText. Now, I'd like to move to another company. Uh, the next company is Twilio.

Now, they actually are an interesting company because they, um, they're largely a, uh, uh, they have really kind of a couple of, uh, key segments. One is their communications business, so things like, you know, delivering messages through things like, uh, SMS, uh, you know, as one of the big part of their business is their communications business. And then of course, the other one is their CDP segment, uh, which is called Segment.

And what they've been doing there is they've really been trying to, uh, incorporate segment throughout the rest of their business. Uh, and why is that? Because as a CDP, that is where they hold all of this company data that really is important in making sure that when you're deploying artificial intelligence, uh, or trying to deliver messaging through text and that sort of thing, that it's relevant and timely, that is the real value that that company has, uh, in terms of delivering, uh, strong customer engagement.

So now this company, Twilio, uh, reported, uh, Q2 to 2024, uh, results. 08 billion, which was good for about a 4% year over year increase. 1 million a year ago.

So that's a pretty, uh, pretty solid number there. Uh, they actually, actually helped, uh, or actually raised their full year guidance to 675 million up from 650 million. So, what's going on with Twilio?

Well, they are really trying to differentiate themselves in the market, uh, because of the fact they have so much data, both, uh, their data that they hold within their segment CDP product, as well as all this data that they have, uh, that's been generated from their communications business. So we're talking about interactions that, uh, span voice, SMS messaging, email, and, uh, you know, other sort of, uh, communication modalities, including things like mobile applications, that sort of thing. So we're, they're really trying to integrate AI across all of those channels to make it easier to engage with customers, make things more relevant and timely.

So, uh, let's talk a little bit about what's going on with Microsoft. So Microsoft, they reported their, uh, fourth quarter fiscal 2024 earnings as well, and they actually reported a 15% increase quarter, uh, from the same quarter the previous year. 7 billion, and their earnings per share number hit $2 and 95 cents a share, uh, which was slightly higher than the consensus estimate of about $2 and 90 cents.

1 billion, which was good for a 16% year over year, uh, increase. And if you think about what a, uh, Microsoft is doing is they are all in on ai. Uh, they're really, you know, leaning into their partnership with open AI and integrating AI across all of its products through copilot, within the office applications, as well as teams.

And, and, you know, even of course, within their Azure business, which is part of their intelligent cloud, uh, segment. 8 billion, which met analysts expectations. But, uh, if you look at what's going on in terms of their intelligent cloud revenue, which includes Azure services, it actually fell short of expectations a little bit.

7 billion. So what's going on there is obviously they're facing a lot of competition from other cloud providers, AWS uh, Google Cloud. Uh, and, and of course, if you think about what's going on, um, you look at external factors in terms of spending, you have a high inflationary period right now.

You have certainly in the market, I'm, I'm recording this today on the 5th of August. And obviously we've seen a very, very strong pullback in terms of, uh, equities in the market. We'll see what happens over the next several days, you know, if the Fed decides to cut rates and response and whatnot.

But clearly, it's, it's a cautionary environment. Uh, one of the other things that is important to note is that, um, Microsoft has been investing so heavily, uh, I think, uh, their CFO noted on their earnings call that they spent $13 billion on CapEx up from 12 billion the prior quarter, noting that most of that spending is going toward ai. So it, it's really creating a ru uh, a challenge for Microsoft in terms of making sure that they're actually able to derive some revenue from all the spending that they are doing on around ai.

Now, I, I certainly believe that, that companies need to continue to invest. If you think of where we're going, AI is not sort of this nice feature to have. It eventually is going to become table stakes for any kind of application.

And it, well, we're gonna get to the point where it's not gonna be thinking about it as a separate thing necessarily, like co-pilot, but it's just going to be embedded throughout, uh, the application, uh, in, in almost like, uh, you're not even gonna know it. I mean, that, that's down the road, but I, but ultimately, the, the point here is that Microsoft is spending heavily and they realize they need to, uh, in order to keep pace with some of the other companies in the market. And I think we're gonna see that continue, not just with them, but others as well.

Now, shifting gears a little bit to another one of, uh, the large SaaS players that reported earnings, uh, ServiceNow. Uh, they actually had a very, very good, uh, second quarter of 2024. Uh, you know, they have really, um, if you look again at what they've done, they've been really leaning heavily into generative AI in terms of deploying it across entire workflows.

And, you know, their generative AI plays really, it's called analysis. And the idea is that, uh, it, it's using AI in very, very specific use cases and workflows that are designed to improve efficiency, you know, enable access to information in a much more seamless way, and of course, remove a lot of the friction involved, uh, with doing repetitive tasks. So if we look at what they've done, uh, the, the really interesting number for ServiceNow is that, uh, the introduction of these generative a AI capabilities within analysis, it's actually doubled the company's net new annual contract value quarter over quarter.

So what we're talking about here is, uh, 11 deals greater than $1 million, uh, in, uh, net new in annual contract value, uh, in the second quarter alone. That's really, really impressive. That's showing that companies are actually starting to buy based on, uh, the promise of the incorporation of AI within software.

Uh, I think, um, you know, it's going to be really interesting to see how this plays out long term in terms of, again, being able to, uh, promise AI as a, you know, a real differentiator, you know, and seeing where that leads eventually, where, as I said, I believe we're gonna get to the point where generative AI is just going to be sort of par for the course. Now, of course, the devil is in the details. How well do your models work?

You know, which use cases are you actually, uh, trying to implement? And then of course, uh, what it really comes down to is the data that, uh, a particular company has and, and, you know, how well do they actually execute on linking the model to the right data sets and making sure that there are guardrails in place so it doesn't hallucinate all of that kind of stuff. But, you know, I, I think the ServiceNow, uh, earnings demonstrate that, you know, the message is getting through to customers or potential customers that, you know, generative AI can deliver value, and it's what they're looking for in terms of their large SaaS platforms.

Uh, I'd also like to talk about Google, uh, or Alphabet, which is the parent company. 7 billion in revenue. Uh, they were particularly strong in search and cloud, and I believe the Google Cloud segment surpassed 10 billion in quarterly revenue for the first time and achieve, uh, $1 billion in operating profit.

Now, of course, if we think about, um, you know, what's going on here with, uh, with Google and ai, all of that kind of stuff, uh, it, it really is all about, uh, leveraging generative AI and or AI in general, uh, to improve the services that they have. Obviously, AI is being used to improve search. It's, it's being used to improve advertising, obviously, which falls into search category to make search more effective, more relevant, more timely.

Um, you know, it obviously impacts the, uh, quality of ad placement algorithms. So, uh, it's clear that it is being used on that front. It's also being used, uh, you know, to, uh, to deliver other services within Alphabet's portfolio.

Uh, you know, certainly using AI to, uh, make it easier to use their productivity package, um, you know, being used within their meat product. All of these things, all these algorithms and, uh, uh, you know, refinement of these algorithms is done to improve engagement, which of course, you know, increases the amount of, uh, activity and usage of the product, which is what everyone wants. So it's, it's clear that it has been a, um, you know, a, a force for driving revenue, even if, you know, organizations themselves haven't fully realized all of these benefits just yet, there's certainly banking on it and certainly are choosing the products that they believe, you know, have the capability to, to deliver AI and its benefits over time.

It might not be right away, but they certainly are banking on the fact that these large platforms are able to do that. Now, part of it, of course, is if you think about a Google or a Microsoft or a ServiceNow or whomever, uh, part of what you're buying is the fact that they are so large, they're going to have that momentum, you know, so as investments are made in the technology, if they don't work as they should, you know, they're gonna be able to refine that over time. And of course, by having such a large base, uh, you know, they're, they're obviously collecting a lot of data that is being used to refine those processes to help make those, uh, algorithms work more effectively.

So I think that's kind of, uh, the key takeaway here is when we think about earnings and everything like that and how AI plays into it, it's really about, you know, again, I, I see it as customers out there are realizing that AI is not going away. They want their platform to be moving ahead, incorporating new features, incorporating new functionality. They, again, may not be necessarily generating a lot of ROI yet.

'cause you might be still in pilot, you might be in sort of a more limited deployment, but they certainly are reaching out and, you know, looking to these large players to provide them with these tools to get them on the road to, uh, to really recognizing some sort of ROI down the line. So, uh, with that, I wanna move to another topic, and this is my ran rave segment, which I do every week. Uh, I actually have a rave this week, so I wanna talk about Atlassian, which, uh, just announced a little bit of, of news through a letter.

Um, this, it was actually a share letter that they, uh, that they released. And basically what they've said is that, you know, they obviously have a, a stated goal of moving, moving all their customers to the cloud. Why?

Because obviously it's more profitable for vendors to deliver, uh, services in the cloud. It's easy to do updates, uh, easy to do maintenance, all of that kind of stuff. We, we certainly know of reasons for that.

But the interesting thing is that they've kind of acknowledged that this cloud first approach they had used with smaller customers, that's great. And that seemed to work pretty well. But for, for larger customers, that wasn't necessarily, uh, realistic for these large on-prem customers that had a much, much more, uh, complex or integrated instances of their software.

So what they've done is they said they have shifted their mindset from just, from being Cloud first to what they say is enterprise first. And what does that entail? Well, that means that they will be working with their customers to move to the cloud over a multi-year period, instead of sort of a, a quick lift and shift.

And some of them may actually wind up using a hybrid approach of having some resources on-prem and some in the cloud. And the idea is that they want to be able to provide their customers with the option to kind of do this over time. And, and to me that's, that's really two things.

One, it is, uh, more realistic in terms of, you know, large enterprises that just, you know, the level of complexity and expense to do a complete lift and shift in one motion just may not be realistic. And the other thing it does is it shows that they're being, uh, very, very customer centric in terms of, in, in terms of acknowledging the challenges that their customers have and are, are, are basically readjusting their messaging, uh, to support their customers. Which I think is, um, you know, it's a novel approach and I think it's, it's one that should be applauded in the market.

But given that, you know, a, a move to the cloud is not simple, it's not just, you know, like flipping a switch for a large organization. So for this, I would like to give that a rave. Alright, well, with that I want to, uh, just say thank everyone for tuning in to Enterprising Insights.

I'll be back again soon with another episode focused in on, on the happenings within the enterprise application market. So be sure to subscribe, rate, and review this podcast on your preferred platform. And I'll see you next time.