For this episode of the Futurum Tech Webcast, I am joined by my colleague, fellow analyst, and founding partner, Daniel Newman, for a conversation about the tech announcements from this past week.
In this episode, we covered:
- Daniel went deep on the recent antitrust landscape, in particular the focus on Apple and Google app stores.
- An overview of Zoom’s acquisition of Five9 and how it will impact the collaboration space.
- What we can learn from SUSE earnings report.
- A quick dive into Intel’s latest earnings report as well as IBM Systems Q2 earnings report.
- A recap of the Temenos earnings report and a look into the rise of in person events as we emerge from the pandemic.
Find the video of our conversation here:
Or grab the audio version here:
Disclaimer: The Futurum Tech Webcast is for information and entertainment purposes only. Over the course of this podcast, 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 do not ask that you treat us as such.
Steven Dickens: Hello and welcome to the Futurum Research Webcast, where we analyze the big tech news of the week and give you the market-making insights behind the headlines. I’m joined by principal analyst, Daniel Newman. Welcome to the show, Dan.
Daniel Newman: Hey Mr. Steven Dickens, how are you doing today?
Steven Dickens: I’m very good. I’m very good. So let’s get the disclaimer out of the way. We’re going to discuss some publicly traded companies on the show today, but really this is for information and entertainment purposes only. We’re not an investment advisory service. We’re not trying to advise you on what securities to buy, and the analyst, employees, and affiliates of Futurum Research may hold some positions in some of the stocks we discuss that you shouldn’t take anything we say as advisory. So we’re going to cover a slightly different format today. We’ve got one big topic, and then we’re going to go through our highs, and lows, and unexpected for the week. So let’s dive straight in, Dan. Let’s get on to big topic, our main dive, antitrust in the app store. You wrote a great piece this week on this topic, sir.
Daniel Newman: Yeah, absolutely. Thanks for kicking me in, Steve. Appreciate the opportunity to have this conversation. This week I published an op-ed and anyone out there is not familiar. I do a lot of op-eds on MarketWatch, and one of the topics that’s probably been plaguing the news more than anything has been, what’s going to happen to big tech? What does the future of big tech look like, and will it be regulated? As a little bit of a backstory, over the past several weeks we’ve seen five new antitrust bills make their way through the House, they’re sitting in the Senate. Made the appointment of a new head of the FTC. She is somebody that has a history, by the way, the youngest at 32 years of age, and has a history of a very strong stance against Amazon, and some of the big tech. Wrote a thesis in the Ivy league. And that kind of reputation was built on that.
We have president Joe Biden wrote an executive order. I think it was about two Fridays ago, published. Maybe it was three. I’m losing time between moving from Chicago to Austin and that. But that had dozens of specific recommendations and advice provided to Congress and policy makers around laws that should be created for anti-trust purposes, as well as things like going back and looking at mergers that have happened in the past. So the long and short is, we have an interest and it seems to be bi-partisan, albeit not for the same reasons, in regulating big tech more closely. So with all this happening there’s a pragmatic and practical look at what parts of big tech should be regulated. And then there’s kind of this sweeping reform, and this idea that many people have that big tech is evil, and needs to be entirely blown up and start over.
My piece this week focused in on an area that I think actually deserves attention. And that’s the app stores. A lot of the regulation of big tech evolves around the idea that companies are big and successful and therefore should be punished. In my mind, being big and successful isn’t punitive in itself. It’s punitive in terms of antitrust, when it really crosses one of two lines. The first line is when a company is designed in such a way that it basically uses its size, its scope, its reach, or its products and services to eliminate smaller companies and even other large companies from competing in a certain space. We’ll call that anti-competitive behavior.
The other side is about consumer harm. And that’s, that companies are using their power and potentially, say, a monopoly, to drive prices to a level where they’re unaffordable, or to take quality out of service in such a way that it would harm those paying for that service but giving no choice. We’ve seen and heard about this with things like our phone companies and cable companies in the past. And that has actually caused for regulation and the breaking up of Ma Bell. If anyone’s old enough to remember that. I’m actually not, but Steven, you might be. Sorry, we have fun here on the Futurum Tech Podcast.
Steven Dickens: It’s close, Dan. It’s close, but I think I might just sneak under that one.
Daniel Newman: Oh, good. You Gen X-ers. Often-
Steven Dickens: It was back in the UK. So we’ve had British Telecom, and unbundling of the last mile, and competition. So I get the dynamic there. I mean, it’s really interesting. We had a conversation whilst, I think, you were drafting that piece for MarketWatch, around some of the options, particularly on the app stores for people. And really some of the economics, and what’s not being told here is, the story around the value that those app stores actually add to the small developer who want to touch a global market. Do you want to touch on that briefly for a second?
Daniel Newman: Yeah. So let’s talk about what’s going on here. The app store and the reason why it deserves and warrants a little bit more attention has a lot to do with competition and choice, and developers, and then these companies, how they are paid. So first and foremost, as a very capitalistic minded person myself, I tend to think that companies that invent great products and services deserve to be rewarded for them. And to some extent deserve the opportunity to benefit in the long-term from their invention. I’ve always been pro-patent, I’ve always been very much pro protecting intellectual property, and things that have been invented and designed that have enabled us to have these things, whether it’s social media, mobile phones and devices, smart autonomous vehicles. I mean, the investment billions that often go into this take decades to realize, and sometimes we want to be able to democratize them for competition’s sake, but when you make it too democratized for competition’s sake, you take all the incentive out of the investment and invention that goes into actually making new products and services.
And by the way, the reason we lead in areas like 5G are because we have companies like Qualcomm that invest billions decades ahead of new technology standards, to make sure that we are on the leading edge when a new standard comes into the marketplace. The app stores are interesting because companies like Apple and Android now, I mean, mobile phones are, they’re not a right, but in many ways the world sees them that way. They are a right. We have the right to have a mobile device. We have the right to have a cell phone. We have a right to have communication and connectivity, but ensure that you really can’t be productive in this world anymore. It would be hard to hold a good paying job. It’s hard to get around anymore. I mean, everything from an airline ticket to a bus pass, you get it on your phone and your mobile device. You want to know what time the train route is on the mobile device. You want to check into your hotel mobile device, you want to pay your bills, pay them on your mobile device, on your banking app.
Apps, apps, apps. Apps rule the world. So I think we’ve kind of come to the point of no return where living life with a checkbook, and carrying your passport and driver’s license, and using physical paper cash. It is the past. And so the app is the future. The developers create these ecosystems, these rich, vibrant ecosystems. In many cases it’s apps that we enjoy personally, whether that’s the Spotify app, or that’s a game that we really enjoy playing. So it could be music, could be the movies like Netflix that we watch. It could be Facebook and Instagram, or Snap, or different apps. It could be a realty app, a car shopping app. All of these are apps that are built, designed to enhance the experience on our mobile devices. And these developers invest this money. And when you develop a great app you can monetize it. And the long and short is that over the course of many years, Apple and Android have become the only two ecosystems. In the US Apple has a slight lead. In the worldwide Android has a lead. But basically, it’s become a toll.
So Steven, I’ll give a metaphor, and I’ll pause here because there’s a lot of inflection here. But essentially, if you develop a great app, say it’s Spotify, something someone understands. By the way, Spotify has had a major legal battle with Apple over the years about how it’s monetized. Right now, the only way that you can enjoy the benefits of Spotify is through downloading it on the app store. And if you want to do a paid version of Spotify, where you pay to get the enhanced service, the only way you could subscribe, you have to pay a toll of 30% to Apple to subscribe to that and then use Spotify on the iPhone. So there is no end around, there is no web experience that you can displace the app with. You have to do it in the app, and Apple won’t let you have any other way around it.
That’s where the antitrust really comes into play here, is that the Android, Android has what’s kind of called as a side load. So remember, basically, Apple is closed to ecosystem. Android is open source and you can side load apps. You can basically use your own code. You can side load an app and you can put it on the device and run it. But you lose all the benefits of the ecosystem. You lose the marketing support. But if you’re a big enough company and you want to go at it yourself, you can build an app and give people the ability to put it on an Android device without the play store. Apple doesn’t give that choice.
Long and short, I was looking at which company is more anti-competitive. In the end it’s very simple in my mind. It’s that one allows you to choose to take the back roads, the other forces you to take the tollway. That’s all it comes down to. The back roads are often slower, they’re lumpy, there’re more potholes, they don’t update it as often, they’re not managed as well. But if you want to take them because you don’t want to pay the expensive tolls that your local municipality has put into place, Apple’s acting is that municipality.
And that is why I dove into this piece that said, this is one real antitrust issue that’s going on right now that needs to be looked at is, we need to give Apple’s developer ecosystem that was making money, developing apps that are making Apple even more awesome and an even more awesome experience, we need to charge less or give them more options. 30% with no options is a huge toll that you could argue borderlines on usury. If a credit card company did that, they’d be out of business.
Steven Dickens: Yeah. And to give some perspective, and to maybe bring it a bit of balance. I mean, there is a real cost in creating a billing engine. There is a real cost in marketing to get your app in front of the same amount of eyeballs that the app store does. So I think you’ve got to look at that. I think your point is, there is value to that, it’s, is the value 30%? And I think that’s the more nuanced conversation that’s not happening. Going back to some of the social media companies. Instagram was a tiny, tiny company when Facebook bought it. I think what was it? Four or five employees?
Daniel Newman: I don’t remember the size, but I remember…
Steven Dickens: I mean the Instagram of today has had significant investment by Facebook and that organization. So spinning it out, and forcing them to divest it, years after they’ve invested millions and millions of dollars in R and D to grow it into the behemoth it is today, that’s where I have a challenge. But we’re going to have to move on here, Dan, unless people are going to be spending an hour with us today.
Daniel Newman: Yeah. I’m going to give you one last thought because I like your closure there. And again, Apple is an example of where it falls into place. Your example of Facebook is a great example of where we cannot give regulators the ability to try to play a fortune teller. They don’t get to decide what a company might become if a big company buys a little company. You should make that decision and regulate when regulation is appropriate. Now, if they got so big, at some point you may have to now regulate them. A final thought is, the easiest way to go onto this is, you do have to, in the market, have some level of choice. That’s all it comes down to. When someone complains about Amazon, the platform, the reason I disagree is because you can go to Amazon, you can go to eBay, you can go to Shopify, you can build e-commerce engine with your own tool or with big commerce. And you can build a tool, build a website, and people can buy right off your site.
If you want to play in the mobile ecosystem, it has come become an oligopoly in the sense, there’s only two to choose from. And among those two, it’s clear there’s become a recognition of how much power they have, and they’ve used that to charge what I think is a very, very high amount without investing much. I don’t think Apple or Google put a ton of investment into their app stores. They certainly don’t help market you. You have to pay if you want to be marketed in their app stores. It’s just another toll. So yes, like when an Amazon invests in the small businesses and then takes a toll on the backend, or takes a fee, I look at that as a circular partnership.
If it’s a one-way street it probably needs to be looked at. Not saying it should be broken up, because to your point, Steven, the experience has been created through the seamless app environment. And the seamless app ecosystem is so good. And this is exactly how I ended my piece. The only thing more evil than overcharging and taking advantage of all this power would be the effect it would have on society if these regulators decided to actually bring these companies up.
Steven Dickens: Couldn’t agree more. So moving us on now, because we’re trying to get done in 30 minutes, but I mean, that’s a huge topic. So the way we’re going to structure this going forward, we’re going to have one big topic because you can’t go fast through a topic like that. There’s so much to cover, but as we pivot to the next part of the show, what we’re going to try and do is go through six topics. Daniel and I are going to give you our highs, and lows, and our unexpecteds from the last week in tech. So Daniel, over to you first, what’s been your high for this week.
Daniel Newman: I have a close call here. The week started off in a really interesting high with the news of Zoom acquiring Five9, but I’ve talked a lot about that. I wrote a lot about that. But another high that I’d actually like to choose for this particular segment here is the news of Salesforce completing its acquisition of Slack. Kind of was quiet concerning how much press, and media, and attention that deal got itself, it very quietly closed early this week. And the reason I’m really excited about it is actually for the sake of competition. Slack is an awesome product. It has been very well received in the market, but did struggle independently as a public company. It wasn’t growing as fast.
And as excited as everyone was about the product, it didn’t see the volume, and growth, and the trajectory independently. Salesforce is missing pieces that are going to be required if it wants to really compete fully with the likes of Microsoft and the likes of Google as just a couple of examples. And I think those two together have a great opportunity to add competition and put pressure on Microsoft, put pressure on Google, add to the ecosystem. And it’s a three, four horse race in this productivity, collaboration, and ERP space for these fully vertical and fully horizontal platforms.
Steven Dickens: Kind of my high. And I think there’s a lot in there. I think it’s interesting that you mentioned you could put Salesforce in the same category as some of the people we’re talking in our main dive as big tech. So I think it’s really interesting there. My personal high was the first of the earnings announcements from a company I’ve long tracked and been involved with, which is SUSE, the open source leader. They’ve had an interesting past over the last 20 plus years, and this was their first earning statement as a publicly traded company. Melissa Di Donato there is doing fantastic work to turn around what was a pretty sleepy German engineering focus company.
That business share price is up 10% since the IPO, the business is now valued at 6.6 billion, which is about three X where they were when the VCs bought them about three, four years ago. Annual recurring revenue up 16%. The Rancher Kubernetes acquisition, they are up 91%. Those guys are doing a fantastic job of growing and scaling that business. What’s going to be really interesting for me, and I put it in my piece where I covered these guys, is how they get out of their stronghold in Europe and really get traction in the US. That’s what I’m going to be watching as they go forward.
Daniel Newman: Take 20 seconds and just tell everybody what SUSE does. I’m talking about Salesforce and Microsoft, you’re talking about a very important, but company that certainly doesn’t make headlines every week.
Steven Dickens: Yeah. SUSE, if you think these guys are in the same business that a Red Hats would be, with the core operating system, and they announced an acquisition and closed it just about six, nine months ago of a company called Rancher Labs. So if you know the Red Hat proposition, it’s the Red Hat operating system coming together with OpenShift. So really SUSE have got a huge volume of clients. They’re the number two in Linux distributions globally, behind Red Hat. But what they were struggling with was really, as you say, Dan, getting a presence and getting into the consciousness of the market, and really getting into that brand newest of spaces around Kubernetes. They’ve done that now with Rancher. They’ve got a complete stack and I’m really excited to see where they go forward with this. So let’s go onto our lows. What’s your low for this week, Dan?
Daniel Newman: It was an interesting week and a couple of things had come to mind. But the thing that stood out to me the most was not Intel’s earnings, which I actually thought were pretty good. 10th consecutive quarter of beating the street. Had their PC business off the charts. Record-breaking PC business, 33% growth, and just a really bad reaction from the street. I feel for the leadership. CEO, Pat Gelsinger, I think, has done a good job since coming on, being more transparent, more articulate. Coming out with plans that are more well positioned to help the company. They’re beating expectations in the middle of a global supply chain shortage. They’re investing domestically here in the states, looking to invest globally. There was recently news that broke about the possibility that Intel was going to try to acquire a lagging edge leader, GlobalFoundries. Lagging edge leader, yes, but to further its distribution of critical components and chips that, by the way, are part of every single PC that ships. It’s not just a 35, 710 nanometer. It’s also 28 and 32 nanometer USB cards, and all kinds of different specialty chips that are for systems and vehicles.
Also, the company’s having massive growth in its mobile eye. It’s EV and autonomous driving technology business. And even its DCG data center business that was off a little bit this quarter represents being off only a slight bit over a year ago where it had a blowout number. So it was down 9%, but 9% from a blowout number a year ago. I just felt overall the street’s been very harsh. It’s expecting Pat to make changes in such a short period of time. His first six months I think he’s done a very good job leading the company, giving it good direction, shifting the culture a little bit. I think the long run is going to look better for the company. I think those people that have been really hating and doubting, despite that there’s more pressure, arm, AMD, Nvidia. Despite that fact, I think betting against Intel is a bad bet.
Steven Dickens: So why do you think that downward pressure, is it just bad time to bring out earnings with some of the fluctuations in the market? Is that why you think it is down, or is there something structural?
Daniel Newman: I read something somewhere that the average market response right now to a beat is something like a half percent loss. So companies across the board are losing, even when they’re winning. Having said that, I mean, Intel, I think, is down five or 6% at this moment today. The day after earnings, at the exact moment we’re recording this, on the 23rd, Friday. So just note that, when I said that it was a Friday afternoon, the 23rd. And again, beat on the top beat on the bottom. I mean, margins are hanging in there under a little bit of pressure. Growth in the right areas. Getting new process taped in. And they even announced that the 10 nanometer had officially surpassed the 14 nanometer in terms of shipping volumes. So they’re overcoming some of the skeletons in the closet in terms of moving forward with leading edge. They’re making these investments, are expanding footprint that are going to build more fabs and they’re increasing their foundry.
I heard there’s more than 100 companies that want to use their foundry service that they announced during IDM, too. Just a lot of good going on. And in terms of times earnings multiples, this company trades at quarter to an eighth of the times, earnings multiples that Nvidia and AMD do. So it’s not like they’re getting too much credit and people are pulling back a little bit. They’re not getting a lot of credit at all if people continue to pull back, which goes to show that fundamentals have kind of gone out the window in exchange for momentum and sensationalism.
Steven Dickens: Well, just that gives me a perfect intro to cover my low. I wrote about this and I’ll put it in the show notes. My friends over at IBM systems, I think a lot of unnuanced coverage and reaction to the reduction. Systems within the IBM earnings was 1.7 billion down 7.3% year on year the flagship IBM said, and LinuxONE business down 11% or 13% year on year, on constant currency. And those were the things that people picked up on. What they don’t realize, and I think where the systems team aren’t getting the credit, is that main frame business is in the eighth quarter of its cycle. Typically, if you look back the mainframe business, that platform’s refreshed on an eight to 10 quarter basis. You can look back it said 14, 13, and beyond, and see that they are where they are. Storage was down 7%, 10% constant currency, some fantastic announcements literally the day after earnings.
I was really impressed with what the team in the storage business are doing around safeguarded copy. I think with what’s going on with ransomware and ransom attacks, being able to air gap your data in a copy that’s not accessible by other sort of nefarious actors, I think is really important. I think the company’s late to storage as a service, but it was good that they made the announcement. They’re lagging, maybe, behind where the likes of Pure Storage and HPE with their GreenLake offerings are. But I think good that they’re entering that part of the market.
The power business, again, very end of the cycle. IBM’s previously said that they’re planning to update to POWER 10, sort of in the very next quarter. So I think the position there is, you’ve got to understand where they are in their product roadmaps and life cycles. And what I’m taking away from this. If you think of just the mainframe business, year on year the compare, you talked about it with Intel. Year on year the compare, the mainframe business was up 68% this time last year. And for those guys only to be down seven when I was expecting them to be worse than 20, now, I think, is a fantastic performance. So overall positive when you understand the context. Tough times for those guys when they’re getting beaten, but if you understand the context it’s a lot better than that. So we’re moving fast here. Unexpected from this week. Dan, what was your surprise? What was your key takeaway?
Daniel Newman: Yeah. Let’s steer away from the news and talk about the tech industry for just a moment. I traveled 47 weeks a year, 48 weeks a year on average, prior to COVID. So you can just say that the adjustment away from the weekly Sunday, Monday fly out, Wednesday, Thursday, Friday fly home, sometimes flying to multiple cities same week, in multiple destinations. Sometimes being gone 10, 11 straight days, depending on what was going on to literally not traveling at all. I’ve gone on a few trips, and I moved, but even given the fact that we’ve been in the late innings of this battle with the pandemic for quite a while business travel really hasn’t returned much. Now I know you’re going to an event next week. We’re starting to have a few face-to-face meetings with clients, but this week I think I got more than half a dozen invitations from big tech companies that are planning to have either hybrid or live events this fall. This fall and early winter, in California, in Seattle, in Washington, and some overseas stuff. And I think is a really promising moment.
Now having said that, as we suddenly get all these invites, and companies are starting to flip the switch, we’re also seeing the media narrative pickup big time on this whole, the Delta variant that’s come out. And this Delta variant has effectively put pause on a lot of things. I’m hearing… I’m here in Austin, Texas, I’m hearing they’re going back a stage in their COVID. I think they’re trying to reapply some type of reinforcement mask mandate of some type. I’m not 100% sure if it’s only for unvaccinated people, but last week I listened to one of my favorite pods is one called the All-In Podcast. It’s with Jason Calacanis and Chamath Palihapitiya, and a few others. These silicone venture guys.
And one of them, David Sacks, was on the show. He’s another, a big startup funnel investor that some of you may know of him, but he actually talked about, he got a breakthrough case. He was double jabbed, went out to dinner in an open air restaurant, and ended up getting COVID. He said he didn’t get very sick, but he said for a few days he felt pretty crappy, and then he got better. But the fact is, is we’re starting to see that resistance from the initial, especially people who got the double vac’s early on, it’s starting to wear down. We’re starting to hear about the efficacy coming down and that this variant seems to be extraordinarily virulent.
I think the fact is, is we’re in this really interesting inflection point now, that we have events coming, companies are starting to pour the cash and capital back in. But at the same time, we may still have a hold off. So I’m trying to choose my words carefully because I don’t want to make this political. Long and short, though, is I was eager to get back out. I do think the science says that if you’re young, if you’re healthy, you… If you’re young and you’re healthy and you’ve been double jabbed, you probably aren’t going to get very sick. And that’s what I think is important is that the people know is, we used to get sick, and get colds, and get flus, and we did get on with our lives. It sounds like that’s more what it’s going to be, but it could be very, very fast spreading.
Steven Dickens: Yeah, I think we’ve got some things to watch there for sure. Trying to keep us towards time here. My unexpected for this week, another company that’s not big big news, but I covered a piece on a core banking vendor, Temenos, who announced their Q2 earnings earlier this week. Big name in the core banking and Fintech space, not such a big name outside of that sector, but their total addressable market, according to the company, $63 billion. The market they’re in is worth 73% of that, is serviced by in-house developed applications. The company lists that they’ve got 3,000 clients in over 150 countries. But what was unexpected for me, and I listened in to the investor call that Max, the CEO, went through the numbers with the street, putting the lens on this as a SAS company. Their annual contract value grew 409%. They moved their ACV guidance from the 40 to 50% range to 50 to 60% range. This company is exploding in a very, very traditional sector.
They’re now listing that they’ve got over 70 banks around the world, deployed on a pure cloud native model. They’re seeing that shift increase with the pandemic. And they talked about a service that they’d launched with PayPal about buy now pay later that they brought to market in nine months. Now I know that doesn’t sound that fast, but in the banking sector, to bring a brand new line of business to market in nine months is rapid pace. So it was unexpected for me the way the company’s changing how they talk about themselves, and retooling that, sort of, the talk track to position themselves as a cloud company with banking as a service. So I kind of knew the company, knew what they did, but what was surprising for me was that retooling of the language that they’re using to describe themselves.
So Daniel, it’s been fantastic chatting to you for the last 30 minutes. I think we’re going to try and see how we get on with this format. I think it was good to go deep on the antitrust. Really interesting, some of your highs, lows, and unexpected. You’ve been listening to the Futurum Research Webcast. If you like what you’ve seen today, please click and subscribe, and take a few minutes to give us a five star review. That really helps. If you really, really liked the show, jump onto your social media platforms and tell a friend. We’ll post the links in the show notes today for the articles that we covered, but join us next week for the Futurum Research Review of the Week. Thanks so much. And we’ll speak to you soon.