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Intel, MSFT, IBM, NOW, SAP, NVIDIA and More! – The Six Five Webcast
by Daniel Newman | February 3, 2022

On this episode of The Six Five Webcast hosts Patrick Moorhead and Daniel Newman discuss the tech news stories that made headlines this week. The six handpicked topics for this week are:

  1. Intel Earnings Report
  2. Microsoft Delivers Big in Q3
  3. IBM Reports Q4 Earnings
  4. ServiceNow Earnings Points to Strong Year Ahead
  5. SAP Q4 and Full-Year 2021 Financial Results
  6. ArmVidia Deal Dead?

For a deeper diver 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 do not ask that you treat us as such.

Transcript:

Patrick Moorhead: Hi, this is Pat Moorhead with Moor Insights & Strategy. And we are here for another awesome Six Five Podcast, on a Friday, as usual, on schedule. Except when we don’t make it on Fridays. Daniel, how are we doing my friend?

Daniel Newman: We always make it except when we don’t. Right? So yeah, living the good life buddy. It’s Friday, big week, kind of a tumultuous week, but a lot of tech to talk about, we’re back in earning season.

Patrick Moorhead: We are, and this is an earnings palooza plus episode. And if this is your first time in The Six Five, we cover six topics, five minutes each, except when we don’t and we blather on. We know you can read the news, so we’re all about the why it matters. When it comes to earnings. Please don’t take this as investment device because the Six Five is for entertainment and informational purposes only. In fact, just do the opposite of what we might be inferring or what you might think we’re inferring. So Daniel, let’s freaking jump in, baby. I’ve had multiple coffees and I’ve got my water.

Daniel Newman: Hey, you’re looking good, man. You’re looking sharp. You’re going to be on CNBC on The Exchange. So if you’re watching here, put that on the calendar right now, because Mr. Moorhead’s going to be talking all these earnings. So you’re just getting a taste here. He’s getting his practice round. Call this a practice round for the big leagues. And by the way, we’re not going to talk about Apple today, but I just feel remiss to not just mention the fact that, I don’t know, one of the biggest tech moguls in the world, love them or hate them, and sometimes I love them and sometimes I hate them, had a really good quarter and iPhones were explosive. But here’s a funny thing, Pat, just one little snippet, just because I know we’re not going to do a full segment on them, the fastest growing category for Apple this quarter? Any guess? Any guess? I don’t know if you watch.

Patrick Moorhead: Geez, maybe MacBooks?

Daniel Newman: Mac. Mac. Oh my God. What an interesting situation though, that paints a picture in terms of is it related to ARM and how well they’re doing there? Is it just cycles and related to updates and refreshes? But long and short, my gosh, I’ve been more than regular in my criticism of Apple, but seems they’re getting something right here now. Long and short though, what I will say is it’s good for the macro economy and it’s good to see a consumer oriented tech company have such a good result and a good when there’s so much fed tightening going on. I won’t give it any more mind than that, Pat, but I just, I wanted to mention it because it didn’t make our docket. It’s not a company that we advise or work as closely with. But it isn’t a company that you can ignore.

Patrick Moorhead: Yeah. I mean, once Apple stopped trying to kill the PC as a category and the Mac with the iPad, and put an A team in and MacBooks, it’s amazing what happens. People suddenly want all their PCs.

So anyways, let’s move into, first of, Intel. Intel beat on the top and the bottom. And they were rewarded with a sell off of pretty epic proportions. Now what it came down to was a little bit about uncertainty, a little bit of top line softness, but it was really about gross margins. And I really dug into this, Daniel, to see what was going on and we’re going to get a full data dump on February 17th on exactly when some of these costs are going to hit. But when Pat Gelsinger came on and said he was going to double down on capital expenditures and he’s got Intel 7, 4, 3, 20A and 18A, that’s expensive, right? So what we’re seeing are those expenses, once they start to get into certain product categories, they hit it pretty hard. And that’s how the accounting of semiconductors go. Let’s say 5% of your mix is on something that you’re spending multiple billions of dollars on. Guess what? You’ve got a peanut butter spread that costs across those the small amount of processors. And that’s where we are.

But a couple things stood out to me. So first of all, everybody’s like, “Oh my gosh, Data Center Group, DCG, something’s wrong with it. AMD’s winning all the market share.” Well, I think AMD is gaining a little bit of market share, but they had 20% growth, which is phenomenal. And then doing a double click on that, 53% increase in enterprise and government demands. Which is off the rails. And macro economically, Daniel, that says a lot of positive stuff to me about how the economy is going. If businesses are buying a lot of on prem infrastructure. And that’s exactly what this is, right? That’s not hyper scalers, which hyper scalers were actually down by 5%. There was this thing, this one time federal charge that I know Intel didn’t really want it to talk about that much, but I’m speculating this was not hitting dates on a few of these big lab deals that they had. There are penalties that are always involved and they had missed a couple milestones on that.

My last thing on DCG is Intel basically says, “We ship more Xeons in December than any of our competitors ship Data Center parts all quarter with Ice Lake, which is the 10 nanometer, shipping over a million units. I kind of like that. A little bit of a flex, right? It’s not them saying, “Yeah, we’ve got 90% market share, but essentially we shipped more in a month than everybody else shipped an entire quarter.” So taking the gloves off a little bit.

I was a little bit surprised on Client Computing Group, called CCG, down 7% and the Core Business, which takes out all the wireless stuff, was down 5%. There was a hard comparison in fourth quarter of ’20, but even so man, that notebook decline was pretty big, a 16% decline. I’m super interested to see what AMD comes out with to see if maybe it was something had to do with inventory or it was a share loss? I do believe for this year, I think Intel will gain unit share. I think AMD will likely gain some revenue share. ASPs, right? That’s a drill down that I like to do on CCG, which is essentially the pricing power. And guess what? ASPs were up for both platforms.

So total overreaction, I think on the sell off. You have to look at the company as a long-term play. And you have to understand semiconductors. This is not like a SAS play where you can make a price move, increase sales, decrease sales, come out with a new product. These are real factories. These are real tangible things. And a next gen fab takes to maybe three years to get going. But I’m looking forward to the investor day.

Daniel Newman: Yeah. There was a number of things that Mr. Gelsinger alluded to in his remarks. You talked about the client, he did talk about some of the pull forward and pull back that’s been related to supply and demand. And so of course some orders got pulled forward and you saw some bigger quarters, I believe last quarter was a stronger one. We saw this same kind of ebb and flow this year with Data Center where the early part of the year was really bad, but it was following a really strong end of the year before. So you’ve had a lot of supply chain related pull forward, pull back because they’re so dependent on the sales of their ecosystem, right? It’s the OEMs and how much they’re selling. And then of course, with all the supply chain issues, it’s been, how much are they able to manufacture?

I thought Ohio was a really encouraged piece of news and this isn’t necessarily related to the earnings, but now you’ve got, what? The third? So you have two fabs in Arizona, you’ve got the fab in Ohio here, with some significant investment. Gelsinger pointed to… he gave an answer that The Street, they may not like it, but when you move process and they hadn’t really had a big process move in about five years, I believe it was, there’s some costs that are associated with that. And the tradeoff is higher margins in continuing to sell old product. I mean the trade off, nobody liked that trade off either, right? Everybody was bitter about how long it took them to see Ice Lake surpass Cascade Lake.

The hardest part about Intel is it feels like the market moves the goalposts on them more than anyone else. It just feels like they get something going good, and then everybody complains. If the client’s good, then they’re going to look at DCG. If client and DCG are good, they’re going to find something obscure. “Oh, your network group is down.” I mean, they will find the thing to not like about Intel, and that’s why it’s trading it 10 times forward earnings. When AMD is 40 or 50 right now and NVIDIA is as well. Intel as a manufacturer is held to a different standard. But I do believe they are the best positioned company on the planet to bring manufacturing here of semiconductors, back to the US to help us get out of a future supply chain crisis. And I think they’re doing a lot of things really well.

The quarter’s numbers were good too, Pat. As we headed into what would was considered a very negative tech economy, interest rates rising, inflation numbers are high, a lot of hawkishness from the Fed. These were good numbers. The guidance forward were good. You pointed it out, margin is the most at risk number right now because it’s being compressed, which means they’re going to have to do more sales to deliver equal earnings per share. But this quarter they did that. And there’s nothing to suggest that next quarter they can’t. Their guidance was very close to what The Street expected. And certainly, with some operational excellence, the potential to beat next quarter exists. So I’ll end there because I know we got to get onto the next topic, but I’d say more good than bad, right? If we were looking at that quarter for Intel, more good than bad is a pretty fair assessment?

Patrick Moorhead: Yeah. Absolutely. And listen, I look at top line pricing and ASP and pricing power is more important than the cost side. I mean, I know in the end, it’s about net cash flows in the future, but long term is about pricing power. And if you’re an IDM, it is cheaper for you than having to go to TSMC. Intel, in their model, they’re capturing both, right? They capture the design value and they capture the manufacturing value. So that’s why I’m not concerned. The company still needs to execute. Investors are giving them zero credit for getting into brand new categories they were never in. Discreet graphics for gaming, discreet graphics for work stations, machine learning training with Habana and more, going essentially directly after NVIDIA. Great stuff, great analysis.

Let’s move to Microsoft, Daniel. And Microsoft pretty much did what Microsoft does.

Daniel Newman: Yeah, I came out last week, I made the call that earnings this week were going to be really good. And I know maybe that’s a risky call-

Patrick Moorhead: Big risk there, man.

Daniel Newman: … Maybe it wasn’t a big risk there, Pat, but with all of the tech wreck right now, considering 40% of the NASDAQ is down half, you would be expecting the numbers to be bad. Or at least guidance to be bad, you expected, “Maybe, okay, one more good quarter and then some really bad guidance. And then the bottom falls out.” Because the market’s forward looking. So the market had already sold because they thought the long term was bad. The discount rate would be meaning growth slows and the valuations are too high. And the multiples on either earnings or revenues were too high. And I guess I just don’t believe that that’s actually right anymore. Now that we’ve had so much correction. And it’s a little bit of personal interest as someone that likes growth. But look, Microsoft beat pretty significantly on revenue. And when I say significantly, 51.73 versus 50.8, so a billion dollars above expectations. And then beat on a per share basis at 2.48 versus 2.31 yield, and then beat on a per share basis at 248 versus 231. The whole story there though is Microsoft probably has one of the most robust and diversified subsets of offerings on the planet right now. They address consumer through things like gaming and Surface. They address enterprise through Windows, Azure, Enterprise software, Dynamics. And of course, they’re so big and so diversified that they’re a really great bellwether for what enterprises and consumers are doing.

And so the interesting thing is Microsoft tracks itself across, I believe it’s like 11 categories. And just to be clear, they’re up in every category. Q2, ’22, up in every category. Another strong Azure quarter, Pat, everyone marks the Azure number at 46%. But strong growth in Dynamics, strong growth in Office 365, strong growth in LinkedIn, server products. And I can go through the whole thing.

But pretty much every place up and down. I think the most modest growth across the company’s portfolio was Surface, which continues to be a little bit of a… I haven’t quite figured that out yet, Pat, but I’ve got a bit of a thesis I’m developing. I’m not going to share it yet on why Surface hasn’t grown faster. But that even came in at 8%. The company just dropped $68.7 billion, all cash, assuming they can get through a regulatory to buy Activision and acquire another 400 million monthly users in a consumer space. That’s another very bullish sign that they think consumer activity and spending is going to stay high, and of course that they feel that their cash is better off invested right now than sitting in the bank offering the company security.

But across the board, Pat, you look at this company and you say, “What’s going on?” Well, what I see going on is that people are investing in cloud and they’re investing in Microsoft. People are investing in European CRM and they’re investing in Microsoft. People are investing in search, in LinkedIn, and in gaming. Up and down their whole portfolio, Pat, there’s really nothing that you could look at and go, “Ah, this is really eerie.” And so beyond just the overall rhetoric that Satya Nadella might be the best CEO on the planet right now, you look at the performance and you say the performance doesn’t lie.

But the other thing that was probably important to point out is the company’s guidance. They’re saying they’re going to beat again on revenue, somewhat significantly. Their entire range was above consensus. They came in at 485 to 493 and the consensus was 49.2. So they’re expecting another possible billion-dollar beat. I know billions become a small number somewhere along the line, by the way. Like only a billion? And they basically expect their margins to widen.

We were just having this whole talk, Pat, about how margins are going to consolidate a little bit for Intel, because they’re making all this Capex investment. Well, Intel’s actually starting to bear the fruits of more margin from all their infrastructure investment, because well, let’s face it. It’s the pivot to subscription. The pivot to subscription has been a huge winner for the company. So there’s too much to talk about and I don’t want to spend any more time on trying to run through all this. I want to give you a little bit of oxygen here. But Pat, I just can’t find much bad in Microsoft’s results this quarter.

Patrick Moorhead: Yeah, hang on, let me get my oxygen mask and put it on.

Daniel Newman: Are you telling me I didn’t leave you anything? are you telling me…

Patrick Moorhead: I got to tell you, man, you machine gunned down the list of… No, no, listen. With Microsoft and how diverse their business is, there’s always room to talk through. And I wanted to put a little bit of color on a few items. So first off, Surface, right? They had back-to-back negative big-time, like negative 20% quarters. And even I was maybe questioning, hey, is this a supply chain issue or maybe is it a strategy change? I am absolutely, 100% convinced it was a supply chain issue and it was short-term. Nobody has told me this, but I’m also going to speculate that when it came down to their Windows partners getting parts and Surface getting parts, I think there may have been some deferment there.

And I do think Surface is strategic, even though it was one of the least highest growing strategic businesses that they had. And I’m super excited to see what the companies bring out in the future. Search and ads up 32%. Here’s the company that isn’t really noted for advertising, pretty much crushing it. Windows, 1.4 billion Windows DAO. Okay? Think about that. That’s nearly as big as iOS and Android. But it’s a freaking PC. And if you want to check out more about Windows’ progress, Panos Panay had a blog you guys should check out for all of that.

The other thing that was a new thing was talking about Azure Arc, which is essentially Kubernetes’ control layer to do multi cloud. And that was a 3X growth. Now, I want the number. X growth doesn’t mean a lot. But I’m hopeful, because they threw that out there, we’ll be seeing more on that. And I feel like Google Cloud, Oracle Cloud, IBM Cloud is all in on multi cloud. Azure’s kind of in on it and AWS is not in it. When you’re the category leader in IaaS, why the heck would you lead with multi cloud, which is essentially an off ramp to your competitors?

And there’s still challenges with multi cloud, like security. Single sign-on. Networking. All that stuff. Data. Data management. But pretty interesting. The final thing I’ll throw out there, security. They gave more depth to their security business than I’ve seen anywhere. And they threw out $15 billion annual business, 700,000 security customers, 45% year on year growth. Incredible. What’s Microsoft’s next big step here, Daniel? A couple things going on. What’s the next big step? Is it general consumer?

Because we know they’re absolutely going after gaming. They’ve been strong in gaming. They have 25 million Game Pass subscribers. But general consumer and gaming are two different things. Game is a subset of the general consumer, and I’d posit that Apple and Google are more consumer customers. So I’m looking forward to seeing Microsoft’s play. I’m trying to brainstorm and think what they could do in the enterprise that they’re not in. IaaS, PaaS, and SaaS, they’re kind of in everything at this… And they’re operating at planet scale. Exciting stuff.

And then the final thing, and I know this isn’t part of our discussion, Daniel, but maybe sometime in the future we can talk about big tech companies getting bigger versus room for smaller companies. I mean, these numbers are absolutely off the charts from Apple and Microsoft.

Daniel Newman: Yeah, they’re so well run right now. And we’re not just talking about big tech getting bigger. We’re really talking about this whole FDC, how big can big tech get before it starts to become problematic for competition? And then of course, these opposing forces of really happy customers that love being able to get everything from one place versus the harm it might do to allowing new and exciting companies to come into market and compete.

Yeah, let’s put that on the docket for a week when we don’t have 7,000 earnings and news to talk about, Pat. But yeah, we could definitely dive into that one. But we’re still on topic two, and we’re now at the 6:11 is our pace right now. So we’ve probably got to keep moving.

Patrick Moorhead: Yeah. Let’s cruise into IBM coming off of post-Kyndryl. And net IBM surprised on the top and the bottom. They had their highest revenue growth in six to seven years. And even though it’s 6% to 7%, and that may not wind everybody up, it’s a heck of a lot better than no growth, 1% growth. I think IBM overall had a really good showing. A couple hotspots for them, I felt, was cloud revenue at 19%, Red Hat revenue at 21%. Software at 8% may not sound interesting until you recognize that it’s 89% gross margin. And then it looks really good.

Consulting, 13% at 27% gross margin. Infrastructure was flat. Infrastructure at IBM is really driven by Z, and z15 really has an extended cycle. So being flat and Z being on its last quarters of being sold before I’m expecting the new version to come in soon I think is really good. And the great part about that is because most Zs are being used in cloud, being used with containers, or at least the new versions, it could get that cloud number up to 30%. Which I think really makes for an interesting type of investment.

And I had some people who were pinging me on quote-unquote “cloud,” what does it mean? But I’m kind of tired of this conversation with certain vendors. Because listen, if I look at AWS, Microsoft, GCP, cloud is IaaS, PaaS, and SaaS. So IBM’s hybrid cloud revenue is a combination of its software, consulting, and infrastructure. And their definition absolutely passes muster. I think we’re more mature. I’m hoping we’re more mature as, I don’t know, a tech analyst industry, and even an investor industry to understand that cloud doesn’t just mean IaaS. It’s a whole lot more. And we’re going to talk about more cloud when we get to the SAP.

Daniel Newman: Yeah. The definition of cloud is a moving target, Pat, and I think the market that long built its reputation on measuring IaaS is problematic. It’s not actually just IaaS, PaaS, and SaaS. It’s also all the services that encompass delivering cloud, and most companies have a combination of all those things. For a long time, we looked at AWS as just IaaS, but they have all the things. They have PaaS. They have a lot of services. Of course, software’s a smaller component of what they’re doing, but I’m watching slowly things like Connect and Chime and other services built out that could easily take them into that direction.

When you get to 16 billion a quarter, you’re going to need to start to find diversified revenue streams when you’re just selling primarily infrastructure. And so data services, there’s so many things. But IBM, look, this is a very simple assessment, Pat. And I know sometimes we like to make analysis tough, because it makes us look smart. But IBM made a big decision to spin off GTS, Kyndryl, and… Most of GTS. It wasn’t exactly GTS. But most parts of it. Managed infrastructure services. It was a boat anchor for the company. It had been losing money and a disproportionately large percentage of the overall revenue and cost centers.

So the company would have really good quarters like a Z cycle, like you mentioned, and could barely break above breakeven or 1% growth. We remember the Rometty declining revenue and earnings period when she was CEO. Krishna realizes that sometimes you have to break down the board before you can build it back up better. And so that decision’s been pivotal. We’ve been hearing for the last few years about his decisions to go hybrid cloud. IBM not trying to compete directly with AWS and Azure was a very good decision, because it’s a different business model.

But when it comes to comprehensive, highly regulated industries that have very specific needs, from mainframe to edge, software and automation, IBM has a pretty comprehensive set of offerings and services to meet that need. Pretty comprehensive set of offerings and services to meet that need. They can do it, as you suggested, at a very high margin, and they’ve made some really good decisions. That $34 billion acquisition of Red Hat looks better with each good quarter. It still was a big number. It’s still going to take a long time to get all that return, but we’re seeing what companies are going for right now.

And IBM didn’t have a choice. I’m going to say that. They did not have a choice but to accelerate their hybrid cloud portfolio in a meaningful way, and Red Hat was instant credibility. That was instant credibility with a large subset of the hybrid cloud community, and that’s starting to pay off with a 20-ish percent growth. Now that they have dropped the boat anchor, they’ve shown they can be more profitable to that mid-high single digits, that’s not going to be enough and the market’s not going to be satisfied. So I’m going to say that right now, the market’s going to want more. They’re going to want more. They’re going to want higher growth, faster growth. But this was a good sign that this quickly, upon the spinoff, IBM was able to deliver better than expected results.

Patrick Moorhead: I give them congrats.

Daniel Newman: Do we have like a little button that we can press like Kramer does that cheers?

Patrick Moorhead: Yeah, exactly. Daniel, let’s move on to ServiceNow, that they just continue their hot streak.

Daniel Newman: Listen, we don’t always cover ServiceNow, but they’re one of the probably most interesting cases of tech is deflationary. Now that’s a bold statement here because as the economy grew, tech grew, but that’s a natural byproduct of economic expansion. But a lot of people aren’t talking about when they want to talk about TeckRack is they’re not talking about the fact that technology is the underpinnings, whether that’s semiconductors or that’s software or that’s infrastructure. If a company wants to become more efficient and more profitable with every dollar, they’re not do it any other way than investing in technology.

And one of those most important right now is going to be workflow automation. The idea that you can take a process, you can remove a lot of the excess steps out of them, out of these workflows, and get more work done and less time in a subscription basis on an OPEX versus more CAPEX, more humans, more people, more process, more paper, just makes a lot of sense.

ServiceNow, of course, sits in a position under CEO, Bill McDermott, to be in an opportunity for strength, whether it’s as the economy contracts and rates go up and growth slows potentially, or whether we continue to boom and run hot. And so this quarter, the company showed strong growth. It showed 30% subscription revenue growth. It showed an improvement in how much on their performance obligation, which is important in SaaS, by 30%. They saw their large customers grow 52%. That’s the over a million net new 52% growth.

And here’s a great thing right now for a company like ServiceNow, 99% renewal. So in a SaaS ecosystem to have almost zero attrition is just a tremendous outcome. The company’s doing, I believe they’re forecasting over $7 billion in 2022 for subscription revenue. They’ve made some really big investments this quarter hiring on and promoting from within, by the way. They promoted several of their top executives, Pat, this quarter under McDermott.

And this was kind of an interesting one that I pointed out to in my research note is we see so many companies when they knew need new blood, they go outside. They don’t promote from within. We recently pointed out, Pat, that Intel made some big moves with some exits and actually hired and promoted from within, which is impressive.

For a company like ServiceNow, McDermott back from his SAP days was always really big on culture. And so he’s bringing people up through the organization, and he really points to the fact that he wants to take his executives, train them up, develop them, and bring them up to become bigger contributors to the ServiceNow org. I like that. I think that’s important.

The other thing that the company is doing that’s probably more important than ever is they’re moving downstream from SaaS to PaaS. So everybody knows them for their workflow automation, but the Now platform, which has been rolled out, is becoming really big for the company. They’ve made some really big announcements. They’ve made some acquisitions this quarter. They announced a big partnership with EY, a big partnership with DXC. And so, I think EY came out, Pat, and said they want a billion dollar business alone with ServiceNow. Ernst and Young, one of the biggest account owning and advisory firms in the world is planning to build a billion dollar practice on ServiceNow alone.

So, overall Pat, I think there’s a lot of strength. The last thing I’ll say is they now have over 1350 million dollar customers in the organization. So as I started and I’ll finish this segment, tech in many cases will be deflationary for many people that are worried about what’s going to happen to tech. I expect if the economy actually gets much worse, tech will actually, surprisingly, do well. Not all for great reasons. This is sort of that human automation, human machine sort of world that we’re moving into, but companies like ServiceNow are building that kind of software that can really help companies be more successful in tougher economic circumstances.

Patrick Moorhead: I don’t cover ServiceNow as closely as you do, but I got to tell you, from an investment point of view, I look over the last year, it has not been a good investment. It’s down. You would’ve lost money had you put money in. Heck, IBM, if I look over the past year you would’ve made 16%. So to me, ServiceNow, doesn’t do a very good job at educating investors. They don’t understand the value proposition, and I think they need a lot of help in getting their story out. And maybe, I don’t know, maybe you and I having this discussion is part of that, but I just don’t hear a ton of folks talking about the company.

Now, I think part of that challenge is that they are a category killer right now, but trying to expand the base into what they do, right? They’re the best at IT and IT workflow. And they’re kind of moving that into kind of the CX point of view. And they’re trying to operationalize it and automate it, which I think is good. And maybe they can pull an Adobe or something like that, where they just keep kind of growing. They’re category killer in one area, and then grow.

And we see company like Five Nines in there as well, who starts off as a category killer, but then expands the definition, either makes acquisitions or goes organic. I put Zoom into that category too. Pretty much Zoom started a consumer tool, and then small business, and then enterprise, and then they get into events, and then they get into kind of contact center lite. And I wouldn’t be surprised if they get into like a CX play.

But good analysis on ServiceNow, and I think you’ve motivated me to learn a little bit about the company.

Daniel Newman: And one thing I will point out, Pat, is you did say something that’s true about the stock and the pull back. Overall though, almost every single SaaS company if you’d invested a year ago, you’d be down right now. There’s not really an example of that. Having said that, if you’d been in it for five years, this stock was at, five years ago today it was at $89. It’s at $551 today. The horizon is always the proof point, and unfortunately the last year to most tech company’s value has definitely done better. You made a great point. The last year has not been friendly. It’s just one of those things that I don’t know how much of an indictment that is on any SaaS company. Because Zoom was $550 a year ago and it’s $150 now, and I think they’re a good company too.

Patrick Moorhead: I don’t think that’s a good comparison because it’s a COVID darling. Maybe Salesforce is a better comparison. But anyways, I’m not criticizing-

Daniel Newman: I’m not arguing. I just mean it’s a tough time horizon because of how badly tech has been beaten up over the last three or four months.

Patrick Moorhead: Listen, I’m not criticizing the company. I’m really criticizing more of the company’s communications. It’s not getting its value prop out there.

But hey, let’s dive into SAP here. And my gosh, this is the second week that we’ve talked about SAP here. Two things here. First of all, stock got hammered because of a perception of risk about cash. And I got to tell you, that is one of the weirdest things, particularly of a fiscally responsible company like SAP. You literally, people, believed that the company is worth a lot less because it was down 9% on the Frankfurt because of how it talked about cash in the future. And for a company like SAP, that’s just, that’s bizarre to me. If Robinhood would make a statement like that, I’d be like, “Oh my gosh, something’s going on there? Something’s going wrong.” But I don’t want that to overshadow what the company did in cloud.

And I’ll reiterate, SAP and cloud were not two statements that you would ever use together a lot in the previous five years, but the different approach that they took. So first of all, they do have some SaaS properties, particularly in European payments. But the company leverages IAS players to deliver its cloud. And hence, it’s a hybrid cloud play and they’re crushing it. Fourth quarter, cloud back log up 32%. Cloud revenue up 28%. SaaS and PaaS, like I said, up 37%. S/4HANA cloud, up 65%. So dare I say it, SAP is a cloud play, Daniel.

Daniel Newman: Well, you bring up a really interesting point. And like I said, we don’t probably have to dig too far into this one because we talked about it last week, Pat. I mean, SAP’s a very fiduciary, thoughtful company. They’re not necessarily known for moving fast. They’ve made some inroads into cloud, some have been more successful than others.

Remember they still hold a big chunk of Qualtrics, but they did spin it off in order to provide and unlock more value from that acquisition. They’ve made some interesting SaaS-type acquisitions, companies like Ariba on the procurement side, companies like Concur on the expense side. That again, maybe the value you couldn’t say has been fully unlocked, but they’ve definitely been making these significant cloud investments. But the biggest investment has been migration of the SAP S/4HANA to the S/4 migration to cloud.

And there’s been a lot of criticism that it’s not fast enough or that hasn’t been easy enough. And that’s why the company has rolled out RISE, and RISE with SAP is showing really strong momentum. I think they got 650 customers just this quarter and some very large customers. You’re talking about coming with multiple hundreds of thousands of customers worldwide. And I think in their data point, Pat, they said the adoption of S/4 at this point is 18,000, so you have hundreds of thousands of migrations left to go. And they’re working hard to streamline and make that more available, but it’s a lift and there’s some significant work that companies are going to have to do. But as I see it, that’s a huge opportunity.

And I know these two companies hate being mentioned in the same sentence, but I’d be remiss not to take this opportunity. You look at the success that Oracle’s had and how the markets really look very positively at the company, despite not always being the most popular, and I see some similarities. Now, they haven’t embraced or offered any sort of public cloud the way Oracle has, but in terms of having that huge, steady, recurring customer database of license and cloud subscribers that they could migrate over to full cloud and SaaS solutions, these two companies have a really similar type of approach and opportunity, and that opportunity is very good type of approach and opportunity and that opportunity is very good. So as I see it, I think the RISE program’s going to be successful. I think right now, the market is bearish, Pat. They’re looking for any reason to be negative. And so they found the reason here, but I think what the data SAP has, the customer’s SAP has, and little bit of continued ambition from CEO, Christian Klein, and I think he’s doing a lot of the right things. He’s taking some of those Satya like risks to flip the safe revenue to cloud revenue. I think if he can do it, there’s a bright future.

Patrick Moorhead: Yeah. It’s funny. First time I heard of RISE, I was like, oh, great, okay, another transition program, marketing, blah, blah, blah. But it’s actually like… It’s made a huge impact. Super impressive. Daniel, let’s go to our last topic here. Bloomberg’s Ian King wrote an article about NVIDIA quietly tiptoeing away from the Arm deal. What the heck’s going on here?

Daniel Newman: Yeah, I mean, this is completely unverified right now by any executive on either side of the house. And neither NVIDIA nor Arm has come out, made any sort of actual statement. But it was sort of an interesting and timely notice that came out amid some real strong tech selling, amidst the crazy fed. You got a war going on. It’s like, well, why not? This might not be a bad time to drop a bomb of news to maybe start to let the market down softly that this isn’t going to happen. Now, Pat, between you, me, and the fence post, it’s almost been a depreciating scale of approval in my mind that this would happen by day. Meaning like literally, if you take me back about six months ago, I was like 50/50. When it first happened, I was like, oh, 60/40 I think they can get the this done.

And I think it was probably a couple months ago when we started to see the UK starting to push back harder, additional probes coming out of China, Europe, the US, everybody. We hear that the… I believe the FTC had planned to file a lawsuit. You just started to hear this stuff mounting. We all remember NXP and Qualcomm, and that didn’t have nearly the actual public headwinds. And just as time kind of went on, you just started to get this feeling like this isn’t going to happen.

So while the there’s nothing verified from this news item, I can’t help but feel that there’s something there. And so I kind of think in the middle of all this sort of negativity and all these sort of macro events and COVID winding down and war in Ukraine, I just think maybe it’s not the worst time to start to kind of float that out there to say, “Hey, if we’re going to be getting sold off, we may as well just take the whole hit right now.” Because you’ve seen NVIDIA’s fallen. And by the way, Pat, three months ago or so, when the first news of some serious litigation or legal challenges came out, it didn’t actually ding the stock at all. The company was just charging forward. And so somewhere along the line, the market had to react.

So I can’t even tell you, by the way, if the reaction has anything to do with this news or just has to do with the general pressures that NVIDIA is under because it accelerated it so fast. But I do want to say I had a chance to talk to Barron’s, and I did put out a research note about this. I actually don’t think this will have as big of an effect on NVIDIA. I think this is a tough thing for Arm though, because SoftBank’s in a tough place. We just were talking about [inaudible] Claure, I believe this is how you say his name, COO, just left this morning.

This deal was a fairly significant one for the company to try to get something back from a big investment that really hadn’t returned very significantly. And SoftBank’s been under a ton of pressure. There isn’t really a logical landing. We’re hearing IPO potentially for Arm. Arm is, I think, needs a big injection of R and D and support. And that’s what they were going to get from NVIDIA. We heard things Pat, like consortiums. We heard ideas like that from Cristiano Amon from Qualcomm. We’ve heard the idea that maybe some of these other companies building on Arm., but Arm right now is basically enabling a series of the world’s largest companies, from Qualcomm to Amazon and Microsoft, to build chips. I’m just not sure how much it’s enabling the rest of its licensee ecosystem. So whether NVIDIA would’ve made that better or worse, wasn’t clear. But Pat, it’s not official. Nothing official happened this week, but I’m at 10/90 now or less in terms of this deal getting done.

Patrick Moorhead: This is so target-rich and conversation-rich, it’s not even funny. I mean, it talks everywhere. Let’s not forget that Qualcomm was being attacked by every regulatory Arm out there. And you know what? Guess what? They found their way out, right? So just because NVIDIA’s getting some scrutiny to me doesn’t mean, oh, it’s dead. There have been companies… I mean, heck, Intel’s still fighting an EU battle on its fine it got in 2009, you know? That doesn’t score a lot of points with me, or doesn’t carry a ton of weight. I was excited about Arm and NVIDIA coming together for the competition it would bring into the x86 market. We have a PC market that is 98%… Well, I guess I have to look at the new MacBook stuff, but let’s just say it’s a hundred percent. Yeah, let’s just say the PC market’s 93% x86, the server market is 95% x86.

I really wanted to see NVIDIA and Arm come in and just pour a tremendous amount of investment into both those markets. And also, I don’t want anybody to be misled by who had an issue with this. Regulatory bodies may be writing the press releases, but this is absolutely NVIDIA’s competitors at work here, undermining this, okay, and bankrolling this effort to derail it. Because in the end, Daniel, and this is going to sound harsh, IBM’s biggest customers prefer a weakened Arm because that means that they can provide value add on top of what Arm did, kind of like it did before.

Daniel Newman: You said IBM’s biggest customers. I’m assuming you meant Intel’s.

Patrick Moorhead: Sorry. Sorry. Arm’s biggest customers.

Daniel Newman: Okay.

Patrick Moorhead: Okay? So they can put their value add on top, and they can innovate. They don’t want Arm to be too strong. And on the SoftBank piece, look at the investments that Arm made since it went into SoftBank. Big core, very big core for smartphones and PCs, two data center cores at different levels of performance, a full automotive ASIL-certified automotive stack, and all the IOT investments they made. And you don’t just make those investments once and then stop. You have to continue those.

So Arm will have to… probably have to raise prices to be able to feed that beast. Now, it’s a private company, so I don’t fully understand… I don’t know all their financials, but all I know is, though, that SoftBank invested, and Arm is either going to have to capture revenue for that R and D at a higher rate, or get out of those markets. Not out of the markets, but doing the value add that they’re putting in which a lot of their customers do appreciate.

So as far as a consortium, can you imagine Samsung, Qualcomm, Apple and AWS and Azure trying to come up with an agreement on a specification for Arm V-10 specification? I mean, it’ll be like the IEEE, which takes like five years to come up with a decision. Anyways, this is target-rich, buddy, and we’re going to be talking about this a lot. And by the way, we went long. We appreciate everybody hanging in there, really motivated to be back. Daniel, I love that hat. Six Five Summit coming up June 7th, June 9th. Last year, we had 50 speakers, 16 CEOs. We’re going even bigger this year and better. We are almost ready to make it official and talking about tracks. But hey, I want to thank everybody for tuning in today, and want you to have a great weekend. Tell me what you liked on Twitter. Tell Daniel what you didn’t like, and suggestions to all of us. Have a great one.

About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio