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Talking IBM & SAP, Intel 2040 Eco Goals, Earth Day, SAP Exiting Russia, TSMC’s Quarter – The Six Five Webcast
by Daniel Newman | April 25, 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. IBM Earnings
  2. Intel Net Zero by 2040
  3. Earth Day Device Hypocrisy?
  4. SAP Earnings
  5. SAP Pulls Completely Out of Russia
  6. TSMC Big Quarter Reflect Chip Strength?

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:

Daniel Newman: Hey, everybody. It’s Friday and we’re here for another episode of the Six Five Podcast, episode number 119. Mr. Patrick Moorhead, who would ever thunk when we did episode one early on in the pandemic, or actually was it before? We actually started this a little bit before that we would be 119 episodes in, and that we would still wake up and do this almost every week. I don’t know. I guess we did. We must have thought it, because we’re here, and you and I would never start something that wasn’t going to be super successful would we?

Patrick Moorhead: Probably not. I mean, we’ll try things, get punched in the nose and reconfigure, try it again, but who doesn’t like winning? So here we are. It’s literally the favorite time of the week.

Daniel Newman: I woke up with a little bit of a… my eye’s a little sore, but I wasn’t sitting behind Mike Tyson on a plane yesterday. That isn’t what happened to me. I just think I’ve got some sort of stress thing going on, but overall doing well because a lot of the things that we’ve been saying are going to happen are happening, and in tech things are still going pretty good, pretty strong. It’s the first week, the first part of the tech wave. Really started last week with the end of the week with TSMC, but carried on this week with IBM and SAP.

So we’ll be talking about that today. Before we talk a little bit about earth day, we’re going to talk about some announcements made by some companies related to earth day, including Intel’s net zero plans. Then we’ve got a couple discussions around SAP. Then as I mentioned, TSMC, the big quarter they had, and also what does that sort of mean for tech? So here we are, another earnings wave just ahead of a travel wave that’s going to have you and I all over the country for the next, I don’t know. What did I say to you the other day? I’m leaving on Monday and I’m back in July.

Patrick Moorhead: Exactly, exactly. Man, it’s funny, I don’t get much into distress as we’ve talked about. A lot of use stress going around, but this whole idea of being on the road this long stresses me out just because I just completely fall apart. I’m a relatively disciplined person, particularly on the work side. Ten years ago I was a little bit more disciplined on the body side. Kind of let myself slip a little bit, but I’m fearful because I know when I come back, it just, I might just be a complete train wreck, gain 10 pounds, or something like that. But listen, doing on the road stuff, the quality of the interactions are absolutely higher, but I’m less productive on all the other stuff.

Daniel Newman: Well, there’s really no way to get around it. Like I said, we had a exponential productivity uptick by being able to do basically multiple things at the same time when you are remote. We all learn to multitask. Anybody that’s going to sit there and tell you that they’re 100% zoomed in and focused in on any one thing at a time, they’re either extraordinarily disciplined, or they’re just lying to you. I can just see it in people’s eyes now. When you’re on a video with them, like right now, you’re definitely not watching me. I can tell you’re about to type something. I’ve gotten to that point where I’m almost prolifically able to know when someone’s actually paying attention to me. But that’s okay, because like I said, I think the split attention is more of the way it is than something that most people should be offended by.

So anyways, we got a great show. For anyone that is a first time listener to the Six Five, first of all, we accept your apology for taking this long to get here, but we are glad you’re here. This is episode 119. We’re going to talk IBM, we’re going to talk SAP, Intel, earth day, TSMC and more.

This show is for information and entertainment purposes only. So while we are going to be talking about publicly traded companies, we’re going to be talking about earnings and results. Don’t take anything we say here as investment advice. Pat would tell you to do the opposite, but just truly, just don’t do anything we say or because of what we say. Otherwise though, six topics. We’re going to dive deep into each of them. Then at the end, I’m going to gratuitously promote the Six Five Summit at thesixfivesummit.com. Check it out. It’s going to be amazing. Kicked off by IBM’s CEO himself, Mr. Arvin Krishna, in case you didn’t hear about that in any of our other conversations. Anyhow, all right, let’s get on with it. Onto the show, Pat. We’ve got other calls today. First topic. Oh wait. IBM earnings.

Patrick Moorhead: I know, how about that. I mean, two years ago, would you have thought that IBM would hit double digit revenue growth on constant currency? Probably not, but got to give IBM credit. That’s really the highlight and the market is rewarding them. In the last five days they’re up 9.3%, going pretty well. They did well on the EPS side, up 25%. The two biggest standouts for me were software and consulting. First off, I was pretty surprised at a huge surge here. This is before Z 16 comes in. So, my big learning here is that software licensing negotiations and hardware are not on the same beat, probably see Z16 revenue hit next quarter. Absolutely the quarter after that.

The pretax net margin in that software business is incredible, 19.7%. That is beautiful. Consulting did well also. Beefy and important projects around hybrid cloud.. On a revenue basis, they were up 13%. Another double digit quarter with net margins at around 7.22%.

Cloud. Oh, expectations as well. Really good on revenue growth. They moved it from the middle of the range to the high end of the range, and then free cash flow. 10 billion to 10.5 billion for the year. Net, cloud is coming together pretty nicely. Interestingly enough, showing up mostly in the software and consulting side. One of the things I would still like to see though, is I’d like to see Red Hat at bigger than 20 something growth. I don’t know why I have that in my head. I think it’s because I’ve been equating Red Hat with cloud. Then I look at cloud, and I look at AWS and GCP and Azure growth, and I know that’s completely unfair because we’re looking at 100% hybrid cloud versus primarily public cloud. Those two tracks are on different growth trajectories, but overall kudos to IBM.

I mean, listen, I’m a revenue guy. Okay, that doesn’t mean I don’t care about profits, but as an industry analyst, I’m looking for growth and people getting on the bandwagon. I’m never concerned about IBM giving away revenue and you impacting profits because they’re a company that delivers high value, high price. But congrats and double digit revenue growth, who would a thunk?

Daniel Newman: Yeah, at constant currency, 11%. Of course inflation is pretty significant. Pricing power has been interestingly more control of the tech companies and that pricing power has been passed along. So it’s 11% was the growth at constant, 8% if you take for inflation. It’s been a decade, Pat, since this company did double digits. First of all, just take a stop, take a breather. Second of all, look at the macroeconomics that has enabled this. Right now we’re heading into to probably about six months of tech compression now, a market that’s generally less accommodative. You’ve got tapering in the fed, you’ve got interest rates rising, you got yields going up, you have tech going down. About four months ago, I wrote a market watch piece where I basically said, here’s going to be some interesting companies that have the best of both worlds, value and end technology. I put IBM on that list.

Now don’t forget, IBM has a yield of about 5%. There’s a couple of things in play here. You hit some of the good numbers. The first question is, is Arvin Krishna making a difference in the company? Now that we’re a few quarters in under his leadership, it’s starting to look like the answer is yes, because you remember there was a period of time where not only were they not growing, they were declining, and under  Romanian, it was happening for quite a long time. Arvin has seemingly turned the ship. He had a big challenge in terms of the spinoff of Kindroll, and while we are a few quarters past that spinoff now, it’s actually becoming more visible in the business how important it was that’s spinoff took place. So we’re seeing the benefit now of getting rid of non-performing assets and enabling yourself to focus.

The focus came around to hybrid cloud, AI, software, and that’s why you’re seeing cloud sort of spread across the business in terms of its new reporting structure rather than cloud being inherent to just being a business unit itself, because there’s a cloud revenue attached to infrastructure, software, and consulting. Of course it’s the big C and the little C. The big C’s all the different ways cloud, IAS, Pass, SaaS, services, consulting all tie together. That high mid teens digit growth of the cloud business in the 21% or so, Red Hat should be reflected upon as good, but it is always compared against the hyper scale growth numbers of Azure, of AWS, of Google, that are larger. I look at IBM as the enterprise hybrid cloud company. They’re very focused, financial services, healthcare, manufacturing. They’ve been able to lean in there.

The Red Hat business is starting to pay off. It’s giving them tie-ins. Their ecosystem investments in partnerships around SAP, around Salesforce, around Microsoft are starting to make a difference to the business as well. They’re not trying to be a cloud company in the sense of what AWS is or what Google is. They’re trying to be a part of a cloud ecosystem, and that seems to be paying off for the company pretty well. The numbers are pretty good. You mentioned that next Z cycle. That’ll be big, because it’ll make the systems number better, which it was not good this quarter, but it’s the 11th quarter of the Z15 box. Now we’re heading into Z16 cycle. The early cycles are always really good.

So as I say, a decade without double digit growth ends. Arvin Krishna is seemingly executing and the team is showing some strength. The company is a stronger investment opportunity right now for people because of the fact that they are more value, while at the same time showing encouraging growth numbers, Pat. Good job, IBM.

Let’s talk about Intel next. We have Intel, basically I just picked one, because there was about… over the last three weeks, Pat, there’s been like 7,000 announcements from tech companies about various greenhouse gas emissions, sustainability efforts, ESG sustainability reports. Just now this morning, ServiceNow put one out. I think a week or two ago we saw one from IBM. We’ve seen them from Amazon, AWS. This one happened to come out this week, so I picked it. At scale, what essentially we’re seeing here, Pat, and I think this will really flow nicely into our next topic, is that we are coming to ahead into terms of this conversation about companies coming out making material disclosures about their plans to be doing things for the climate, for the world.

That’s whether it’s materials, whether that’s manufacturing, programmatic changes, whether that’s data and accountability, whether that’s purchasing carbon offsets. By the way, Pat, the first time ever I was booking travel for an event through a booking and I was asked if I wanted to participate in carbon offset credits for my travel. Starting to see companies doing more of this. Intel basically came out, said that they’re going to reduce direct/indirect greenhouse gas emissions to net zero by 2040. Again, this aligns with what a lot of companies are doing. Some have gone as aggressively as 2030. I think the Paris Accord is looking out to, is it 2050? It’s a longer horizon, but there’s this horizon and companies are trying to challenge it and beat it.

One of the things I did like about what Intel did here was, 2040 is a long time from now, Pat. I’m not sure what I’m going to eat for dinner tomorrow. Actually, I’m not even sure what I’m going to have for dinner today. When you think about a company making a disclosure of a roadmap, for instance, we usually look at roadmaps like we want the chip roadmap for three or five years max. Coming out with ESG initiatives that are going to go out over two decades is one of those things that I think it gets kind of a wink and an nod and everybody says, great. And then everybody goes, I’m going to be like a hundred by the time this is done.

It’s kind of trying to reconcile that in people’s mind. I like the fact that Intel did come out with some milestones. They did say by 2030, they plan to for instance, achieve 100% renewable electricity used across global operations. They’re going to invest about $300 million in energy conservation at their facilities to achieve what they call $4 billion in cumulative kilowatt hours of energy savings. Then they’re going to build all of their new buildings, and of course, you know, they’re building all these new fabs to meet US lead program energy saving standards.

One other thing that they mentioned in this report, is that there’s going to be an ongoing increase in effort with its supply chain, its partners up and down, to expect and demand more from everybody in their supply chain to participate, because as we know, none of this happens alone. A semiconductor, what is it? 50, 70, sometimes 100 different sources of materials and assembly and manufacturing. That’s why our supply chain is so problematic right now. These are all partners of Intel, and then they got all their resellers and all the impacts that they have to manufacture the goods, a PC or a server. All that comes together.

I like the fact, Pat, that companies are coming out and saying it. I continue to be a little bit flexible about accountability of how do we really track this to make sure that what companies are saying they’re doing. Pat Gelsinger is the say, do guy. So I’d like to know how they’re going to say do, but I did like that there was a bit of an interim 20, 30 goal that’s going to be set. But overall, still wondering quite a bit personally, if all the efforts around climate and ESG are going to be matched with actual outcomes, and at what point are we really going to audit it and hold all of these companies feet to the fire?

Patrick Moorhead: Good stuff. So I’ll first say that I see a difference between companies trying to be woke and say they’re doing something, but they don’t actually have anything to do with the chemicals, the manufacturing plants. Then there’s the people who are using, actually doing the manufacturing. Intel, I mean, listen, all semiconductor manufacturers use some very toxic chemicals to do etching, to do cleaning. A lot of solvents and acids are used here. Chemicals like trichlorethylene, acetone, ISO propal, ISO propanol, and other alcohols like denatured alcohol. You can’t just throw those in a river. There’s a lot of stuff that’s done.

I think Intel making a proclamation on this to me means more than some of the other companies who, they don’t actually manufacture. They’re distributors. They put stuff together. This is a big deal to me, and this is why a company like Intel who actually has to make big decisions and big investments about this, I’m really appreciative that they would do something like this. I’ll wait for the next topic to dive into kind of some of the hypocrisy that I’m seeing on the device side. Not necessarily, maybe we’ll hit the data center side another time.

Daniel Newman: I mean, again, there’s always so much to say. I think the macro trend is looking at each company, looking at each company’s contributions, goals, and the way they’re being measured, Pat. To your point, Intel has a big role to play because of how big their supply chain is up and down.

Let’s talk about that. You went on a little bit of a Tweet storm. You were doing your thing, as I like to say. You made some calls, because obviously earth day was a day to celebrate all the great efforts that companies are making, but at the same time, as I just did, it’s also a time to reflect and say great for posturing, but what’s really happening here? Your tweets created a bit of a storm. So talk about that.

Patrick Moorhead: I’ve always been kind of a scab picker when it comes to, and playing the opposite side of the room. First off, I just want to say that I am a firm believer. We should be doing more to use less resources. We should also be consuming less as well. But when I see hypocrisy out there, I have to call it. I think I really feel like it’s one of the as analysts we have to do. I picked the scab and listen, I don’t come from, this is not coming from something I read in a book. I worked for device manufacturers for 20 years. I’m very close to this, but when some of these tech companies proclaim sustainably is their number one priority, I have to ask that question.

On the device side, there has not been a device with a modular design that, and this is my hypothesis, that wouldn’t need to be thrown away in a dump every two years You would essentially take different pieces of what you wanted to upgrade. Let’s say it’s a smartphone, it’s a camera, or a processor module, or an upgrade on a display, and the same thing goes for notebooks and for smart speakers. I just think this is hypocrisy in the industry. Now economically modular designs, more expensive they’re thicker, consumers see them as more complex, many times less rugged because the interfaces, the connectivity and it’s hard for these manufacturers to put a commitment on an upgrade roadmap, like let’s say a decade or something like that.

Net consumers are saying through their actions by the chronic upgrades that they actually don’t think that sustainability in the environment is number one. Otherwise they would be like, I’m not upgrading. I’m going to use this smartphone for five to six years, regardless of the awful performance that I could get out of that. Here’s the dirty little secret with CIOs. When I talk to them, I’ll always ask them, “Hey, are you willing to pay more for something that pollutes less?” Daniel 99 out of a 100, when I talk to a hundred CIOs every week… that’s an inside joke everybody. I don’t really do that, but I probably talk to 100 CIOs per year. Anyways, they say they won’t pay extra for something that’s green.

If consumers aren’t voting with their wallets and enterprise IT is not voting with their wallets, do they actually care about sustainability?

Then another way I wanted to look at this, well, maybe the industry just hasn’t done enough here. Well guess what? In 1998, I was on the board of the device bay consortium. It was Compaq computer. We were number one in everything. That’s who I worked for. It was Microsoft and it was Intel. We were going to put together a modular architecture for floppy, hard drive, optical, and even processor and memory modules. You know what? It fizzled away. People weren’t interested. It was too expensive.

It’s funny, it’s so old I can’t even find it on the internet when I do a web search. There was Google’s project Aura that was a modular architecture for smartphones. It’s dead. There is a notebook company called Framework, and interestingly enough, they don’t talk about the environment and long term upgrades. It’s all about having a DIY notebook and something that is easier to maintain. Listen, I can back into that and say, okay, that’s good for the environment, but it’s not necessarily there. So anyways, Daniel, there we go. I think as an industry, at least for devices, I mean, look at Apple. They had this robot called Daisy that I saw in town that would, you put a smartphone in and it disassembles stuff. Whatever happened to Daisy? How many smartphones have been recycled? How any iPhones have been taken to third world countries from North America that we thought sucked that got moved out? Where’s operating system support for a decade? It’s not there. Anyways, rant is over.

Daniel Newman: Is that like a slash rant, end rant thing goes there? Should we put that in the show notes? End rant, 22 minute, 23 minutes, 25 seconds? Not a lot to add here. I guess I’d say there are some companies like HPE financial services working on the circular economy that is doing some things in the enterprise space to take servers and computers and laptops and hardwares and get them recycled. I think that stuff’s interesting. I think that’s an opportunity that’s going to grow, because a lot of the notebooks, Pat, to your point that we do get rid of notebooks, phones are perfectly still usable. They’re not no longer functioning and capable of running a current operating system or the apps that people need, but we literally throw these things in the garbage. We just toss them out. No longer good enough for us.

I do think it’s interesting because we spend a lot of time on our iPhones or our new Samsung devices, yelling at people and getting angry on social media about what other people and companies should be doing to give back to the earth. But this kind of goes on to just be what I would call a symptom of society, of today’s society, Pat. That’s that everybody wants things to be done, but they don’t want to do it themselves. They want climate change to be a focus, but not my phone, not my laptop, not my… I need a new flat screen TV every year. I want to replace the car. I mean, heck even Tesla. What are we going to do with those batteries? Okay, because I’m pretty sure-

Patrick Moorhead: By the way, where does most electricity come from? It’s from burning coal globally.

Daniel Newman: I’m pretty sure though, that the toxicity of that lithium and those batteries is probably worse than some of the toxicity of the carbon that is output from our vehicles today. But again, no one wants to talk about that. So let’s not talk about it, Pat. Let’s just talk about something else, because I don’t want to offend anybody by actually at least making them think beyond. You know me, I play it safe.

Patrick Moorhead: I know. I know you do, but I have 14 years on you, and if I get canceled, I’m 54.

Daniel Newman: I don’t think this was that risky. That other thing you said, inside joke.

Patrick Moorhead: No. No. Okay. I got you. I got you. No, no. I think we do need to pick these scabs. Otherwise we will never actually get to what I think we really want to do. Listen, I’m a big do say guy. If you say you’re going to do something, do it, and don’t pander.

Daniel Newman: Amen. No more pandering. Speaking of no more pandering, let’s talk about another earnings. This was a mixed result coming in from SAP early this morning out of Germany. Company had a top line beat, but a bottom line miss. We talked a little bit early on about kind of what’s going on in the market. Look, I’m going to be pretty straightforward about SAP. I’m watching cloud. When I look at that company, they are a recurring revenue machine in terms of hundreds of thousands of customers that depend on SAP to run their businesses.

You look at their overall revenue, very predictable, a lot like some of the other big software players. That’s been one of the things that’s made the company incredibly dependable, but growth and cloud have been the question marks that have been around the company for some time.
I think they’re actually really making some progress here. This quarter they saw 31% cloud growth, 25% of constant currency. They saw that backlog in cloud grow significantly, nearing $10 billion, up 28%. SAP4HANA cloud revenue, 78% growth. It reaffirmed outlook for the company.

So what happened on the miss? Well, our next topic we’re going to talk a little bit about a note that came out this week about SAPs, what they’re doing to deal with the Russia and Ukraine war, but that had a big part of it. One thing I liked, Pat, and you and I got access to this this morning is, I’ve been asking and I’ve said over many years, one of the big complaints about S4 is that the lift from legacy on-prem SAP to S4 is a significant transformation that companies cannot make gradually. It’s a fairly large lift in ship.

So the company’s got this rise with SAP. We talked about it here on the show, and the whole idea was providing basically a simpler pathway for companies to move from legacy on-prem to S4, and do it as seamlessly as possible. But that transition’s significant. So the company’s been working really hard to make it easier so that a company can make the shift. You saw 500 more customers this quarter jump over to S4. You saw the adoption number jump in just under 20,000, 18% growth. You’re seeing rise though, becoming highly adopted by big companies that wanted to make this transition. What are some names? How about Accenture? How about Daimler? How about NEC out of Japan? You also, and by the way, I mean, that’s just a select few. You also saw Microsoft, which again, you’d say, oh, aren’t they competitors? Yes, but Microsoft also works with and uses some of SAP’s technology. They actually announced that they’re going to become the first public cloud provider to adopt the rise with SAP and SAP S4 HANA transform in their own SAP deployment.

Patrick Moorhead: Wait a minute. Let me see if I got this right. The company who makes Dynamics 365 is using rise with SAP on their own internal ERP?

Daniel Newman: In this case, what they’re doing, they’re doing their own, their transforming. Let me read that.

Patrick Moorhead: It’s not that hard of a question.

Daniel Newman: SAP S4 HANA to transform its own SAP ERP deployment. So yes, and it’s going to enable Microsoft to move faster. That’s kind of a nice validation of what SAP is doing with rise. So strong regional performance, strong top line performance, a little bit of a miss on the bottom line. I think we can talk more about what that means in the next segment, Pat, but overall, I keep saying, watch the cloud growth. It’s a sticky business. SAP’s got a huge number of customers, and seeing that transformation from pre to cloud in its broader customer base is the biggest indicator I can give the market in terms of how successful the companies be over the long haul.

Patrick Moorhead: Man, you’re on fire. You really are. So the only net adder I’m going to put up is, so I think SAP probably for the last year has been way too apologetic on cloud. I think about a year ago, while I wouldn’t say investors looked at the hybrid cloud, but the reality is everybody agrees the hybrid cloud is the future, and that hybrid cloud is basically a combination of resources that are in the public cloud and that are on prem on a cloud basis. But this slide alone tells me that the company is getting a lot more aggressive in their story. These are very respectable numbers. Then the cloud revenue numbers are similar to IBMs, because we’re really looking at an on-prem private cloud versus something different. But look at those 71% growth in S4 Hana cloud. That is just, that’s a monster. Look at that backlog at 79%. And then finally Qualtrics, which I believe is going away after a while, more of a SaaS play, those are actually bigger numbers than an enterprise.

Daniel Newman: Qualtrics was spun off, but SAP still holds the vast, the majority of the share, kind of like the VMware.

Patrick Moorhead: No, I appreciate that. Thank you for the clarity on that. But still, the interesting part is Qualtrics, which 48%, are you kidding me? Typical SaaS growth we’ve seen is 30, 35% from the big guys, whether it’s Oracle or even Salesforce. These are monster numbers. So net, net congratulations on a great cloud quarter. Some of the customers that were brought out as well, like Accenture, Daimler Truck, Groupo Estrella Blanca, X side, NEC, Oradu, Quinn Quinn Food, Rising Auto Tellis,, Tramontina, and Y pro, right? Those are big names. I don’t know, Daniel. Something big seems to be brewing at SAP. You started on this and I’m going to end on this.

What people need to understand about SAP is SAP at the center, that the center business or applications go all the way back 25 years ago. With rise and when you’re moving to S4 HANA, you’re not just doing a copy and a paste. You’re not doing a lift and shift. You’re completely redoing the business processes, how you make products, how you source raw material, how you invoice, and how you pay people. The basics of business, as opposed to some brand new application that sits out on the edge that has no,  but good stuff going on here.

Daniel Newman: Absolutely. Let’s talk about the situation in Russia, because SAP put out a note this week. They sent out a press release kind of talking about that. When they were pointing to what their shortcoming was for the bottom line, that was a lot of Russia related talk.

Patrick Moorhead: Yeah. I mean SAP was doing very similar things that at other companies in their class were doing, but I think they were getting more heat because they’re a German company and there’s a lot of heat on the overall German government on the amount of military support that it’s giving Ukraine. It’s kind of been a huge story, less so in the United States, but more so in the EU This was SAP’s definitive statement, first of all, that it’s supporting Ukraine and all the government sanctions. It always has, but this is essentially a complete and orderly exit.

I mean, think about this, if you’ve been service a customer for 30 years and literally the shit hits the fan, you really have to think through a pullout. It can’t be some crazy thing. You might be shutting down a hospital. You might be shutting down a grocery store. I think when you look at the big picture, I don’t think anybody can say it’s a good idea to leave anybody in any country at risk of food or medical or anything like that. Maybe you’re going to take down a power grid. That’s just not cool.

So SAP really had to think about this. So first off, cloud services. They are shutting down all cloud, a complete cloud shutdown, and they’re giving their customers the choice to delete the data, to have it packaged up and sent to them.  What these Russian customers go to, right, they can’t go to Oracle. They can’t go to Microsoft. They’re out of SAP. I don’t quite know what they’re going to do.

On the on-prem products, they announced exit to support and maintenance of all on-prem products in Russia. This is a big deal, and it doesn’t come at a zero cost. In fact, let me pull up the numbers here. In their earnings call this morning, SAPs total Russia shutdown, 300 million Euros in annual revenue. There’s going to be one time, 80 to a 100 million Euro one time charge, and overall a $350 million non IFRS profit hit, and non IFRS RS is like non gap here in the United States. It’s going to leave a mark. Some countries do very little business in Russia and it was on the edge. Maybe it was one application, not a big deal. They’ve been operating for 30 years, powering hospitals, manufacturing plants, food processing, and things like that, but they’re taking a pretty big annual hit, but you have to. I give them credit for doing this.

Daniel Newman: Yeah, absolutely, Pat You hit a sub theme that I want to mention. I don’t think I need to beat the drum really hard, but we conflate things a lot as a society. Causing economic harm to Russia to slow down its military actions and to make Vladimir Putin think about his continued strategy to inflict this war in Ukraine is one thing, but there are a lot of citizens in Russia who have nothing to do with this. There are people that are running businesses. There are families they are trying to feed. I mean the broken supply chain, we could have extended famine. You listen to the all in, and I do, talking about the food insecurity risks that are being created right now in the world. SAP is a backbone of businesses, large and small in almost every industry.

They break into more than 25 different industries. Everything from agriculture to mining, and these companies people are just like us. They’re just people that are running businesses that are being basically penalized because of the actions being taken by a regime. A company like SAP being thoughtful about this should not be the victims of activism for a negative approach because they’re trying to do something gradually and thoughtful for those non sanctioned companies. Again, they’re splitting this up between companies that are being specifically called out for participating in this war and participating in harm that’s being done, and every other company. It could be restaurants. It could be manufacturing companies. You mentioned, Pat, it could be hospitals and banks that enable people to get access to money to support their families.

So anyways, it’s a bigger story and I’m glad you called it out. I’m glad we took the time to talk about it because the fact is, they’re trying to do this in a way that’s thoughtful and compassionate and empathic in a world where we’re very binary right now. If it’s in Russia, get out. It’s one thing if you’re McDonald’s like, yeah, we’re not going to sell more cheeseburgers there. It’s another thing when you’re saying that the local school district that depends on SAP for data in the back is not going to be able to run or pay its teachers anymore, or run maintenance on those facilities because it’s basically taken their entire systems down. So I’m glad that, again, nuance people, nuance. I think one of the themes of this show, nuance.

Patrick Moorhead: I wonder how many millennials and gen Z who look at this stuff have ever worked in a factory before, or done something. Do actually understand how real businesses is conducted? Maybe that’s my old man, get off my lawn, point of view here. But I think every kid should work in a factory to see how things actually work, get their hands dirty a little bit.

Daniel Newman: Yeah, when I started working, my dad owned a trucking company. He made me work on the dock and I had to work in the yard of the trucking company. I picked up trash. That was my first gig. My second gig was unloading and loading trucks on the dock. I wasn’t the one driving the forklift. I was the one that all the stuff the guy on the forklift didn’t want to do. I can tell you it’s real work.

So final topic, maybe on a slightly more positive note. I wrote an op-ed in market watch early on in this week after TSMC came out with some really strong numbers. Again, this segment isn’t so much to talk about TSMC, but to talk about the impact and how to look at the market when a company like TSMC reports. Now, TSMC manufactures 90% of the world’s leading edge semiconductors. That’s the percentage based upon the most recent and research I was able to find. Not only did they beat significantly on the top and bottom line, Pat, but they also raised their guidance for the remainder of the year.

So while we’ve got all these forces that I talked about earlier, we’ve got macroeconomic and fed FOMC forces like rising rates, high interest, and high inflation, you’ve got the war and geopolitical consequences that are going on, and of course we’ve heard endlessly about this broken supply chain. But somehow despite all this TSMC, the company that manufactures chips for Apple, for Qualcomm, some for Intel by the way, AMD, NVIDIA, and others is actually manufacturing more chips, specifically calling out things like data center and AI as a big propellant of its growth.

The op-ed I wrote basically said, are we sort of being unreasonably negative towards tech and growth right now? Because if TSMC is any leading indicator, we should see some good results from Qualcomm, AMD, NVIDIA, AWS, Microsoft, all these companies. If tech is doing well despite a less accommodated fed, tapered purchasing, higher interest rates, inflation through the roof, a very tight labor market, rising and costs of labor, they’re still growing revenues, making more profits and guiding up. We sort of disconnected the economy and tech and as tech, in fact as deflationary, as I’ve been saying all along that companies are going to actually turn up the investment automation, AI, big data, cloud services, software at scale in order to make sure their businesses continue to grow, sustain, and operate, even in what is likely going to be either a recessionary, Pat, or at the very least a stagflation type of economy that’s being caused by a lot of decisions right now being made in Washington.

So net net, I’m thinking the next couple weeks, Pat, weighing it ahead, I think they’re going to be better than we expect. I think where we might just start see a little pullback is going to be some of the discretionary spend, notebooks, smartphones, some automotive purchasing could slow, but heck, Pat, we saw record housing starts just this last week.

Patrick Moorhead: Hard to believe. Hard to imagine.

Daniel Newman: We got interest rising and people are still starting homes. You’ve got cars still selling faster than they can be produced. I drove by a Toyota dealership in Round Rock the other day, and I’m not joking, Pat. There could not have been two cars in the entire facility. I don’t know sometimes about the narrative and the story and the media, but tech seems to be a bastion of hope right now in an economy where everybody’s kind of rooting against it. The sentiment’s really bad. I’m feeling good.

Patrick Moorhead: Yeah, so we saw 47% jump in earnings and a 36% increase in sales. The way that I try to see is if TSMC reflects on the market is really, they’ve doubled prices on some of their highest order semiconductor products. Then if I look at the percentage of revenue from those, I still think we’re going to have a good unit. I think so. I think, AMD, Qualcomm and NVIDIA are going to do pretty well. Even when I adjust for TSMC flexing their pricing muscle, I think it’s going to be good quarter. The smartphone market is down a little bit, so that might be the one thing I’m going to be squinting at, but PCs, graphics cards, data center, keeps on trucking.

Daniel Newman: Yeah, we ran a little bit long here everybody. So thank you so much, Pat. Good adds to my diatribe, and thanks for letting me do that. I think we each had one today, but overall a lot to cover. A great show. Hit that subscribe button. Go to thesixfivesummit.com and sign up. It’s going to be epic and we appreciate you. We should be back next week. Pat and I are going to be on the road in Chicago together doing a Six Five insider from the road, or which one is it? Is it on the road? Is it insider?

Patrick Moorhead: It’s on a Six Five on the road at Oracle.

Daniel Newman: We’ll be at an Oracle launch event, but thanks for tuning in. We appreciate y’all, but we got to go see you later.

Patrick Moorhead: Take care.

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