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We are LIVE! talking TECH EARNINGSPALOOZA on SAP, Microsoft, Google, AWS, Intel, Honeywell- The Six Five Webcast
by Daniel Newman | November 1, 2022

On this episode of The Six Five, leading global tech analysts Daniel Newman and Patrick Moorhead jump head first into the tech industry’s latest earnings reports to see who made a big splash and who belly-flopped.

On deck this week is:

  1. SAP Earnings
  2. Microsoft Earnings
  3. Google Earnings
  4. Amazon Earnings
  5. Intel Earnings
  6. Honeywell Earnings

For a deeper look 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. Welcome back to another episode of The Six Five podcast. It’s Friday morning. It’s Earnings Palooza. It’s my favorite week. And I’m joined by my favorite bestie co-host, Mr. Patrick Moorhead. Good morning, Patrick.

Patrick Moorhead: Daniel. How are you doing, my friend?

Daniel Newman: Man, it’s good. It’s been a good week. I slept in my own bed every night this week. It’s a weird phenomenon. It doesn’t create as much Twitter entertainment as showing a picture of your crotch on aisle or windows.. What was it? A middle seat. Middle seat. Row 79 on a Delta flight coming home from New York. But Pat, it’s got to be good. It looks like you’re at home today.

Patrick Moorhead: I am. I actually feel very good. It’s funny. I thought I was only on the road for four straight weeks. And then, I went back and looked at my calendar. The reality is, I’ve been in airports for eight straight weeks and I’m going on a ninth. But you know what, Daniel? I’ve lost eight pounds since I’ve been in those nine weeks, so I’m feeling pretty good.

Daniel Newman: Is this an ad for Noom? Is it Noom?

Patrick Moorhead: It could be. You know, I’m a tough love kind of person. Noom tells you, “You’re screwing up, you idiot. Or, “Do you want to get fat and die,” types of things. I love that. I really do. That’s motivation for me. I love it. But you know what? I don’t care where I am on the planet unless, I don’t know, I’m on a plane. You and I are going to do this Six Five podcast. And I’m happy for my bestie, because this is your favorite show.

Daniel Newman: Everybody that knows me knows I love these ground truth moments. I don’t necessarily love where we’re at right now with the market. It’s a bit of a tough time. We’ve hit somewhat of an impasse. There are some companies doing really well. Some that we won’t even talk about here on the show today, but I guess worth shouting out. We love to pick on Apple, but they did have a good quarter.

We’ve mentioned, over this earnings period, some of the enterprise tech names. IBM. ServiceNow had some really good results this quarter, above the fray. But man, this big tech week. FAANG, MAMAA, whatever you want to call it. There’s been some really tough results. I think we’re going to break a lot of those down today.

Running through the show, we’re going to talk SAP. We’re going to talk about Microsoft, Google, AWS, Intel, and Honeywell. A few of those did well. A few of those had a tougher quarter. We’re going to try to break down the ups, the downs, the good, the bad, the ugly. Quick disclaimer. This is the show that we really need to do this disclaimer. This show is for information and entertainment purposes only. While Patrick and I will be talking about publicly-traded companies, please do not take anything we say as investment advice.

Pat, I did the rundown already. We’ve got a lot of names to talk about. By the way, we’re both fresh off Austin GP. That was fun. I don’t care what’s going on in the world. I think I saw you, you were rubbing elbows with Brad Pitt. Were you rubbing elbows with Brad Pitt? I ran into Max Verstappen and I actually thought that was cooler.

Patrick Moorhead: Well, I actually stole that picture from somebody and pretended it was my own. But I’ll tell you what? I was really happy to meet with Lenovo CEO, YY. Qualcomm CEO, Cristiano Amon. AMD CEO, Lisa Su. HPE CEO, Antonio Neri and Matt from Marvell. Gosh and Austin from Luminar. What a great place to meet some of our CEO friends.

Daniel Newman: It was really cool. I felt a little bit like we would almost be bragging to talk about all the who’s who, but that’s actually what we do. I was looking through my Twitter feed and I said, “God. That’s a lot of self-aggrandizing promotion,” but we’ve got a great job, man. We’ve got a great job.

Patrick Moorhead: This is self-aggrandizing promotion. We talk with these people on a weekly basis. They’re not our besties, but we see people and we say, “Hi,” just like normal people would.

Daniel Newman: Absolutely, my friend. I’m just being facetious. I’m more apt to a picture of your crotch while you’re sitting in the middle of Row 73D on a Delta, but those pictures of you with those CEOs are pretty cool as well. I just like them all. That’s what besties do. All right. Let’s jump in, Pat. Because there is a lot to talk about. Let’s do SAP. They were first to go this week and pretty good results.

Patrick Moorhead: Pretty good results. You talked a little bit about this, but while the trillion dollar club is declining, you have companies like IBM, Cadence, ServiceNow, and SAP doing really well. They beat on the top by 3%. They did miss on the bottom line due to some investment losses through Sapphire Ventures. But in a very similar thread, as we’ve seen in the last two quarters, they are kicking butt in the cloud. Cloud plus BTP revenue and backlog, up 38%. What I think is super exciting. SAP S/4HANA up 108%.

And then, overall cloud. This is what I’ll call non-gap, which EU companies called IFRS, gross profit was up 44%. It was a bigger pass through, bigger profit than the increase in revenue. I feel like net-net, the strategy is working. Gosh. You and I bumped into Christian Klein, speaking of CEO, at Sapphire. I think we had a very similar message that quite frankly we had been telling for a while, which was, “Stop apologizing for the cloud, just because you don’t have a public cloud.”

Hybrid is here to stay. All of the services that you put in that to move your customers into the cloud, whether that IS service is on Azure, who’s number one in that and number two is a toss up ironically between AWS and GCP. To their credit, and again, I don’t know how much they listen to you or I. They did that and now suddenly they’re being recognized as a cloud company. A little later than some of the earlier cloud customers, if you consider that AWS is 15 years old. But nonetheless, very positive earnings. Christian Klein’s strategy and his leadership is working at the company.

Daniel Newman: Absolutely, Pat. Look, we’re in a period where critical technology projects are going to come to the forefront. You’re going to hear me talk about this probably a few times throughout this podcast, because there’s going to be the stuff that I’m going to beat my chest and say, “I was right.” The compression of ad tech. Consumer revenues largely outside of Apple being pretty hard-hit.

Companies during the early onset of the pandemic got really long on the growth. There was a ton of transformation and a lot of projects. Companies were talking about digital transformation, but they were actually doing a lot of hiring. They were actually bringing people on. Staffing up and beefing up their OpEx, in order to fulfill the next generation of requirements on mobile and e-commerce and digital business. But the problem is a lot of their actual digital projects got held up. They slowed down and didn’t move.

Look, when companies are doing well, they spend, they get fat, they get happy, they get comfortable. When the markets get tough, deflationary tech becomes critical. That means you’ve got to start cutting back, pulling back. Being more efficient, more effective. SAP is a core technology that runs hundreds of thousands of businesses around the world. Those cloud revenue growth numbers are good.

The S/4HANA and the cloud revenue and backlogs at triple-digit percentage is good. The company is struggling with some of their venture numbers. That happens. Look at Amazon the last few quarters having to write-down Rivian. It’s all about, “Is there enough patience there?” It’ll get there.

Patrick Moorhead: Look at our risk portfolios.

Daniel Newman: I don’t want to talk about it, Pat. I’ve seen things. I’ve lost 60%, 70% in a week on things before, because you’re in on risk. Pat, there’s one number you didn’t mention though. They gained, I believe it was about four points this quarter. It was what they call, “The share of more predictable revenue.” This particular number has grown to 80%.

Now, I’ve talked about this with Oracle a lot. SAP has now come to match. Those two love to spar on earnings calls, but the 80% more predictable revenue. This is what they’re calling their cloud slash ARR. This is a really huge number. Basically, SAP came out this quarter and said 80% of the revenue that they’re sharing is predictable. Meaning it’s renewing, renewable, recurring, or likely to recur.

It makes the company pretty valuable. And it also adds to this story of stability that needs to be told for a lot of investors during times of market contraction. With that in mind, I think Pat, that is the SAP in a box. You want to go onto Microsoft? You ready to go?

Patrick Moorhead: Sure, buddy. I am ready to go.

Daniel Newman: All right. Microsoft had I thought a pretty good result. I don’t know how you feel about it, but it came down to … What was it? Their Q1, $45 billion in revenue. $20 billion in OpInc, up 11%. 16% in constant currency. I believe it was a beat on the bottom. It was a just-miss on the top. Doing this all from memory. Trying not to look at the notes, so I can stare at all of you.

Patrick Moorhead: You can just look at my tweet and it will show you.

Daniel Newman: By the way, Pat’s tweets are the best. But what I really liked about this … I had the chance to go on and talk to Bloomberg Tech about these earnings after they hit. I liked the fact that their number was pretty well-diversified across the business. Now, the Azure number was probably the one thing that got investors a little bit of short-term indigestion.

I think it came out at around a 35% growth for Azure. That is a slowdown. I think they were looking for 40%, which is what they had last quarter. But if you look across the business, you look at things like Dynamics ERP, Dynamics 365. Even their more personal business. The personal computing business showed some really good resiliency coming in at the expectation. Or even just a little bit above.

This is a company that has a little bit of exposure to consumer, has a lot of exposure to enterprise. And as far as I could tell, the business is still growing. Like I said , we’re acting like the world is coming to an end right now, but the reality is this company did more sales than a year ago when tech was being valued at exponentially higher multiples. And so, what are the consequences? Well, FX, of course.

Every company like a Microsoft that has a big global platform is being impacted by FX. As far as I could see though, OpInc was still strong. It was still up, I think, 6% on a year-over-year basis. But the NetInc was down a little bit, people were a little bit worried about that, and so was their diluted EPS on the year-over-year basis. But if you look across, like I said, the portfolio. Office up, office consumer up, LinkedIn up, Dynamics up, server up.

They had a couple of downs. Xbox. Not surprising. Even devices though, Pat. 2% up. Now, again, I think we’re going to see some pretty bad device numbers from some other companies. But now, you’ve got Microsoft up. By the way, I know Apple botched the iPhone a little bit, but did you see that Mac number? Oh my god.

Patrick Moorhead: Yeah. 20%.

Daniel Newman: But apparently, not all the PCs are in trouble. Apparently, there are certain ultra-premium. I’ve always said that Surface is a little bit more like the Mac of the PC world. It’s kind of the ultra-cool premium product, and it seemed to hold its own this particular quarter, Pat. I think, “Good job.”

I know people are bunching Microsoft in with some of the lower performers, but I think that’s kind of a miss. I don’t see it that way. I see a good performance after a series of great performances here. Microsoft largely looks like it’s in good shape to weather any short-term storm.

Patrick Moorhead: Good stuff, my friend. I’m going to give my overall thoughts, and then I’m going to dive in. I’m not going to talk financials. I’m going to talk more about usage metrics and things like that. Everything I’m going to talk about is in constant currency, because quite frankly, I’m not an equities analyst. I’m an industry analyst. I care more about the tonnage and the money that changed hands than the financials.

First of all, I agree with you, Daniel. They had a very good quarter. Most of their revenue numbers were deeply impacted by foreign exchange. Listen, I interned in a foreign exchange group at a company when I was 18. Short-term, you can’t control it. You can do some arbitrage, as we’ll see with Google. You can manage it, but it takes time with hedging.

PC market stinks. Surprise. Therefore, Windows would be down, and new services, new sales related to that as well. I think it’s too soon to hit the panic button on Azure. I said that before we saw the AWS numbers, which declined as well. Azure has a very strong offering. It’s a big business. I think it has more to do with the economic climate than being uncompetitive in certain areas. They’re not perfect in certain areas, and I think they can be doing more on their own custom silicon. But again, a lot of people hit the panic button just based on that. They were wrong when we saw afterwards, AWS’s numbers.

On productivity and business processes. This is like Office 365, LinkedIn, Dynamics 365. Office had record engagement. ARPU growth through E5 licenses. LinkedIn, up 21%. That came from growth in Talent Solutions. They brought up this number. A 4X increase in newsletter subscriptions to 150 million. In Dynamics 365, they talked about share gains in finance and supply chain. Isn’t it funny, Daniel? If Microsoft, Oracle, and SAP are gaining share in supply chain, who’s losing it? It’s odd.

But again, probably, I need a lot more analysis on that. You already gave I think a good breakdown on Azure. Let me finish out here with more personal computing. Windows. Zero surprise. Down 15%. That’s actually lower than the market was down, which was more like 20%. Hey. Windows commercial products though were up 15%. A little bit of usage on Windows. 20% increase in monthly active users versus pre-pandemic. Gaming, because I look at constant currency, was actually up 4%. Xbox hardware, up 19%.

Finally, although they don’t like to trumpet this, I think this might be the only major ad business that was up. Maybe Amazon’s was up. I think I saw a tweet from you on that. But ads from Bing and from Xandr, up 32%. I thought it was pretty good. A couple of new details that came up. Viva, I’ve always wanted to know usage on that. 20 million monthly active users on Viva. I think that is absolutely huge. From an industry analyst perspective, a good quarter.

Daniel Newman: I think the demand for their products are strong, Pat. I do need to correct myself. They actually did beat on top and bottom. It was very narrow. I thought it was a narrow miss. It was a narrow beat. Having said that, I think the cloud and a somewhat cautious outlook was what created that immediate negative response. But yes, you hit it on the head. Let’s jump to topic three, Pat. Let’s get all Google-y. Let’s be all Google-y.

Patrick Moorhead: Daniel, I don’t cover the ad business as an industry analyst. I’m just going to jump … Well, let me talk about the top line. They had a rough Q3 ’22. They missed on the top by 2% and a huge miss on EPS by 15%. But guess what? Bright spot. Ding, ding, ding. Actually, two bright spots. The cloud. Google Cloud, up 38%. Boom. Currency hedging, up $576 million. I love that they put in there. It just shows what you can do with good cash management. I wish Microsoft would do that.

They added a paltry 37,000 employees year-on-year. But Google Cloud. That’s the focus. Revenue is up to $6.9 billion. They narrowed the loss percentage from 13% to 10%. They still lost $700 million, but on 38% more revenue. As you might remember from our visit to Next in New York City at beautiful Pier 57, I asked Google Cloud CEO, Thomas Kurian, “Hey. Why don’t you give more love on the earnings call?”

Regina, who runs AR was like, “Patrick. Did you not pay attention basically to the last earnings?” I said, “I did, but I couldn’t make the call.” She said, “Watch this next earnings.” To their credit, there were 28 earnings calls citations about Google Cloud. Two pages of content out there talking about Google Cloud Next updates, Google Workspace wins, and overall big customer wins. But what I liked the best out of all of those 28 call citations was Google CEO, Sundar Pichai, saying that Google Cloud is a key priority for the company.

Listen, I’ve run corporate comms and marketing for big corporations. I know what happy talk is on corporations, but I think it’s meaningful that he said this. Because there’s always that bugaboo that a lot of these Google Cloud competitors are whispering into our ears, which is, “Hey. How committed are these folks?” If the going gets tough in advertising, which it did, what does that mean to the investment in Google Cloud? Anyways, 38%. $6.9 billion. We are getting close to a $30 billion annual revenue run rate. I think that is incredible.

Daniel Newman: Pat, I first of all totally understand where you’re coming from, in terms of the company talking more about it. I think it’s been one of those things. They’ve been a little ominous about talking, because people get a little tough on them about the profitability of it. But Google has the luxury. And I want to be very clear that this is okay.

When you have a business that creates extraordinary profit margins, it’s okay to take the margins and utilize it to invest in growth areas. Google understands that this isn’t a game that they want to play at a small scale. Meaning, if they wanted to be a small-scale cloud company, they could probably make it profitable. They could start right now. Start cutting fat, taking a $7 billion-ish run rate, and making it profitable this quarter. Just get rid of a lot of overhead and costs.

You’ve got Amazon, we’ll talk about that in a minute, doing almost $21 billion a quarter. That’s their target. Let’s just be very clear at who their target is. Their target is to be the biggest. Google doesn’t enter markets to be a third, fourth, fifth player. And so, they want to be 20-plus billion dollars a quarter. We are in the early days. You can go back and review our commentary on Google Cloud Next.

This is a company that’s finding its way into key enterprises in every major industry. Whether that’s coming in as the second cloud, the primary cloud. And of course, with great depths of experience running their own cloud. Talk about learning how to build a cloud to run traffic. The highest search volume traffic in the world. Then, securing it. Making it compliant, they’ve got a lot of best practices inside their four walls, Pat, that are going to be very valuable as they continue to scale the business.

Look, I will talk a little bit about ad tech. Just because I think it’s interesting. I like to talk about the economy. As you see, there are certain booms and busts in tech that are very reflective of what’s going on in the macro space. First, is semiconductor booms and busts. We all know we’re in a little bit of the bust cycle of semis now. Well, guess what? That tends to run very much in parallel with GDP.

As we look at what’s going to happen to our economy, it tends to be a good leading indicator. If the Fed’s watching, I could join the Fed board guys. Which one do you want me to run? Chicago? San Francisco? I can do this. But in serious, that’s something to watch. Ad tech is another one. Ad tech is an amalgamation of many smaller businesses. This is the way small businesses reach customers.

Whether you’re using Google keywords, you’re using YouTube, you’re using TikTok, you’re using Snap. This is a what I call a hierarchical revenue model, where the best tend to get the least spill during the downturns, and the lesser, they fall harder. We saw what happened to Snap. Meta right now has no clear strategy. Their Metaverse is completely nebulous. People are moving away. They find Mark Zuckerberg to be arrogant. Now, their investors are turning on them as well. By the way, did you see Jim Cramer? I think he cried on TV.

Patrick Moorhead: He did, which is weird.

Daniel Newman: It’s sad though. He probably lost a lot of people, a lot of money, because people listen to him. But my point is Meta and their strategy. I still think Alphabet and Google is at the very top of the pyramid in terms of when people are going to cut. They’ll cut Google’s ads and YouTube less than other things, but TikTok is a major problem and it continues to be a growth story.

Overall, I think Alphabet is in a situation now where they’ve got to double-down on cloud. They’ve got to get that growth to profit in some time. But having said that, focusing on their core business. By the way, I do love the fact that this company generated almost $70 billion, they missed by a little bit, but they still generated almost $70 billion in revenue. Man. Sometimes these numbers are just astounding to me. It was like the guide for Amazon. Perfect segue. Let’s talk about Amazon.

Pat. Google, there you have it. Amazon, here we go. God. Where do we start, Pat? I know we want to talk about the cloud, and that’s a good one. Look, AWS, I’m going to leave a little bit to you. Amazon as a whole. I just found this really good graphic. I want to pull this up really quickly. Their Q3 ’22 income statements. $53 billion in amazon.com. Their physical store, by the way, I don’t know if you know this. $28 billion. Third-party services is $9 billion. Prime is about a $10 billion business. Their advertising business. .

Prime is nine. Advertising is nine. AWS cloud is almost 21. And then, they got $1.3 billion of other. There’s a great graphic online. I’m just looking through this. It actually shows all their revenue sources, how their revenue comes out. On the other end of $127 billion in revenue was $2.9 billion in profit. What we know for sure is that all the OpInc plus some was generated by AWS. Amazon is this company that’s continuing to build this moat of basically being the world’s biggest eCommerce company, but very clearly, they’re actually very hyper-dependent on their cloud business to generate the OpInc for the organization.

I think the revenue is less the problem to people. I think what people are trying to look at is, “How much of Amazon’s results are indicative of what’s happening in our broader economy?” Pat, we didn’t talk about Apple on the show, although I’ve referenced this several times. Apple is always, in my opinion, indicative of the top-end of the market. Meaning … How successful are successful people when they can continue to upgrade their phones and buy super overpriced laptops?

People that have money apparently still have money, but Amazon is more of, “I need toilet paper. I need fruit snacks for my kid’s lunchbox. I need supplies for school. I need socks and underwear.” Well, when their revenue starts slowing … And that was really what people got upset with this. Their guide was down by $15 billion. Now, they’re only going to do $140 billion next quarter, but the market thought they were going to do $155, which is huge.

And so, what I see this as indicative of is we’re heading into the biggest quarter of the year. We’re heading into the part of the year where this is going to say, “How much are people spending on holidays?” Christmas, Hanukkah, different holidays where spending tends to go up. It looks like it’s going to go down. As I was alluding to in the Alphabet, when I was talking about the broad economy, what I think is happening is we are really starting to see clear cracks in the system that we are heading towards a recession.

Sorry. I know everybody thinks it’s perfect. Now, we’ve got the FX. Europe is on stilts. US is slowing down. We’ve got seven plus percent mortgage rates, tight credit markets. Amazon, by the way, should be a bellwether. I know, by the way, that our policy makers should not … Their mandate is not to look at stocks when they make decisions about Fed policy. But Pat, how can you not look at Amazon’s results and not think, “Gosh. This is a pretty good leading indicator that people’s home household budgets are getting smaller.” Things are tightening up. That’s what is going on there.

I’m just going to kick it over and just say, Pat, I know everybody’s really negative on the AWS thing because their revenue has slowed down, but 27% year-on-year growth at over $20 billion. There’s a lot of large numbers here. Because I’m pretty sure, if you look at their growth, they grew via Google over the course of the year in terms of their total number, their Google Cloud number. When you’re growing 30% and you’re at $20 billion, isn’t that like $6 billion in annual run rate growth?

They by the whole grew their number for the quarter. I guess there’s a little bit of that push and pull. Because Google is doing great, but so is Amazon. And so, I know we’re sometimes super positive, but I don’t think AWS is in as much trouble. I don’t think cloud business is slowing as much as people think. I think it’s slowing a little bit. Projects are elongating. Customers are being a bit more cautious. And I think we’re seeing that in a more mature cloud business like AWS.

Patrick Moorhead: Good analysis. Take a deep breath. I’ll take the baton and go the 100 meters for you, buddy. The AWS story this quarter is really a repeat of the last two quarters. In that, the rest of the company lost business. In fact, the rest of the company lost $111 million in operating income, and AWS made $4.8 billion in operating income. Essentially, all of the operating income was AWS, which is just an incredible feat.

By the way, when it comes to regulators, I can’t believe that regulators wouldn’t look at that. It’s not illegal to use something as a loss leader, but it certainly shows power and the ability for the retail side to operate at a loss. Anyways, I’m not an antitrust lawyer. I only play one on TV once a quarter. But once again, AWS is at an $80 billion run rate, which is absolutely astounding when you look at that audacious profit pool. They are being rewarded for being first and getting a jump on everybody going the widest. I also think there’s a huge effect from them using their own homegrown silicon on reducing their cost of goods.

One interesting thing that I saw, Daniel, in the press release was that typically they went division by division and talked about it. With this change now to going into characteristics, which is obsessing over the customer experience, inventing on behalf of customers, empowering employees and delivery service providers, supporting communities, and protecting the environment. It’s a key indicator on where the new senior management wants to go with it.

Now, it is harder for me to pick apart and look at some of the highlights that it had. I want to shift to a future view here. We have AWS re:Invent coming up. You and I will be there along with The Six Five for a couple days and I’m super excited about it. A couple of things I would love to see out of AWS at the show. First of all, multi-cloud. They’re starting to get dinged by certain analyst firms for the quote, unquote, “Lack of multi-cloud offerings.” It is a fact when you look at the amount of multi-cloud offerings that AWS has versus other companies, they don’t have as many.

I also understand that with AWS in the driver’s seat for IAS, they’re less motivated to be multi-cloud, because it would probably mean that they would lose business as opposed to gain business. Maybe another way to look at it is, as Andy Jassy said, “We’re only 10% into the cloud build-out.” What about that other 90%? Could the company start losing business because enterprise CIOs are looking more to multi-cloud?

And the second thing that is on my hit list. Man, I want to see Trainium and what it is. As I said, AWS has a lot of its own homegrown silicon. Companies have yet to even start to dethrone NVIDIA for training. Intel Habana has a good offering, but I’m not seeing a lot of design wins or talk about it. But Trainium could be the first training solution to put a dent into NVIDIA.  I’ve got nothing against NVIDIA. I just think the industry needs more competition when it comes to that.

Daniel Newman: That’s a good analysis, Pat. I will say two things. One is they did have good advertising growth, which you mentioned they might earlier. Two is, I have to correct myself, because I can’t read an infographic apparently. I hate giving wrong numbers.

Physical store is $4.7. Third-parties, $28.7 billion. I read those a little bit awkwardly earlier when we talked. I said physical was $28.7. It seemed big to me. It was big, because it was wrong.

Patrick Moorhead: Dan Newman was wrong.

Daniel Newman: Mark those words. 35 minutes, 29 seconds into today’s episode. That’s for you, Twitter trolls. Anyways. All right. Let’s jump into the next one, Pat. This one will be fun. I’m looking forward to getting your take. Intel Corporation.

Patrick Moorhead: Intel had a big surprise and a positive surprise, in that they met top line, but they beat by 79% EPS. Ghoulishly enough, I think the big pop, it was up 5% after hours. I’m not looking at it right now. I’m paying attention to the camera, but they love layoffs and cost reductions. That was one of the big messages here, “Hey. We are going to reduce costs by …” Let me get the number here. $3 billion in 2023 and cost reduction of eight to $10 billion by end of year ’25.

I’ll leave the details to you, if you want to hit those, but I do have those. I think it’s more interesting to go up by business unit by business unit. PC group, off 17%. No surprise. The PC market stinks. Unless, of course, you’re Apple, who is up 20%. And if you’re Surface, who’s up 8%. Really hit by consumer and education demand. There was more OEM inventory bleed-off, and it looks like a mix-shift from Core i9 to Core i7. Likely, at the hands of AMD. Now, with the new 13th gen coming out versus AMD’s new offering, Intel is better off competitively than it was in the prior quarter.

Probably the biggest surprise here to me was just the incredible operating income decline of data center and AI business. Off just an eye-watering 99% out there. Revenue is down 27%, which didn’t surprise me, because they just started shipping in volume Sapphire Rapids recently. Probably, in the last month of the quarter. But man, AMD really took it to Intel this quarter. Because I’m not expecting the data center market to be off by 27%. You can do the math.

Three very positive points. Edge Networking, up 14%. Unfortunately, operating income off 85% due to networking. Big increases in 5G, in the Edge. Graphics, up 8%, but a huge $378 million loss due to inventory write down. My guess is that has everything to do with Arc in there. Because again, as I called, I think it was four years ago .I said Intel would be aspiring to have the fastest graphic card desktop, but it would likely settle in the mid-range. And that’s exactly what happened. You had a higher-valuation inventory that they had to take a write-down. But again, not all bad.

These are brand new businesses and I’d give Intel probably three at-bats in consumer graphics to truly see what they can do. Mobile revenue, up 38%. Operating income, up 12%. Driven by IQ, which is their next generation L2 plus solution. I’ll mention they had an IPO. Started at $17 billion. Got to $22 billion. I don’t even think the stock is reacting to it, even though Intel owns the majority of those shares. Daniel, I’m going to leave a little bit of oxygen for you. Whether you want to go into transformation actions or really all of the positive stuff that the company cranked out.

Daniel Newman: Yeah, Pat. Well, first of all, I think you did a really nice job breaking it down. I think Intel is at this massive inflection point right now. They did hammer out some good bottom line results. If I have to say one thing maybe. I expected client computing to be soft. I was hopeful of a better result for DCAI this quarter. I think Sapphire Rapids is scaling and I think that is going to be a tailwind for the company over the next few quarters.

You did hit on the three. The network, graphics, and Mobileye. Foundry is a longer tail for the company, but I do believe with everything going on in China right now and all the attention that has, Intel is definitely the best-positioned company in the US to benefit from what is going to likely be a continued series of microaggressions between us and China. The fact is that’s not going to slow our need for semiconductors. The $10 billion in cost cutting is going to create some indigestion for everybody.

It’s going to be indigestion for the employees, for the management, for shareholders, and for us to try to digest, “What does it mean?” Intel has been in this transformation phase for a long time. The fact is that if you’re cutting costs, you’ve got to do it really efficiently. Especially, when you’re planning to launch five new processes in four years, and you’re being held to an incredibly high standard for execution, in which the market wants to see you hit every date. Absolutely, Pat.

I mentioned booms and busts. We are in a semiconductor cycle of booming and busting. This is a little bit of, “Hey. We’ve got that glut.” We had that huge amount of demand. We didn’t have enough supply. Now, the supply is beefing up a little bit and we’re going to see a little bit of a downturn for semis as a whole. Please do not think that this is unique to Intel. This is all semiconductor companies. This doesn’t mean tech is ruined forever. It just basically means we ebb, we flow. Or now, we’re doing a little bit more ebbing than we are doing flowing.

I did want to talk just a bit about the Mobileye IPO. I thought it was a remarkable vote of confidence by Intel that they only made 6% of the shares available in the public market. Based on their current situation, I think they probably could have made some people happy by raising a lot more capital, by making more shares available. But I think Intel knows what they have in Mobileye. They know that it’s going to be a really big business for the company.

I think they were able to do some crafty financial engineering here to extract value, raise capital, allow people to invest in Mobileye that wanted a play in this space. They want to invest in ADAS, the future of autonomous vehicles, but maybe right now weren’t going to put their money into the broader Intel in order to make that investment. Now, you have the best of both worlds. I think it’ll swell in valuation when we hit the next growth cycle.

I’m an eternal optimist, Pat. We’re going on a year now of really negative market reaction to tech. I think the market is forward-looking. Nobody calls a bottom. By the way, this isn’t financial advice. But I think our friend Chamath said it on the All-In Podcast. My friend, I met him once. On the All-In podcast though, he did say that if you look in the history of rate-rising cycles, the bottom of the market tends to happen in the first third.

Most people think the highest terminal rate is going to come sometime in the middle of the late part of next year. If that’s the truth, we are definitely in that first third. Maybe even heading into the second third. Are we at a bottom? Is Intel at a bottom? Is this the turning point? I think Pat’s doing the right things. Doing a better job than Zucker. Pat, before I move on to Honeywell. Anything else you want to add here?

Patrick Moorhead: I just want to make it clear that the company Intel is taking actions. Pat Gelsinger is a man of action and he’s not going to sit around and let things happen to him. These transformation actions that they talk about. First off, they’re going to do layoffs. No question. They said they were going to reduce cost of goods. We don’t know how yet. There were no details. They’re going to continue these skips to have asset light.

They said that they’re going to do a 20. A $2 billion CapEx reduction this year. That’s in two months. Interesting stuff that we don’t know yet. But I saw they’re reallocating resources by return on investment. That means moving dollars from one BU to the other. I want to know. What does that mean? They also said they’re looking at M&A and divestitures. I’m thinking, “What more divestitures could they possibly make at this point?” But I think their customers, rightly so, do want to know.

By the way, in this quarter, they got a shitload done. First of all, reaffirming. On-track. Five nodes in four years. I looked Pat Gelsinger in the eye, challenged him. You and I both peeled that onion back, and he’s sticking to his guns. Shipped in high volume Sapphire Rapids. He launched Raptor Lake. By the way, everything I’m hearing about Meteor Lake is very positive across the OEMs.

They launched Arc Desktop Graphics. That’s a big fricking deal. There were only two people in that market for 15 years, and now Intel is in that market. They introduced a Flex Data Center GPU for transcoding and inference. They signed up. They did a $30 billion skip deal to help finance the fabs out of Columbus. They signed up NVIDIA to IFS. No details yet, but boy, did that one go over what it said.

Basically, NVIDIA is going to fab some of its processors at IFS. That’s mind-blowing. This is for a military contract. They set up an entirely new business office for IDM 2.0, which by the way, the leader of that is one of the biggest hard-asses that I know, who I’ve known for 15 years. A guy named Stuart Pann is the Chief Business Transformation Officer.

Now, a lot of times when I hear those words, it sounds so corporate. But Stu Pann is going to go in, he’s going to kick ass and take names, and make shit happen. With that, I think we’ve spent 15 minutes on Intel, but there’s a lot to talk about there. Sorry for my voice.

Daniel Newman: It’s all right, man. Your passion rings true, buddy. Let’s hit the final here, Pat. I woke up this morning early. I was on the elliptical and none other than our Six Five friend. He’s been on multiple times now, so I think we can call him a friend of The Six Five. Darius Adamczyk was on CNBC talking about the company’s most recent earning report. It was a beat and raise quarter.

Now, let’s just talk about one big macro here. The money flowing out of big tech is flowing into industrials. I think we’ve had five days in a row of gains on the Dow, which is because people are looking and saying, “Well, if tech’s not going to grow or come back immediately, where do we put our money?” Well, I’ve said for a while, maybe the best place in the world is in a company that is using technology and even is building technology, but is doing so for some of these industrial markets.

I talked about the bifurcation of deflationary tech being implemented. Automation and AI and cloud. But another area is tech being applied to legacy industries or older industries. Manufacturing, building technologies, aviation, and aerospace. These are the core businesses of the company. Darius seemed very optimistic. Now, he did say that he does think that it’s going to be a tighter period, but there are core businesses like aerospace are doing very well. It was a beat and raise quarter. The company basically performed strong.

By the way, the company is up 19% in just the past couple of weeks. Great indication of what’s going on. This is a company that’s got the same headwinds as global tech companies. The FX is a headwind to them. Europe is a headwind to them. Well over half of their products now are ESG-oriented. I’m not sure if everybody out there is familiar, but I’m really proud to say that Futurum had partnered with Honeywell this year to launch a first quarterly Environmental Sustainability Index.

We were working with them and talking a little bit about how companies are still planning to invest more. They’re going to budget more, they’re going to spend more, and they’re planning to work on achieving their goals on sustainability. Pat, I say this with a caveat, because I know how you feel about this. We talk a lot about it. This wasn’t about marketecture. This study was about action, visibility, data, and companies that are meaningfully doing things like changing their fuel sources to more sustainable fuel.

This isn’t, “Oh my gosh. Are we going to put a bunch of windmills in front of our building that are going to power one laptop for the next six minutes over the next 10 years?” That was another thing that we were really proud of this quarter. You’ve got a company that’s making investments, that’s growing, that’s minimizing its layoffs, that’s increasing its OpEx. It’s increasing its cash flow, it’s increasing its sales, and it’s doing so while putting sustainability into the narrative in industries like manufacturing buildings and aerospace where you’re talking real big consumers with significant carbon footprints.

But Pat, we talk about Honeywell through the lens of tech. That’s really where we try to focus. This is a company that’s building IoT technologies to provide data and analytics in manufacturing facilities. They’re building warehouse automation technologies. They’re building management systems that are trying to create more sustainable, but also more livable building environments for people to work. This is what Honeywell does.

This is why I think we keep coming back to the company. Because right now, in an era where traditional, exciting, breakthrough innovative tech companies are struggling. Companies like Honeywell that are in these big and traditional industries are actually performing quite well. Congratulations to them. I think you’re heading off to their big Honeywell Connected Enterprise event next week.

I don’t know if you want to jump in and talk a little bit about that, or if you want to talk about their earnings in particular, but what a good quarter. Darius, we’re here, in case you want to jump back on the show at some point in the near future.

Patrick Moorhead: Darius is a friend of The Six Five and we always appreciate talking with him. What I’d like to do is talk a little bit about the segments, Daniel. To your point of Darius getting on CNBC and having a really good interview. What I was emailed from Honeywell was that Honeywell is the most talked about company in the US across all news items over the last 12 hours. According to Factiva. Whatever he said and whatever the company did is definitely making a difference.

I do believe , but again, we don’t give investment advice here. But I do think if you look at the names of the companies that had great quarters, they are not these trillion dollar companies. They are these smaller companies that some people have characterized as companies of the past. I think that is changing. If you look at the segment results from Honeywell. Aerospace, up double digits. It’s all about commercial aviation. This is even during a time of supply chain challenges.

Their profitability was up 40 basis points. Building technologies, up 19%. That’s all about using HCE. Running the building from your smartphone. Performance materials and technologies. I sometimes criticize companies who greenwash. Honeywell is a company that actually makes technologies that are less pollutant, that use less energy. Some of their biggest customers in energy and in aerospace and in manufacturing are some of the biggest users of energy and chemicals.

That business unit was up 14%. Safety and productivity, off 4%. Unfortunately. But profitability was up 250 basis points. This was due to some declines. The revenue was off due to warehouse and workflow design. So if you go into the biggest distribution centers on the planet and you see packages going on conveyor belts, that is Honeywell technology. I do want to end on this event that I’m going to next week. I recommend that all of you tune in.

Some things that I think we gleaned from earnings was that HCE, which is their SaaS and digital transformation platform, we finally see it go across all the main segments that it’s targeting. Whether it’s warehouses, site management, factories like I talked about before. Complete supply chains for SaaS goes across every single one of these. From a financial standpoint, HCE is driving a 30% CAGR year-over-year. I’m hoping to hear a little bit more details at this event. I’m excited about it. Daniel, I’m going to miss you there, but you’ll be there in spirit.

Daniel Newman: I’ll be heading off to the West Coast. I’ve got some meetings with our friends from Twilio, but Pat, we’re dividing. We’re conquering. That’s what we do. It’s always better to be eventing with my bestie, but sometimes it’s just the way the world works. If you could send your drone jet to pick me up, I’ll come visit you. Or maybe we could teleport ourselves in the Metaverse and we could all hang out together.

But Pat, man, what a show. Action-packed. We were going a little quick in the beginning. I’m like, “We may actually finish this show early.” But nope. A 29-minute Intel segment took us over the edge there. But I think it’s a moment. It’s an impasse. An inflection point. It needed to be discussed, and man, did you provide some great insights there. Pat, is that it? Did we do it? Are we done?

Patrick Moorhead: We are done. Next week, I’m off to the Cisco Partner Conference. And then, like I said, the Honeywell Connected Enterprise Conference in Orlando. That will be my ninth straight week in airports. I’m not dead yet.

Daniel Newman: Well, you deserve it. Congratulations on dropping the eight lbs. You’re lighter by a watermelon at this point. Just think about that. Everyone out there. Thank you so much for tuning into our show. We love Earnings Palooza. This is a fun week. I think next week we’re going to have some big ones too.

I know Qualcomm is coming up and a handful of others. Hit that Subscribe button. Join our regular community. Tweet all your negative thoughts to @PatrickMoorhead. And if you’ve got anything good to say, send it my way. But for now, for this show, for this week, for this podcast, it is time to say adios, goodbye, ciao. See you later. Bye now.

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