AI: Enterprise Cloud Software Growth facing AI Wave. RTZ #373

...AI headwinds for traditional enterprise cloud growth

Back this March, in a piece titled “AI: Slow Slog in the Enterprise”, I noted that enterprises while figuring out how LLM AI fits in with their eventual AI deployments, they also need to balance the growth of their existing enterprise software investments and budgets. And that the need to increase budgets for AI enterprise cloud deployments may be headwinds for traditional investment commitments.

Anecdotally this week, it looks like at this point in this AI Tech Wave, there may be some air pockets for enterprise Cloud software. For now, evidence is mounting that there may be some softness in the growth of existing Enterprise Cloud software commitments that impact many public enterprise software companies.

As the WSJ reports in “Salesforce Darkens the skies for Cloud Software as AI Threat Looms”:

“Growth slows as big deals are taking longer to close and artificial-intelligence hype isn’t yet paying off”.

“Turns out, a more profitable Salesforce isn’t that exciting when growth is grinding to a halt. Especially when investors have a culprit like artificial intelligence to blame.”

“The cloud software company isn’t yet in no-growth territory. But its fiscal first quarter results and forecast late Wednesday put it a bit closer. Revenue for the quarter ending in April rose by a record-low 10.7% year over year to $9.1 billion, and the company projected just 7% growth for the current period. Both were below Wall Street’s forecasts.”

“More important, billings—a measure of business transacted during the quarter—increased an anemic 3% year over year, another record low and well under the 9% growth analysts had expected.”

“And Salesforce’s current remaining performance obligation, which measures contracted revenue not yet recognized, rose 9.5% year over year—the first time that metric has fallen short of double-digit growth. “

It’s not just Salesforce, the cloud enterprise software bellwether company. As the WSJ goes onto note:

“But Salesforce isn’t alone. The current earnings season has largely been a rough one for cloud software providers. Workday saw its shares sink more than 15% last week following its report for the April quarter, which included disappointing billings growth and a trim to its full-year projection for subscription revenue. That was the worst single-day selloff for the stock in more than eight years.”

“Workday cited “increased deal scrutiny,” with CEO Carl Eschenbach adding that customers were committing to “lower head-count levels” on deal renewals. Cloud deals are typically based on the number of employees—or seats—that will have access to the software.”

“Also last week, Snowflake saw its stock fall 5% following its own report, which included a sharp cut to its operating margin projection for the year because of its AI investments. That was after its stock had already shed nearly 18% this year.”

The Information reports similar news for MongoDB as well:

“Database provider MongoDB said Thursday that its sales would grow about 9% to between $460 and $464 million in the current fiscal quarter, sending its shares down 26% in after-hours trading. Mongo’s results capped a string of poor or middling quarterly earnings from enterprise software firms including Salesforce, Snowflake and UiPath. Those firms and others, including Adobe, have each invested in new artificial intelligence features but don’t appear to have gotten much of a business bump. That has contrasted with results from cloud providers including Amazon, Microsoft, Google and Oracle that have rented out specialized chips for AI made by Nvidia.”

“In a call with analysts, Mongo CEO Dev Ittycheria blamed the weak growth projection on macroeconomic factors, and said the cloud providers were benefiting from companies training new AI models rather than from actual usage of the AI. On the plus side, the company generated $63 million in cash in the quarter that ended April 30, up about 19% from the same period a year earlier. Shares of Mongo, which on Thursday had a market capitalization of about $23 billion, before the after-hours drop, were down nearly 20% this year, ahead of its earnings release.”

I also highlighted back in February in “All Three AIs now at $20/month”, we may see varying degrees of adoption for the AI premium subscription services being offered by Microsoft, Google, OpenAI and others. In a period of enterprise experimentation to figure out how these services may work at scale, these may also go up and down in the near-term.

Stock markets ebb and flow, with financial cycles often out of sync with secular cycles like this AI Tech Wave. And the above cloud enterprise software weakness is but one short-term financial data point at a moment when there is otherwise general enthusiasm and expectations for AI-driven investments by tech companies.

As I’ve highlighted before, these waves take longer than markets sometimes expect. And we see the type adjustments that we’re seeing, however long they last. Stay tuned.

(NOTE: The discussions here are for information purposes only, and not meant as investment advice at any time. Thanks for joining us here)