Sometimes Dragons

RedMonk SlackChat: A May 2020 Look at Earnings Reports and the Impacts of COVID-19

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kelly (Kelly Fitzpatrick): It’s the beginning of May, and a slew of companies have released earnings reports for the quarter ending March 31, 2020. The purpose of this chat is to discuss any points of interest that have emerged from these reports against other industry news. In particular, we are looking at what this all might mean when read amidst the larger context of the extensive and rapid changes the industry (and world) has seen as a result of the COVID-19 pandemic.

monkchips (James Governor): First off, we’d like to point out that times are very hard for a lot of folks, but we do need to continue to cover the industry as best we can. As such covering financials and company impacts is still very much part of RedMonk’s remit.

There is nothing normal about the current situation, but we’re still here to help people understand technology trends and directions.

kelly: Well said, James. And within that context, our first question: What are your general impressions of the latest earning reports from the major public cloud vendors (Amazon Web Services (AWS)/parent company Amazon; Google Cloud/parent company Alphabet/Google, and Azure/parent company Microsoft)? Do you have any key takeaways?

sogrady (Stephen O’Grady): Key takeaways for me are that tech is, at least for now, avoiding the nose dives we’ve seen from other sectors of the economy. The results are anemic in certain cases – Apple’s modest returns being one example – but as the world has been left with no other option in many cases but to go digital, the companies that supply that digital infrastructure are seeing that influx.

Per the Financial Times :

First, there is more dispersion between winners and losers. Compare Microsoft’s statement that Covid-19 had a “minimal net impact” on its overall quarterly revenues with retailer J Crew filing for bankruptcy protection.

That is just one example of the contrast between mainly digital companies, including social media giant Facebook and streaming services Netflix, with those operating primarily in physical spaces, including carmaker Ford and fast-food group McDonald’s.

rachel (Rachel Stephens): Alphabet’s CFO described this as “the tale of two quarters.” For Google that was specifically a reference to the mid-quarter change in their ad revenue, but it feels applicable to all the cloud providers. Everyone is seeing COVID-19 impacts to varying degrees.

monkchips: For context, I think it’s important to point out these are not normal times. This tweet that did the rounds sums things up very well.

rachel: Microsoft’s earnings call referenced that indirectly. Satya Nadella said “we have seen 2 years’ worth of digital transformation in two months.”

monkchips: My sister-in-law, who works for Microsoft in Germany, a normally conservative market, especially in data sovereignty terms, said to me: “Coronavirus is shovelling workloads into the cloud.”

Teams has had a huge boost, downtime notwithstanding.

rachel: Teams in Italy at least had a huge boost.

That blog post from Microsoft quoting “775 per cent increase of our cloud services in regions that have enforced social distancing or shelter in place orders” when they were actually just talking about one product in one country was one of the significant missteps of the quarter.

As Corey Quinn said:

But yes. Traction for cloud workloads definitely gained steam this quarter.

sogrady: The question for me, which @rachel alluded to, is whether tech’s ability to more or less weather the storm thus far is sustainable, or whether more severe second order impacts are imminent.

monkchips:  Unfortunately, I suspect that, as per the immortal words of Winston Churchill, and with apologies for the war metaphor, “this isn’t the end, or even the beginning of the end, but it is the end of the beginning”

The talk from economists and pundits has been about U, V or L shaped recoveries. L is the bad one.

rachel: I think you see evidence for both the ability to weather the storm and also evidence of storm clouds on the horizon. Take Amazon for example. Ben Thompson talked about how the retail side is “constrained by its ability to meet demand, not by demand itself” – there are huge opportunities for tech in these times.

But at the same time, Amazon had $600M in COVID-related expenses and increased their reserves for doubtful accounts by $400M (indicating they expect significant growth in the number of businesses unable to pay them.)

Even with surging demand, there are still going to be business impacts.  It cuts both ways. No company is immune from macroeconomic forces. But for now, it seems to be cutting in a way where tech companies are positioned to weather things.

monkchips: Oh yeah a point on cashflow, some deals and revenues are being deferred, so a lot of the companies currently reporting may see some flattening of the curve (sorrynotsorry) in their revenues over the next couple of quarters.

And anyone with exposure to real estate is going to be in bad shape. Also the travel and hospitality industries. How do you all feel about a trip to Las Vegas in 2020?

sogrady:  The other question, and I’ve been hearing this one a lot, is whether tech companies will be able to asymmetrically outperform the wider market. In other words, do the likes of the large hyperscale clouds have an advantage in terms of hiring or retention versus smaller entities. So far, the conversations we’ve had haven’t varied much big or small, but will that continue?

View of London from the top of St. Paul's; clouds fill the sky in the top half of the image while surrounding buildings fill the lower half.

rachel: Good question. Enterprise contracts are decently resilient revenue streams, and we already referenced the surging demand for cloud services, which are often pay-as-you-go. Clouds might be in better shape than most.

But not all revenue is created equal. I think a lot of tech companies are going to see their ARR (annual recurring revenue) be more volatile than they originally anticipated as their customers feel the impacts of the crisis.

If you’re a retailer, you’re worried about leases and inventory and staff costs right now.  A small software provider to these types of companies could definitely feel a pinch if the customers get to a point where choices have to be made.

monkchips:  @rachel that is a very very solid point about ARR. a lot of assumptions about the reliability of ARR could be about to blow up.

sogrady: I definitely think self-service businesses are positioned to have an advantage over businesses reliant on field sales teams, at least as long as travel is impractical to impossible, but those impacts will downstream.

rachel: Agreed, @sogrady. The sales motion is also a significant factor.

monkchips: Maybe I should jump in here, with some points from IBM’s recent financials, with deals I suspect were inked before the crisis kicked in, but are still notable. Red Hat signed its two largest ever deals this quarter.

Red Hat revenue was up 18 percent.

If IBM can position Red Hat as a digital transformation play in the current climate, there could be upside there, though as Rachel and Stephen point out, Very Large Deals don’t seem obviously amenable to the crisis, generally driven as they are by enterprise sales folks.

rachel: Well, I mean. Oracle landed a Very Large Deal with Zoom. They’re definitely still happening. That win was a solid feather in Oracle’s cap.

monkchips: But yes Zoom what an incredible PR win for Oracle.

sogrady: Indeed. Shout out to Corey Quinn who had the best take on that that I saw.

rachel:  Agreed, his analysis on data transfer pricing here is solid.

monkchips:  So the hottest company in 2020 runs on Java and SOAP…

On Oracle.

To be fair, I have seen some inside baseball that indicates most of Zoom is running on AWS, but it’s still a great lighthouse win for Oracle Cloud.

kelly: It certainly put Oracle in the news in a way that I was not expecting.

monkchips: Verizon just acquired Blue Jeans, another videoconferencing company, so plenty of movement there.

kelly:  And that takes us to a more general question: In your mind, how has the COVID-19 pandemic changed the tech landscape more broadly?

rachel: I think we’re seeing the crisis accelerate trends that were already forming. Work from home, video calls, moving to cloud / SaaS technologies: all of that was happening, but it is now happening at a quicker rate as the environment forces changes. This applies to consumer behaviors, too, not just enterprises.

kelly: To my mind it has also really brought to the forefront larger issues of workforce safety. Many tech workers have the privilege of working at home right now, but as we have seen that is reliant on a whole other set of industries supplying everything from electricity to food to new web cams. I can work from home because a whole lot of folks are going out to work every day.

sogrady: One of the more interesting to me is the overnight work from home shift. Tech has obviously been more remote-friendly than other industries, but large swaths of the industry still were very reluctant to embrace work-from-home – including some of the largest employers. Now, they’ve all been forced to reverse that position in a very rapid timeframe, so there are a million questions to ask: what, if any, have been the hits to their productivity? If they’re minimal, how much of this work-from-home permission sticks around? And if it’s a substantial amount, what impact does that have on real estate markets both where they operate and elsewhere?

monkchips: We’ve already seen folks like Barclays Bank say they’re not going back, in terms of their commercial real estate footprint.

sogrady:  There is one strain of conventional wisdom – that I don’t subscribe to, for the record – that says that this proves that everything can be virtual, and thus it all will be, moving forward.

rachel:  I think it’s a catalyst for change, for sure, but I agree that it’s naive to think it will be permanent change for everyone across the board. I think we’ll see pockets of change stick, but some things will definitely revert.

monkchips: Another interesting point talking to the Big SIs – usually the client wanted contractors to be onsite. That mandate makes no sense now obviously, and firms expect that to be a permanent change.

sogrady: As a former SI who suffered through awful – and totally unnecessary – travel, I hope that’s accurate.

monkchips: Red Hat told me about a client, a German automotive company, that had moved some of its folks in one division, doing testing, to home working and cloud last year. When COVID-19 hit they were the only group that could work, because everyone else had to do their testing at the factory itself. Naturally the company is now moving all testing to the cloud where they can.

kelly: On the topic of being able to quickly adapt, are there any other specific ways that folks in the tech industry have adapted or responded to this changed landscape that you find notable?

rachel: One of my favorite stories we heard from a client was how they adapted when they saw the stay-in-place orders coming. They were historically not a WFM business, and to get their workforce transitioned they bought literally all the Cat 6 cable from every local Best Buy so their teams could take their workstations home. In the face of the pandemic, we’ve seen some  IT departments show incredible grit, creativity, and resilience to keep things up and running.

monkchips: While we’re here I want to call out Werner Knoblich, who runs Red Hat in EMEA. During the company’s recent virtual summit I had a nice chat with him, and he said something I felt was really profound, about Red Hat and other tech companies and their relationships with clients and other stakeholders, in these tough stressful times. He quoted Maya Angelou, which made me very very happy:

“I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

kelly: omg yes we need more Maya Angelou.

monkchips: I think Werner summed this up beautifully, in that this is a time when feelings matter, and treating people (including clients obviously) right matters more than ever. Companies’ brands are at stake right now. People are going to remember how suppliers treated them, whether they were flexible on contracted payments etc.

sogrady:  On a related note, and I’ve mentioned this on Twitter, I think one of the most encouraging adaptations I’ve seen in the wake out of the outbreak has been the patience, kindness and grace that everyone is bringing to calls and conferences. Everyone’s getting interrupted, everyone’s scrambling to try to juggle everything and everyone is a thousand percent ok with all of the above.

kelly: Last question: Any observations we can make right now reflect –as @monkchips noted–only the end of the beginning of the impact of the COVID-19 pandemic; that said, any thoughts about what key points we will look back on and recognize as important changes to how our industry works?

sogrady: I think the big one to me is what an accelerant this has been for digital initiatives. Take a small example like SMBs such as restaurants, bars and grocery stores: all of them have been forced to figure out and execute digital models on the fly. As Nadella said, we’ve seen two years of digital transformation in two months, and that part at least isn’t going away IMO.

monkchips:  Please less travel. I am currently putting together a conference about Developer Relations without having advocates on the road or the air all the time. Flylessconf.com though isn’t just about the lockdown, or even the era of less travel we will see immediately afterwards, but really about better ways of working, finding ways to be more productive, the balance between creating compelling content, SDKs, app samples and so on, ways to scale the business function without getting on planes every week. I really hope we as an industry take this opportunity for a cleaner, healthier, more sustainable way of living frankly. We shouldn’t have to retire to “spend more time with our family”.

rachel: I agree with both points: acceleration of trends to build digital capabilities, and an acceleration of finding new and better ways to work that might be different than the old ways.

We’ll look back and see this pandemic as both the start and end points of trends.

monkchips: Beautifully summed up, Rachel.

kelly:  Agreed–and I am calling that a wrap! Thank all y’all for your time today.

 

Disclosure: Amazon, IBM, Microsoft, Oracle, and Red Hat are current RedMonk clients.

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