GenAI boom eludes enterprise software...for now
The great generative AI boom for enterprise software isn't happening yet as the sales cycle grows longer due to platform bets, macroeconomic conditions and cost of capital crimping budgets.
What's really happening: Enterprise technology buyers aren't buying into grand enterprise software copilots, picking sides in large language models (LLMs) and platform bets that could easily equate to technology debt if they're not careful. It's also clear that generative AI projects are stealing budget dollars from enterprise software purchases.
Simply put, we're in the pick-and-shovel phase of the AI buildout and that means Nvidia, server makers and that's about it. Rest assured we'll see the indigestion from the AI capacity buildout too, but that's months if not years away.
The recent earnings parade from enterprise software companies highlights the big hurry up and wait approach when it comes to AI. Here's a tour.
Salesforce predicted single-digit revenue growth amid longer sales cycles. CEO Marc Benioff defended the company's first quarter disappointment and played up the long game.? "When you look at the power of AI, you realize the models and the UI are not the critical success factors, it's not critical where the enterprise will transform. There are thousands of these models, some open source and some closed source models, some built with billions, some with just a few dollars, most of these will not survive," said Benioff. "They are just commodities now and it's not where intelligence lies. And they don't know anything about a company's customer relationships."
Benioff added that customers are flocking to Data Cloud, which has over 1,000 customers. Operating chief Brian Millham, however, noted that "we continue to see the measured buying behavior similar to what we experienced over the past two years and with the exception of Q4 where we saw stronger bookings."
Millham added, "customers are getting their data estate in order as a precursor to leveraging AI capabilities, and we're seeing that with the growth of Data Cloud right now."
Nutanix said sales cycles are longer and more unpredictable. Nutanix is battling VMware , but CEO Rajiv Ramaswami noted that the company is seeing larger opportunities that "tend to have longer sales cycles can involve aggressive competitive responses and exhibit great variability with respect to timing and outcome." Nutanix isn’t a direct generative AI play, but has GPT-in-a-Box and is often lumped into a broader transformation plan.
Workday said the buying cycle is choppy. Workday CEO Carl Eschenbach reiterated comments made on the company's first quarter conference call at the Jefferies Software Conference. He said: "Last year was a pretty solid year for most software companies. I think this year, people do talk about a slightly different macro that they're dealing with. They use terms like it's choppy--it's uncertain, it's uneven. And I just think when people are going to invest in technology, they're really thinking hard and deeply about where they're going to make those investments. And I think for all of us in the software space, you have to have a strong value proposition to make sure you're a priority."
MongoDB cut its outlook for second quarter and fiscal year. CEO Dev Ittycheria said, "we had a slower than expected start to the year for both Atlas consumption growth and new workload wins, which will have a downstream impact for the remainder of fiscal 2025."
Ittycheria said MongoDB still had a large opportunity to gain share and become a standard and that it will be "a substantial beneficiary of this next wave of application development" revolving around AI. For now, MongoDB saw lower consumption due to a spotty macroeconomic environment and go-to-market changes.
UiPath's first quarter had a lot of issues, but longer sales cycles were one of them. Sure, UiPath's quarter was a disaster as CEO Rob Enslin resigned, but deliberation time for purchases was also extended. Incoming CEO Daniel Dines said: "While we had a healthy start to the quarter, we saw the pace slow as we progressed through the second half of March and into April. This was primarily due to the impact of a challenging macroeconomic environment that we see persisting with mid-market customers, as well as a change in customer behavior particularly with large multi-year deals."
These enterprise software executives aren't seeing the generative AI boom yet, because the technology hasn't really hit the application layer. And when genAI drives enterprise software deals it's unclear whether buyers are going to swallow copilot upcharges. Today, the genAI spending is on infrastructure moving into tools and data platforms and then hitting applications.
In the end, enterprise software valuations moved too far too fast without anything to back them up. Constellation Research CEO R "Ray" Wang said, "valuations without cash flow are the key issues." Wang noted the buy and sell side of enterprise tech are dealing with three factors driving the market.
Not every enterprise software play is struggling. C3 AI reported a better-than-expected first quarter but is showing growth on a much smaller base than the companies that were pummeled over recent quarters. C3 AI is also working a layer above the application providers seeing longer sales cycles. C3 AI CEO Tom Siebel said the genAI era will rhyme with previous technology cycles:
"The AI era will be no different and the same game is going to play out as we move forward. The bulk of the value is going to accrue to the applications that leverage the entire AI stack and deliver value to the business. Silicon will get commoditized. It always gets commoditized. Infrastructure will get commoditized. It always gets commoditized. What doesn't get commoditized in the long run are the applications and that's where C3 AI plays."
If Siebel is right--and there's no reason to think he's wrong--genAI will drive enterprise software for years to come. When this evolution plays out is anyone's guess.
Follow the GPU money
Nvidia filed its first quarter 10Q and instantly set off the customer guessing game. In the filing, Nvidia said one direct customer was 13% of revenue in the first quarter and another direct customer was 11% of sales. If I'm going to guess, I'm thinking Dell Technologies and Supermicro are in the running with perhaps HPE in the mix somewhere. It's obvious that Nvidia and Dell are tight partners.
领英推荐
Two indirect customers were 10% or more of total first quarter revenue. This cohort could be a bevy of players, but my two favorite guesses would be Microsoft and Facebook. Other big indirect customers could include AWS, CoreWeave, which has raised billions of dollars in funding, and maybe Google or Oracle.
Nvidia also noted that one of the two indirect customers bought through the second direct customer that was 11% of sales.
From our underwriter:
NOTEBOOK:
?? Dell Technologies saw strong demand for AI-optimized servers and delivered solid first quarter demand. Infrastructure solutions group delivered record revenue.
?? C3 AI reported strong fiscal f ourth quarter results . The company reported fourth-quarter revenue of $86.6 million, up 20% from a year ago. The company's net loss was 59 cents a share, or 11 cents non-GAAP. C3 AI's earnings presentation highlighted generative AI pilots and other data.
?? Platformization is the buzzword du jour in cybersecurity circles. The general idea is that enterprises are consolidating vendors and will bet on one platform to solve cybersecurity. I caught up with Constellation Research analyst Chirag Mehta to noodle over platformization and whether it's of any use to the enterprise buyer.
?? PwC has inked an agreement to become OpenAI's first reseller of ChatGPT Enterprise and the largest user of its product. For PwC, the move can boost productivity of its audit, tax and consulting services. For OpenAI, PwC will be a strong channel to drive growth . PwC said: "We are actively engaged in GenAI with 950 of our top 1,000 US consulting client accounts alongside discussing the use and implications of AI with many of our audit clients, emphasizing the near universal demand across industries for the transformative power of this technology."
??? Who doesn't have an advertising business these days? PayPal has entered the ring and announced it is creating a new advertising platform and hired Mark Grether SVP and GM of PayPal Ads. Grether joined PayPal from Uber, where he was VP and GM of Uber Ads. Before Uber he was at Amazon's ad unit.
????♀? Life Time, a large fitness chain that specializes in athletic country clubs, launched L.AI .C (lay-see) , a "generative, AI-driven Healthy Way of Life personal companion for its members." L.AI .C is built on Microsoft's Azure OpenAI Service and aims to serve up programming and services. Personalized workouts, classes and products are on tap. The genAI assistant, which is rolling out in beta on the Life Time member app, highlights how generative AI use cases are proliferating.
?? Jan Leike, who recently resigned from OpenAI and panned the company's approach to AI safety, has joined Anthropic to lead a new "superalignment" team.
?? Arm is launching CSS (Compute Subsystem) for Client , an integrated set of technologies that aims to optimize AI workloads on edge devices.
??? Box?is seeing customers upgrade to its enterprise content management suite to get access to Box AI and there's a big opportunity in mining unstructured data, workflows and vertical use cases. But the payoff to Box will take time.
Like getting our weekly round-up??Subscribe to Constellation Insights? for consistent news and analysis on technology trends, earnings, enterprise updates and more.
Want to work with Constellation analysts??Our Sales team would love to get in touch!