Talking Tech

Talking Tech is produced by the Progressive Tech Team of George O’Connor, Ian Robertson and Gareth Evans. Our aim is to bring you up to date with the tech news cycle each week. We comment via blog and podcast on the slings and arrows of the sector at a time of huge change.

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February 27, 2024

Happy Sad: It’s just how [GenAI] life is

As US Q4 reporting fades, we are still in the data weeds, yet to glimpse the ley lines. The worry beads were rubbed raw ahead of Nvidia which then delighted with a ‘beat and raise’. In the happy, there is sad. ‘Fatigue’ crops up frequently, record numbers of CEOs are leaving (below), higher for longer (wacc) equals lower for longer (valuation), our happiness index (Glassdoor) drifts lower. Mr Market’s love affair with Nvidia means few look beyond the GPU for GenAI investment exposure. Record amounts of share buybacks have helped sector TSR to turn a corner (TSR YTD +2.8%, -9.7% cal2023, -22% cal2022). We should be happy, melancholia is rife. We blame the FT.

What has happened?

  • NvidiaA Cisco by any other name? While Q4 results (21 Feb) saw investors fall into rapture over the revenue beat (especially on the data center), in truth the strength was across the board (see data tables). Note the progress at COGs illustrating pricing power. While the valuation is not stretched commentators have drawn parallels with Cisco back in dot.com. The clever clogs at the FT conjured up the chart to breathe life into the parallel… If you are squeamish you might want to look away from the chart in the data section (see below).
  • Bookings.com: Whipping up the experience economy. As an armchair traveler, we enjoyed  another strong print from Bookings Holdings Q4 results (after hours 22 Feb). While there is much positive going on in the business model, the analyst conference call was hijacked by the GenAI opportunity. GenAI is significant for the travel tech segment, not only for driving internal process efficiency (thinking sales and advertising) but also in improving the customer offer, which could lead to fewer cancellations (these were up at Bookings). In the data section we update our Travel-tech dashboard.
  • Cirata: Talks GenAI Cirata could be classified as a start-up given the root and branch changes wielded by newbie CEO Stephen Kelly. Mr Kelly was keynote on a technology thought piece podcast – it too was all about GenAI – we agree with Mr Kelly’s view that we at the foothills of the opportunity. A challenge for the GenAI world is ‘data’. LLMs have (loads of) data but companies need data and analytics tools to get business outcomes. In this we reprise our view on the opportunity for RAG companies and the GenAI data enablers.Retrieval-augmented generation, RAG, is a technique for enhancing the accuracy and reliability of GenAI models with facts from external and up-to-date sources. They fill a gap in how LLMs work. We see the GenAI industry evolving with very large companies (a standard model for many industries) and a tail of best of niche RAG companies which have specialised models with particular domain emphasis.Alternatively think of it from the perspective of how builders are engineering AI applications. The first design pattern is the AI query router. A user inputs a query, that query is sent to a router, which is a classifier that categorises the input. A recognised query routes to small language model, which tends to be more accurate, more responsive, and less expensive to operate. If the query is not recognized, a large language model handles it. LLMs are much more expensive to operate, but successfully return answers to a larger variety of queries so there can be a balance of cost and performance. For us, RAG models will focus on specific use cases, but also draw in more up-to-date data. In this we see a clutch of companies who today have little obvious connection with the GenAI wave. However, what they have in common is large data sets from specific industries and user cases, coupled with a cultural ‘lean’ into data and analytics. The LSE hosts a group of companies where the impact of GenAI will be seismic. They are the data hunter gatherers of the tech-economy.
  • Intuit: On-prem desktops still alive. Intuit Q2 results (reported 22/2) feature revenue +11%Y/Y to US$3.4bn, with the Small Business and Self-Employed Group revenue +18% Y/Y to US$2.2bn, with the Online Ecosystem revenue, +21%Y/Y to US$1.7bn.  Intuit reiterated FY revenue growth guidance for the Small Business and Self-Employed Group a range (16% to 17%). In the data section we show how the little tweaks in the operating costs are carving out improving profitability ahead of the reliably seasonally strong Q3. Intuit has orchestrated one of the most successful cloud transitions, but after a decade of transition desktops are still c25% of the Small Business revenue, admittedly down 186bps Y/Y. Sage could wish for the same success. In data we show how the operating costs tweaks are driving better margins.
  • Sopra Steria: Didn’t disturb the charts. Sopra Steria final results (21/2) continued the trend established by the cohort and support our view that the KPIs are starting to turn. We note Sopra’s 6.6% organic growth, 7.6% Y/Y, and another company budging the cohort average (currently -1.1%) upwards. The segment is unloved – a good indicator of value opportunities. We update our IT Professional Services cohort dashboard to reflect the results.
  • Palo Alto: US$100m of cyber ARR. Q2 results from Palo Alto (20 Feb) featured that it is closing on US$100m ARR from GenAI Cyber (I know, who cares). .. and if nothing else the print reminded us that GenAI is being adopted as fast by fraudsters as it is by businesses. And yet that very impressive result is lost on the investment community. Also of note is a concern about the buying environment and whether Cyber products companies might be a victim of consolidation and the ‘fewer throats to choke’ effect. Should this be true, it breaks a long-established trend in the cyber industry where the user community is content with overlapping products in the knowledge that every product has gaps. In cyber there is no ‘one stop’ solution, and this is still largely a ‘point solution’ industry, despite what marketechure might suggest. This means multiple vendors on the corporate supplier list and relatively sticky products, but expansion rates are not as strong as elsewhere in SaaS. As we plug the print into our ARR monitor (below) we note (again) falling cohort ARR numbers. To us, this suggests that SaaS has a maturity profile – similar to ‘S curve’ more synonymous with the on-prem initial license days of old.
  • CEOs for the Exit. CEOs are leaving the start up community. According to Sifted, Maddy Cross, partner at Erevena, looked at 300 VC-backed European companies founded between 2010 and 2020 that have raised $50m or more. Ms Cross concludes that 36% saw their original founder CEO resign last year. Even in 2020, arguably the other most turbulent year in recent times, there were fewer founder CEO resignations from this cohort. It is hard to be a CEO in uncertain markets as success qualities are different. The latest plc CEO on the exit trail is CAB Payments Bhairav Trivedi. Mr Trivedi is to be succeeded by incoming Neeraj Kapur, following FY23 Results (26 Mar). This followed a disastrous IPO. Before him (21 Feb) Neil Murphy exited Bytes in somewhat of a hurry. Mr Murphy is replaced by interim CEO Sam Mudd, Executive Director of  Bytes and MD at subsidiary Phoenix Software Limited. The speedy change prompted Bytes to state that trading, FY end 29 February 2024, was in line with expectations.
  • Beeks Financial Cloud: Diary date Beeks (IaaS for low-latency compute, connectivity and analytics to global capital markets and financial service) is on a roll (Note: trading update 6 Feb). It announced this week that it will post interim results 5 March 2024. Well regarded Mark Niznik from Artemis is erudite as he outlines the Beeks investment case.
  • RWS: Bathwater and baby – A wash out. Investors know what they like in GenAI (Nvidia) and what they don’t like (anything in the content creation cohort). A positive AGM statement (22 Feb) by RWS did not dispel the view. Despite the global uncertainty (well-worn phrase) RWS has increased dividends and is repurchasing shares. The FY outlook is “in line”, as client retention and satisfaction remain high and growth initiatives are contributing incremental revenue. In January it completed the beta programme for Evolve (linguistic AI solution) which promises to offer “significant efficiency gains for global enterprises with substantial translation demands” and are already “beginning to see some early wins with enterprise-level clients” (I know, who cares).

George O’Connor

Nvidia: Awesome numbers

Nvidia: The other side of the argument (from the FT)

Working Bookings.com into the Travel-tech dashboard

Intuit: Tracking operating costs (US$m)

Working Sopra Steria into the IT Professional Services dashboard

Palo Alto reminds of the declining ARR growth rates

CEOs for the exit (from Sifted)

RWS and Tech Sector TSR since 2019 (from Yahoo Finance)

 

 

 

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