Wall Street Jitters, Cloud Earnings, Intel Leadership Crisis, Acronis PE Buyout

[00:00:02] [SPEAKER_01]: It's Monday, August 12th, 2024, and I'm Dave Sobel. Four things to know today. Wall Street

[00:00:08] [SPEAKER_01]: Jitters among weak job data, the tech giant's earnings underscores the cloud play, Intel's

[00:00:14] [SPEAKER_01]: leadership crisis deepens with earnings miss, and private equity moves, Acronis, Trend Micro

[00:00:21] [SPEAKER_01]: and more. This is the Business of Tech.

[00:00:26] [SPEAKER_01]: I'm back from my time off, and I'm only slightly sunburned but also very rested. I'll work

[00:00:32] [SPEAKER_01]: through the stories from my time away with you so neither of us will miss any highlights.

[00:00:37] [SPEAKER_01]: There's a bit of a ride from last week. The jobs data indicates a significant slowdown

[00:00:43] [SPEAKER_01]: in hiring, with June seeing 5.3 million hires down 314,000 from May, marking the lowest

[00:00:51] [SPEAKER_01]: hiring rate since March 2020. While layoffs remain low, the reduced appetite for new hires

[00:00:58] [SPEAKER_01]: reflects a cooling economy impacting workers' confidence and job opportunities. And everyone

[00:01:03] [SPEAKER_01]: freaked out as the S&P 500 fell 2.5% and Treasury yields fell. But as of this writing, Monday

[00:01:11] [SPEAKER_01]: morning we're back to the levels before I even went on vacation, so there's nothing

[00:01:16] [SPEAKER_01]: to see here. And despite recent discussions about a potential recession due to that weak

[00:01:21] [SPEAKER_01]: job report and market volatility, key economic indicators suggest continued growth rather

[00:01:27] [SPEAKER_01]: than contraction. The National Bureau of Economic Research indicates that while job

[00:01:32] [SPEAKER_01]: growth has slowed, it remains positive, and personal income growth has remained

[00:01:37] [SPEAKER_01]: stable. Elevated recession talk may stem from the SOM rule, which links rising unemployment

[00:01:44] [SPEAKER_01]: rates to recession onset, but historical patterns may not apply to the current unusual

[00:01:50] [SPEAKER_01]: economic conditions. While caution is warranted, there is insufficient evidence to confirm

[00:01:55] [SPEAKER_01]: that a recession has begun. And the 2024 Information Week US IT salary report highlights

[00:02:03] [SPEAKER_01]: that despite economic growth and high consumer spending, IT professionals face job stress

[00:02:08] [SPEAKER_01]: and layoffs. 56% are satisfied with their jobs, but 42% feel overworked. Generative AI is seen

[00:02:16] [SPEAKER_01]: positively with many companies hiring for AI-related roles, while concerns about fake job listings

[00:02:23] [SPEAKER_01]: and ghosting during interviews persists. CompTIA analysis shows that in July 2024,

[00:02:31] [SPEAKER_01]: tech employment in the US declined, with the sector losing approximately 9,162 jobs,

[00:02:37] [SPEAKER_01]: reflecting a broader slowdown in hiring across the national labor market. While tech services and

[00:02:44] [SPEAKER_01]: software development added about 4,000 jobs, telecommunications and cloud infrastructure

[00:02:49] [SPEAKER_01]: losses offset these gains. The unemployment rate for tech occupations decreased slightly to 3.2%,

[00:02:56] [SPEAKER_01]: contrasting with a national rate of 4.3%. Active job posting in tech exceeded 471,000

[00:03:03] [SPEAKER_01]: jobs, indicating ongoing hiring interest despite the slowdown.

[00:03:09] [SPEAKER_01]: The Q2 Service Leadership Data Report indicates a slowdown in managed service revenue growth

[00:03:16] [SPEAKER_01]: to pre-COVID levels, while MSP profitability remains strong, with an average adjusted EBITDA

[00:03:23] [SPEAKER_01]: of 14.1%. Private equity-backed MSPs outperformed others in revenue growth,

[00:03:30] [SPEAKER_01]: achieving 18.7% adjusted EBITDA. Additionally, fewer MSPs reported losses,

[00:03:38] [SPEAKER_01]: and VARS experienced a 3.5% revenue growth after previous declines, although Project and

[00:03:45] [SPEAKER_01]: Professional Services revenue for VARS fell by 4.3%. Why do we care?

[00:03:52] [SPEAKER_01]: Wall Street is a bunch of nervous nellies, and day to day ignore their reactions. And remember,

[00:03:58] [SPEAKER_01]: dips are both natural and sometimes good. They're buying opportunities if you're younger or looking

[00:04:04] [SPEAKER_01]: to enter a market, and disruption is good for smaller players. Some volatility is a positive

[00:04:11] [SPEAKER_01]: thing, and savvy operators remember that. The insight is to look for longer term recommendations

[00:04:17] [SPEAKER_01]: from economists as a better guide. Broad economy growing. The MSP market is still growing. Sure,

[00:04:25] [SPEAKER_01]: slowing, and let's acknowledge that. But not anything panic worthy.

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[00:04:49] [SPEAKER_01]: to proactive defense. Here's what Wayne Portner, owner of MSP Allegheny Computer Services has

[00:04:56] [SPEAKER_00]: to say. With previous advanced threat protection software or insurance prevention systems,

[00:05:02] [SPEAKER_00]: our only options were block and alert. But with Trinity, we can remove, we can modify,

[00:05:08] [SPEAKER_00]: we can replace. And that's really what makes Trinity so unique.

[00:05:13] [SPEAKER_01]: Help your customers improve security, save time, and enjoy a higher service level.

[00:05:19] [SPEAKER_01]: Visit trinitycyber.com slash msp4 to learn about their discounted MSP pricing options.

[00:05:27] [SPEAKER_01]: I also want to review some earnings calls. Microsoft's cloud growth has slowed,

[00:05:33] [SPEAKER_01]: with Azure reporting 29% growth below the expected 31%.

[00:05:38] [SPEAKER_01]: Despite solid revenue and profits, concerns arise over AI spending and demand outpacing supply.

[00:05:45] [SPEAKER_01]: Microsoft 365 co-pilot showed better adoption, with a 60% increase in business customers,

[00:05:52] [SPEAKER_01]: but high costs may affect long-term retention. Investors remain cautious due to significant

[00:05:58] [SPEAKER_01]: capital expenditures, totaling $55.7 billion over the past year, as slowing cloud growth

[00:06:05] [SPEAKER_01]: raises questions amid the generative AI boom. Microsoft's AI business has thrived by reselling

[00:06:13] [SPEAKER_01]: open AI's models, with Tech Talk contributing nearly $20 million per month, accounting for about

[00:06:20] [SPEAKER_01]: 25% of Microsoft's revenue from this sector, which is projected to reach $1 billion annually.

[00:06:27] [SPEAKER_01]: Amazon Web Services reported a 19% revenue increase in Q2 2024, reaching $26.28 billion,

[00:06:35] [SPEAKER_01]: surpassing analyst expectations. AWS continues to grow faster than Amazon overall,

[00:06:42] [SPEAKER_01]: despite increased competition from Microsoft Azure and Google Cloud.

[00:06:46] [SPEAKER_01]: AWS generated $9.3 billion in operating income, accounting for 63% of Amazon's total.

[00:06:54] [SPEAKER_01]: The company plans to increase capital spending this year, focusing on acquiring Nvidia GPUs

[00:07:00] [SPEAKER_01]: for AI model training. The company plans to discontinue several less popular services,

[00:07:06] [SPEAKER_01]: while emphasizing support for generative AI. Apple's Q3 2024 earnings report showed better

[00:07:13] [SPEAKER_01]: than expected results, with revenue rising 5% to $85.78 billion and earnings per share at $1.40.

[00:07:22] [SPEAKER_01]: The iPhone remains crucial, accounting for 46% of sales despite a slight year-over-year decline.

[00:07:30] [SPEAKER_01]: The iPad division experienced strong growth of nearly 24%,

[00:07:33] [SPEAKER_01]: while services revenue rose 14% to $24.21 billion.

[00:07:39] [SPEAKER_01]: Apple anticipates similar revenue growth in the current quarter and continues to invest in AI and

[00:07:45] [SPEAKER_01]: new services. In this quarter, the cloud infrastructure market reached approximately $79

[00:07:51] [SPEAKER_01]: billion in revenue, marking a 22% increase from the previous year, primarily driven by AI interest.

[00:07:59] [SPEAKER_01]: Microsoft's Intelligent Cloud reported $28.52 billion, slightly below expectations,

[00:08:05] [SPEAKER_01]: while Amazon and Google Cloud also saw significant growth. Amazon held 32% market share,

[00:08:12] [SPEAKER_01]: Microsoft 23%, and Google 12%. And despite Microsoft losing some market share,

[00:08:18] [SPEAKER_01]: it continues to grow substantially and overall the market is expected to double in four years.

[00:08:24] [SPEAKER_01]: Enable reported a 13% year-over-year revenue increase in Q2 2024, raising its full-year revenue

[00:08:32] [SPEAKER_01]: outlook to $464 million and adjusted EBITDA margin to 36%, with total revenue of $119.4 million.

[00:08:42] [SPEAKER_01]: The company also announced that Enable Cloud Commander has enhanced its Windows 365 management

[00:08:48] [SPEAKER_01]: capabilities and allows managed services providers and cloud solution providers to manage

[00:08:54] [SPEAKER_01]: Microsoft users, Azure resources, Intune, and Windows 365 from a single console.

[00:09:00] [SPEAKER_01]: This integration facilitates monitoring and managing Windows 365 cloud PCs,

[00:09:05] [SPEAKER_01]: including key actions and license management. Disclosure, I'm a shareholder.

[00:09:11] [SPEAKER_01]: Why do we care? Well, cloud is where it's at with a booster for AI.

[00:09:15] [SPEAKER_01]: Now, I want to highlight something. Big tech infrastructure players are achieving

[00:09:20] [SPEAKER_01]: significantly higher growth rates than MSP-based technologies when looking at Enable or Service

[00:09:25] [SPEAKER_01]: Leadership data. This is even at their scale. Achieving 29% growth in the raw numbers of

[00:09:31] [SPEAKER_01]: Microsoft is impressive. So don't compare yourself to big tech players.

[00:09:38] [SPEAKER_01]: Well, we have to talk about Intel. Intel's shares fell 26% after a significant earnings

[00:09:45] [SPEAKER_01]: miss and a major restructuring announcement impacting global chip stocks, including TSMC

[00:09:51] [SPEAKER_01]: and Samsung. The company reported a net loss of $1.61 billion and plans to lay off over 15%

[00:09:59] [SPEAKER_01]: of its workforce or 16,000 workers. The layoffs will primarily affect research,

[00:10:05] [SPEAKER_01]: development, marketing, and administrative roles with most cuts completed by the end of the

[00:10:10] [SPEAKER_01]: year. The semiconductor sector faces additional pressure from an antitrust investigation

[00:10:15] [SPEAKER_01]: into Nvidia, contributing to a broader decline in chip-related stocks.

[00:10:20] [SPEAKER_01]: Additionally, Intel will reduce capital expenditures by over 20% and suspend its quarterly divinence

[00:10:26] [SPEAKER_01]: starting in Q4 to prioritize liquidity. These measures will save the company more than $10

[00:10:32] [SPEAKER_01]: billion by 2025. And Reuters covers Intel's decision not to invest in open AI around 2017

[00:10:41] [SPEAKER_01]: or 2018 due to skepticism about the future of generative AI, contributing to its decline in the AI

[00:10:47] [SPEAKER_01]: sector. While open AI has thrived, Intel has struggled to compete against rivals like Nvidia and AMD,

[00:10:55] [SPEAKER_01]: failing to develop a cohesive AI product strategy and missing key market opportunities.

[00:11:01] [SPEAKER_01]: Despite attempts to create viable AI chips through acquisitions and internal projects,

[00:11:07] [SPEAKER_01]: Intel's efforts have not gained traction. And Intel is extending the warranty on its 13th and 14th

[00:11:14] [SPEAKER_01]: Gen Core processors by two years due to ongoing instability issues, bringing the total warranty

[00:11:21] [SPEAKER_01]: to five years. While a patch is expected to address the root cause of the problems, it will not

[00:11:27] [SPEAKER_01]: repair any existing damage, prompting customers to seek replacements for affected chips.

[00:11:32] [SPEAKER_01]: Intel is committed to supporting customers through this process and will provide further details soon.

[00:11:38] [SPEAKER_01]: Why do we care? Because Intel's leadership blew it. Poor product quality, incorrect strategic

[00:11:45] [SPEAKER_01]: choices and a continued decline in value. Is anyone really eager to have an Intel chip in

[00:11:51] [SPEAKER_01]: your device? While I expect most IT service companies to view many chimp manufacturers as

[00:11:57] [SPEAKER_01]: irrelevant, as you're more interested in hardware manufacturers such as Dell, HP, Lenovo or Apple,

[00:12:04] [SPEAKER_01]: the value of Intel inside is underwater. I wouldn't be pushing to replace them. Yet,

[00:12:11] [SPEAKER_01]: I would also not forget that. And some money moves for vendors. EQT, the largest European

[00:12:20] [SPEAKER_01]: private equity firm, will acquire a majority stake in a cronus, enhancing its growth vision

[00:12:26] [SPEAKER_01]: and commitment to expanding its platform for managed services providers. The transaction,

[00:12:31] [SPEAKER_01]: pending regulatory approvals, is expected to be finalized in early to mid 2025. A cronus serves over

[00:12:38] [SPEAKER_01]: 20,000 service providers and protects 750,000 businesses globally, focusing on data protection,

[00:12:45] [SPEAKER_01]: cybersecurity and IT infrastructure. Trend Micro, the Japanese cybersecurity firm

[00:12:51] [SPEAKER_01]: valued at approximately $9.9 billion, is exploring a sale after receiving buyout interest amid a

[00:12:58] [SPEAKER_01]: weakening yen and stock underperformance. The company is working with investment bankers to

[00:13:03] [SPEAKER_01]: attract potential buyers, including private equity firms, although no deal is guaranteed.

[00:13:09] [SPEAKER_01]: Trend Micro's shares have declined over 10% this year and it's competing with major U.S.

[00:13:14] [SPEAKER_01]: rivals, while reporting a 13% increase in second quarter net sales.

[00:13:20] [SPEAKER_01]: Ruist has raised $45 million in series C funding to enhance its robotic process automation platform

[00:13:26] [SPEAKER_01]: and support for managed services providers. This follows the significant growth of 182%

[00:13:32] [SPEAKER_01]: in annual recurring revenue and 204% in customer base in the first half of this year.

[00:13:38] [SPEAKER_01]: The funding will be used to develop a new low code app platform, expand educational resources,

[00:13:45] [SPEAKER_01]: and improve the core automation platform. At the same time, the company plans to double its

[00:13:49] [SPEAKER_01]: workforce from 100 employees within the next year to meet increasing demand.

[00:13:55] [SPEAKER_01]: Why do we care? A cronus is a significant player in the MSP world that often goes unnoticed

[00:14:02] [SPEAKER_01]: and a new PE player has entered the scene. As I always counsel, there's no need to change

[00:14:07] [SPEAKER_01]: anything now. Watch for any possible changes to come. And note, someone might buy Trend Micro now.

[00:14:14] [SPEAKER_01]: Be amusing if those two combined, wouldn't it?

[00:14:19] [SPEAKER_01]: Thanks for listening. It's International Youth Day, but it's also IBM PC Day as the PC was

[00:14:24] [SPEAKER_01]: introduced on August 12th, 1981. We can celebrate with National Gooey Butter Cake Day.

[00:14:31] [SPEAKER_01]: If you have a question you want answered, we take list of questions. Send them in,

[00:14:35] [SPEAKER_01]: ideally as a voice memorable video to question at MSP.com. I answer listener questions live

[00:14:41] [SPEAKER_01]: this week on Thursday at 3pm Eastern on YouTube and LinkedIn. And if you got a comment or a thought

[00:14:47] [SPEAKER_01]: on a story, put it in the comments if you're on YouTube or reach out on LinkedIn if you're

[00:14:51] [SPEAKER_01]: listening to the podcast. I'll talk to you again tomorrow.

[00:14:56] [SPEAKER_01]: The business of tech is written and produced by me, Dave Sobel under ethics guidelines,

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[00:15:34] [SPEAKER_01]: Once again, thanks for listening to me. I'll talk to you again on our next episode

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