Enterprise Software Earnings Preview

Key Takeaways

So, let's start with a look ahead to next week specifically. We have a number of software companies that are set to report earnings today and tomorrow and we're starting with Zoom after the bell today. What is the most important thing from Zoom that you're going to be keeping an eye out for? >> I think there are probably two things. One is how is gross retention and net retention holding up? And then the other thing is if we get any kind of uh breadcrumbs or initial outlook for 2026 growth. Those are kind of the two things that we're looking for presumably tonight. >> How has Zoom's retention been trending in the last year or so? >> It's been I think steady. Um and it really depends on which segment you're you're looking at. Now remember Zoom you know we are using Zoom right now. A lot of businesses or enterprises use Zoom as their primary video platform and that's been pretty durable but the call it the consumer use case they their nomenclature that the company uses it's called online the online retention rate you know in 2020 and 2021 you had your um I don't know uh book clubs might have had a zoom license or uh you know pub scout troops might have had a Zoom license that in 2025 they just simply do not need because they're back meeting in person. So the gross retention rate for that cohort really suffered in 22 and 23 and 24. It has also stabilized. Um but the the gross retention that we we really care about is more in the enterprise and that's been pretty stable and actually improved. >> How fast or how slow is Zoom growing these days and how does AI play into that story? Zoom um low single digits. I think we have you know 3% maybe three and a half% looking out into 2026. Um so call it I don't know CPS or CPI plus or minus you know a percent or so plus or minus. Um, and and AI is interesting because there are a few ways that Zoom can play in the AI space and actually generate AI revenue. Um, one is just right there in the in the Zoom application where you can record things and have transcripts be uh summarized for kind of automatically given maybe a sentiment score by an AI agent from Zoom. And then they also have a um a contact center business and a phone business where AI agents can handle some of the incoming contact center requests or or uh some of the issues that might come in. And so they can actually charge money for artificial intelligence revenue to maybe offset some potential pending headwinds on a seat count basis where maybe in in 2024 you needed a 100 people to be answering phones for you and in 2026 or 2027 you don't need a 100. Um but they can supplement some of that potential loss in revenue by by selling AI agents. >> That's really interesting Jackson. I mean, is Zoom actually seeing traction in that line of business? So far, >> they are. They are. Um, I I don't know exactly, you know, how much of their total revenue is going to be generated from AI agents at this point in the next two or three years. The the we cover a number of of companies in this kind of contact center and communications space. It is still early. um whether it's Zoom or 59 or Twilio, I mean there are there are some AI there are real AI revenue uh uh being generated and attributed but it's just still I think a little early to to be able to look out the next two or three years and say oh this came from AI or this will come from AI and this did not. >> Yeah no that's that's totally fair. I mean, I guess expanding our our Zoom to uh broader software earnings. We have a few other companies. We have Zcaler and Workday that are also reporting tomorrow. And I noticed that both of them have been growing quite a bit faster than Zoom. And I was wondering what's behind that. Is it AI or is it something else? >> Oh, um I mean I certainly follow Zcaler and Workday. I don't I don't cover them formally, but I would say it's not just AI. I mean, Zcaler and Workday are um I would say more in their kind of secular growth phases, particularly Zcaler from a security perspective. And Workday being a kind of a classic SAS company, SAS companies are still generally growing in the double digits. Um, and Workday has the ability to drive increased sales from their channel. uh cross-ell HR revenue with financials revenue or I could say HR software with financials software to generate additional revenue whereas Zoom just had this massive pull forward of spend in 2021 and 2020 and 2021 that they are still kind of working through at this point. I mean, speaking of software companies that are a little bit behind in terms of growth and how they stack up with the rest of the cohort, another one I think a lot of investors are going to be looking at that I've been watching closely is Salesforce. You know, they've made this big AI push recently. They've been talking a lot about AI agents and they're set to report after Thanksgiving. What are you going to be focused on, Jackson, when Salesforce comes out with their earnings next week? >> Yeah. Um it'll be the first time that we've heard from the company since their Dream Force event and since they hosted a a financial event, an analyst day. Um what I'm focused on are I would say two areas. One is okay, the company expects their net new AOV to be able to grow faster than their and and AOV is average order volume or annual recurring revenue. Just think of it as as you know the current run rate of the business. So their net new uh ARR is expected to grow faster than the existing ARR just by math. That means that the company should accelerate their revenue growth. They expect this crossover to be happening kind of now and at the end of their fiscal 2026 which is calendar 2025 and hoping that that can lead to overall revenue acceleration by the time we exit maybe this time next year. So what we want to hear is how's progress on that goal? Are you still growing net new ARR or net new average order volume faster than your existing base? And if that is the case and they're still on track to be able to reacelerate growth. The other thing that we're looking for those core clouds. So salescloud and service cloud and and even marketing cloud, how are they holding up and are they going to be able to maintain their high singledigit growth rate for the [clears throat] next few quarters until this AI play and agent force and data cloud are maybe able to to take over kind of the engine of growth when we get into next year. >> Got it. I mean, it is still sort of early in in this game, Jackson, but I was wondering if you had a view on which legacy software companies have done a good job bringing AI products to their users and maybe which ones haven't done quite as well with that >> legacy um software. I mean, >> the companies that you cover like in the public market. >> Yeah. I mean, I'm just thinking I I I think you probably have to list Microsoft first, don't you? I mean, they they were they're early. I mean they were they were early in if you know we think about okay the chat GPT moment was was what three years ago almost to today right November of 2022 and co-pilot Microsoft co-pilot that was launched and announced the following spring uh spring and summer and so while you know there's been a lot of back and forth and consternation about $30 per user per month and how valuable is it and our enterprises uh adopting it I still think that Microsoft through its incredible distribution into basically every single major company that exists, they have been able to sell and cross-ell co-pilot and um and put really really valuable AI features into their existing license base. So, I think they're probably they they have to be number one in terms of uh companies that are actually monetizing AI in their applications. And what about ones that maybe haven't done as well or you think will still continue to struggle and have challenges catching up in this race? Oh, >> um I mean we just talked about it even though we are believers in in Agent Force in the long term. I think that again the things that Microsoft really has been able to drive through its just its sheer distribution being able to crossell into its base. We think that Salesforce also should be able to do that with agent force, but in our initial conversations, it's just it's just slowgoing. Um there are there's a lot of data cleanup that needs to be done. There's a lot of change management that needs to be done. Um and also I think you know there's there's some product innovation that also needs to happen outside of the uh the kind of initial most obvious use cases which are like we said serviceoriented or or contact center oriented and then business development reps which is hey can you go out and maybe source a few hundred leads for me u Mr. or Mrs. AI agent and and you know do an acceptable better than just a passible or acceptable job actually show that that can generate real returns for their customers. So yeah it's been slowgoing and I think that's probably reflected in the in the share price for uh for Salesforce and then you know the other one is probably Adobe. Adobe is just in a very difficult spot. They are competing on the merits of their model like for like against some of the most well-funded and uh well-resourced AI companies whether it's OpenAI or Gemini or or others. And that's just a really difficult place to be in if you're Adobe because they have this fantastic creative cloud business and uh and and editing tools in their creative cloud. But people are are interested in trying to come after that uh that near monopoly and disrupt it. >> Well, I guess we'll have to wait and see till after Thanksgiving how Salesforce fares and um I think it'll be a bit of a bell weather for the rest of the sector. So, thank you so much, Jackson, for coming on again and talking to me about software. >> Thanks, Anita.