Microsoft’s New Coding Model, Apple’s New Push for AI on Devices, Snowflakes Shares Jump

0:13Aaron Tilley:Welcome everyone to the information's TITV. My name is Akash Pasricha. It is Thursday, May 28th today. First up, we will break down Snowflake and Salesforce's quarterly results with a panel discussion. We're also going to dive into Meta's push into AI subscriptions alongside the information's exclusive reporting that the company is launching a new unit focused on driving business adoption of its AI tools. I'll then bring on our Apple reporter to talk more about his exclusive reporting, Apple's renewed push for AI that runs on devices instead of the cloud. and we'll wrap with a look at Microsoft's Build Conference happening next week and the big announcements that the firm has planned.

0:55Aaron Tilley:It's going to be a fun show, so let's get right on into it. Snowflake shares jumped yesterday after the company exceeded its own revenue forecast and also raised guidance for the year. The company also announced a$6 billion deal with Amazon Web Services. Salesforce, meanwhile, lowered its cash flow forecast for the 2027 fiscal year. To break down more of the results, I want to bring on Gil Luria, Managing Director at DA Davidson, and Ben Palladian, founder and CEO of BEP Research. Welcome to the both of you. Thank you for joining us. Gil, I want to start with you. What stood out to you about the Snowflake results?

1:36how much they're winning uh software's been under a lot of pressure this year which impacted even stocks that we knew were winning like snowflake but they're winning a lot more than we thought they would be so accelerating growth from 30 to 34 is fantastic it's reflecting what's happening which is it snowflake is absolutely critical for companies that want to deploy ai if you don't have all of your information in your data warehouse, in your data lake, you can't do a lot of the things that AI does for you. And so companies have been embracing Snowflake as a platform. Now, above and beyond that, Snowflake talked yesterday about the fact that they now have a new coding tool that works within Snowflake, within the platform that allows their customers to use their Snowflake capabilities, their Snowflake credits to write code.

2:33So it looks a little like Cursor, right? It's not their own frontier model, but it is a coding tool based on frontier models that has had tremendous success just over the last few weeks and months, which is part of how they've accelerated revenue. So it was a fantastic result. And then they added that long-term deal with Amazon. Amazon is their main partner. Most Snowflake customers are on AWS. and they've had a deal that ran out and they were able to renew with Amazon. And the reason that's important is that it locks in their gross margins in the mid 70s. So we now know that they're on an increasingly accelerating revenue trajectory with gross margins locked in at a very high rate.

3:16Aaron Tilley:So Ben, that AWS deal was pretty interesting. One of the notable things about that deal is the Graviton chip that they are planning to leverage. Can you talk a little bit about your view on the Graviton chip? This seems like a big win for AWS. It's not a monstrous deal, but it's a pretty big deal, right? Yeah. In the land of compute and agentic AI, Amazon really leads on having a large fleet of CPUs based on the ARM cores, which is the Graviton. It's a multi-generational chip that they put together. So they've built it really well and they run it very cheaply. So it works well for these tasks that they want to orchestrate with the agentic workload.

4:10So that's kind of what investors are looking at from an investing perspective. Amazon has a large fleet of Graviton, and now they can monetize it pretty well now with Snowflake and other companies. So it's really working well for them in that aspect.

4:27Aaron Tilley:So Gil, if you look at the multiple for Snowflake, I mean, it's trading around, I think, 9.6 times forward revenue is what I saw this morning. It's probably up higher than that after the big jump. How high do you think that multiple can get? And do you think it gets anywhere close to what we saw maybe a couple years ago? Well, at the peak in 2021, Snowflake traded it 100 times revenue. Yeah. I don't think we're going back to that. I don't think we're going there. But having said that, what's happening right now in software is if you're winning, if you have accelerating revenue growth, multiple is not an issue.

5:08Ask Palantir, ask Datadog, ask Shopify. those multiples are very high on a revenue and cash flow basis because these are the companies that are winning. These are the companies that have accelerating revenue growth, which is not the case for the vast majority of software companies. Most software companies are being crowded out by AI. Those handful of companies that are actually doing better because of AI, the multiple doesn't seem to be a restricting factor right now.

5:37Aaron Tilley:hmm uh what's your take ben on the on the multiple do you have a view on how high the multiple should go could go uh you know what that could look like i mean i i agree with gil there's a huge bifurcation in what software is and how it's going i think companies that are able to harness and have availability of their own compute in the right way to add their intelligence and are based on consumption models, like a data dog, are the ones that are really winning the AI acceleration. And you'll see the winners rise to the top and the losers really fall to the bottom. And I think if that acceleration is maintained and the margins are there, you'll get higher multiples and a re-rating because I think most of the street investors have been very pessimistic on a lot of the software names and have thrown out the baby of the bathwater.

6:37Aaron Tilley:Okay, so Gil, so speaking of different segments of software, let's go to Salesforce now. They had a new look to their earnings call. It was, they had some fancy microphones I saw. They had a little more of a podcast vibe. Wasn't enough to make investors jump in terms of the reaction. What stood out to you from Salesforce's results? yeah the podcast format is fun i actually hope all companies go to it it's a it's a lot more it adds a lot of texture i have to tell you gill i i you know maybe we can all bond about this for a second it has it is so strange to me that the conference calls are notorious like the worst audio quality in the world i mean you've got i mean netflix is pretty good at but like amazon i mean microsoft google i mean some of the audio it's like it's like they're talking into their little headphone microphones.

7:34Yeah, and without video and anything like that. So yeah, let's follow that trend, but let's not follow how Salesforce is doing because expectations were very, very low and they barely eked them out. So the quarter itself was good, mostly because they bought back 11 % of their shares in the last few weeks through a massive accelerated buyback. but then their guidance for the second quarter was below expectations at a time where they're telling us that acceleration is coming right they've now decelerated to about a seven percent organic constant currency revenue growth rate that's the number that matters and they're saying that they're going to be back at double digits by next year it's just very hard to imagine how that's going to happen so even with very low expectations and a very low multiples a company trading at 10 times cash flow.

8:28Even with that, they were still able to disappoint.

8:33Aaron Tilley:Ben, you know, I know you don't cover Salesforce, but I wonder if you have a view at all on the incumbent strength that Salesforce has and this idea that it's very hard for people to tear out their Salesforce systems outright. And so, you know, to some extent, the fact that they are so big uh gives them a bit of an advantage i mean i wonder in in the people you talk to talk to you in your orbit how much does that incumbent strength uh matter in right now for them yeah i mean i've never been a sales force investor i've always watched mark benioff from afar and then the the multiple acquisitions that they've uh made and everyone calls them sas jesus i think he does a good job i think he does a he does a good job of that but at the same time uh the the challenge is is that you can't run around saying we're a system of record and we're doing agents and look at william sonoma using agents and spending all this money on matthew mcconaughey commercials and like all this other stuff like i mean they're pretty fun they're they're fine right yeah but like uh at the same time you really need to get down to the product what if you spent that money and actually bought like your own compute and controlled some of your own destiny as opposed to spending it on buybacks and like all this other stuff and i think investors are very wary about that and they're not giving him the benefit of the doubt which they gave the last decade and you see it in the performance of the stock and the multiple like it they're really not happy with what's going on.

10:15Aaron Tilley:Do you think Salesforce vertically integrates a little more looking ahead? Well, I love McConaughey. I don't think he's worth what they're paying him, but I do love those ads. I'm talking maybe not upstream in terms of marketing. I'm talking downstream in terms of models and infrastructure and stuff. Yeah, I mean, they're in a tricky situation that many software companies find themselves in, but I would actually put Salesforce, I'll be kind to them and say They're actually on the safer side of the AI impact because they are so entrenched with their customers. Everybody has an installation of Salesforce and it's how they have all their data relating to their customers and a lot of other aspects of their business.

10:58And that doesn't seem to change. That's what we're referring to as system of record. That doesn't seem to change. So there is a future where Salesforce is the platform where humans and agents interact. And that is value added. And they can continue to manage that business. That's just not a very high growth business. That's really, we will keep our existing customers, but we won't be able to grow very fast within those customers' business. That's why they're struggling to find a formula to work with third-party agents. Now they're talking, initially they charged people to use third-party agents.

11:32Now they're talking about headless and API access. And they're not there yet. They haven't figured it out. But the likelihood of somebody replacing their Salesforce installation, taking it out, is quite low. So we do have an annuity, a perpetuity that's worth something. Now, I would argue that instead of buying back stock, Ben mentioned that they used to be acquisitive. They used to make terrible acquisitions. They used to buy software companies at the peak at 20 times revenue. What they could be doing now is looking at this very rich target list of companies that are good companies that are growing that they could buy at less than 20 times cash flow and make that very accretive and revive the business.

12:18Like what? Braze, Zeta, Flavio, Amplitude. These are all very good category leading products that still have double digit growth. that if Salesforce was to incorporate them and sell them through their distribution, they could be year one accretive and help them accelerate organic revenue growth. So at the time they shouldn't have made acquisitions, they did at a time where they should be making acquisitions, they're a little more gun shy.

12:49Aaron Tilley:So you're saying the message to Mark Benioff is, hey, don't worry about the flashy stuff. Worry about really making the offering more, well, I guess less about the AI, more about sort of what you can offer under the hood and offer more value that way, which by the way, is exactly what we've been talking about on the show. You know, we've had folks on the show who would help negotiate these contracts with software vendors. And the message that customers have is you're selling me all this AI stuff. I mean, I'm still trying to get value out of the subscription that I already have. And so to your point, Gil, if I understand you correctly, it's like, let's worry about building out that offering rather than focusing on agent force or a model that might not even be competitive.

13:36Right. What you need to create is the venue and the platform that the agents use. It's now becoming increasingly clear that companies are going to buy their agents from Anthropic and from OpenAI. They're not buying them from their software vendors. All the software vendors can do is make their platform more usable for those agents. That's how they can make their product more valuable, create more surface area, more functionality that those agents can use in conjunction with humans to add more value to their customers, to your point. So the subscription is now worth more as opposed to try to compete with OpenAid Anthropic, which is what they've been doing for the last couple of years and clearly does not work because those companies, the frontier labs are going to have the best capabilities and the best agentic offering.

14:22all you can do is just do what you've been doing better at accommodating this new wave of agentic use. There's a really good parallel right now, which is the web, right? The worldwide web, the internet, used to be web pages that only humans would use, and they were designed for humans. Right now, increasingly, they're being used more by chats, by bots, by AI agents, than they are by humans. And that means that these websites have to adapt to that and have these two facets, a facet that deals with humans and a facet that deals with agents. That's the evolution software companies need to go through right now.

15:00Aaron Tilley:Okay, so I want to pivot quickly. I want to talk about the meta headlines that we saw coming out of yesterday, and there were a number of them. And Ben, I want to get your reaction to them first. We saw they are piloting subscriptions, paid subscriptions, for some of AI services. We also saw the news that Mark Zuckerberg sort of acknowledged to shareholders that, hey, maybe a cloud computing play is a possibility. And then the third headline, I'm blanking. Well, OK, let's start with those two and then I'll remember what the third one is in a second. It's the forward deployed engineers. Forward deployed engineers.

15:39Aaron Tilley:That's what it was. I'm sorry. Our headline, the information exclusively reported that Meta is looking to implement a forward-deploying engineer program, which I didn't see coming. But Ben, what do you think? I think forward-deploying engineers, the du jour way to implement AI. Obviously, Palantir was the first to really coin that term. And now NVIDIA and other companies like Salesforce, us everyone is saying that if you want to implement the best practices of ai let us let us drop in some of our engineers and we'll we'll see how your business processes are and we'll be able to tailor the the ai to your usages and you know going back to what you were saying about the new subscriptions i mean it dovetails well with the the 10 layoffs i think what zuck is seeing is an underperformance in his stock uh he doesn't he thinks investors think he's spending too much money on compute and he's got to be able to really pay for it i think one of the the benefits that facebook and or matter of mark zuckerberg has is that i don't really see him as an innovative type of person or or a company but they own some of the best virtual real estate on the internet with whatsapp Instagram and obviously Facebook so he's always going to be collecting rent and he's gonna be taking shots on whatever works and this is like another shot I don't know if actual fortune 500 companies in the United States are going to use this type of product I'm sure he's done this before with other he tried to take over yeah like a slack program and other stuff but I've had this thesis that meta with its business tools through WhatsApp.

17:29And I guess if they use Manus or not with that title. If it goes through.

17:36Aaron Tilley:Yeah. Or the agents. In other parts of the world, like the Middle East or Africa or India, WhatsApp is the CRM. People run businesses through that. And you can see. So maybe, I mean, maybe people pay for it. But Gail, what do you think here? I mean, the enterprise push, the story of Meta is, what, this is like the 18th time I think they've tried for an enterprise product. We saw Clara Shee come in. That was the former Salesforce executive that came in. She has now, I think, taken on an advisory role at the company. Do you think this is the enterprise moment for Meta? So I think where we're at is Meta is growing a lot faster than the other mega caps.

18:21Let's not forget they're growing high 20s when the other mega caps are growing low double digits to teens. And that's just by selling ads. So here we are and they're saying, you know what? We need to pay for all this compute. Let's turn on some of the levers that our competitors are turning on. So Google has a lot of subscriptions. We don't have any. We could turn on some subscriptions by offering heavy users more functionality, by offering our AI by subscription because the market is now conditioned to that by Google, OpenAI, and Anthropic. So we have new monetization tools. And by the way, if we're not using all this huge capacity that we've created by building data centers, we can just turn around and sell it, right?

19:05This is what Elon just did ahead of the SpaceX IPO. He had all this compute capacity and he said, I'm not using all of it right now. So how about I rent that out at$15 billion a year to Anthropic? Meta is in the same position. as long as they're not using all of their compute, they can turn around and rent it out. Now, participating in the enterprise space with four deployed engineers, to Ben's point, that's already crowded, right? Palantir does it better than anybody. OpenAI is getting into that. Anthropic and other software companies are trying to get into that. So I'm not sure that that's necessarily where they'll have success, but they do have a lot of compute capacity they could turn around and rent out at a very high rate right now because the compute is so, so valuable.

19:49And they have extra monetization. Again, they're already growing faster than anybody. And now they have this extra monetization on subscription, extra monetization on renting out compute. And subscription solves other problems for them. Let's not forget that in Europe, they can't serve ads in the same way that they do here because of privacy restrictions. So they monetize in Europe a lot less than they do in the US. All of a sudden, they can turn around and say, you know what, if we can't sell ads effectively in Europe, we'll just charge everybody to use these platforms everybody nobody's gonna drop instagram because of

20:20Aaron Tilley:a subscription yeah so i mean forward deployed engineers from from meta uh can you just let's just talk a little bit about like what this offering could even look like i mean it's not it's not clear to me what the enterprise product even is i mean look ben mentioned whatsapp and so I guess, I don't know, maybe one way to do this is helping a business set up their WhatsApp storefront. Like, is that what we're talking about here? Or, you know, what role do you think these forward-deployed engineers could actually play for Meta? So, again, the term comes from Palantir. So let's talk about what Palantir does.

20:58Aaron Tilley:Yeah. But they have an enterprise product, right? I mean, like, I could see you need help setting it up. Right. That's what Meta wants to get into. The market of going to the CEO and CFO saying, you have this huge problem around reporting. What we're going to do is we're going to use our AI model. We're going to send you four deployed engineers, and they're going to help you with our AI model, solve your very complicated reporting and supply chain problem, and do what Palantir would have done for you. And that way, you're buying our compute and using our model and using our capacity. That's their goal.

21:32Again, it's already a crowded market, and there's no way they do it as well as Palantir. Right.

21:37Aaron Tilley:Great. Well, I want to thank you both for coming on. That is Gil Luria from DA Davidson and Ben Palladian here on TI TV. Thank you. Thank you. Apple is looking to renew its focus on running AI models that could run on its devices. That is according to a new exclusive report from my colleague Aaron Tilley. I want to bring him on to share more about what he's learned. Aaron, welcome back to the show. It's great to have you here. Yeah, great to be back. So what do we know? So Apple has, you know, this has been a key competitive advantage for them. It's their internal chip program. And as part of that, I mean, they're going to only continue to deepen this and at the next WWDC, they will include that as a big part of their strategy.

22:25And one part of that is sort of distilling a very big version of the Google Gemini model onto their device, because that's the model they're going with for their future AI strategy. So they've gotten the license rights to do that, and they will shrink it down to run on device. And they are sort of one of the key players that's really capable of doing something like that with their own sort of unique memory architecture, their chips. So that will be a key advantage to them for this upcoming WWC.

22:59Aaron Tilley:So the idea here is that they are behind closed doors. They're sort of moving a lot. They're focusing a lot more on installing compute on the actual devices themselves rather than relying on compute, right? Yeah, rather than relying on cloud or spending hundreds of billions on the data center build out like we see with companies like Meta. And, you know, they'll be looking to further that sort of advantage. They are looking for acquisitions to help for companies that can help them shrink down models and make them run more efficiently on device. and so this will only continue to expand in the years to come and certainly it will be on display at their next upcoming developer conference.

23:52Aaron Tilley:So this was kind of interesting. In your story, you quoted someone who is working in the realm of the on-device compute and they basically made the claim that, hey, it's kind of a mistake that everyone is investing into data centers so heavily because edge computing or on-device computing, I mean, that is really the future. Um, is that segment of, uh, technology, is that getting louder right now? Are there more investors pouring into those startups? Are there more founders looking to it? Like, just talk to me a little bit about how buzzy that category is right now. Yeah, it's certainly, I think very, um, you know, it's not, I, I wouldn't call it mainstream yet.

24:33I think there is a, there is still this sort of fever pitch, uh, like, uh, effort to just build the biggest sort of compute in the world. I think that is still very much in the zeitgeist. And this sort of next generation of like, we need to be efficient with how we use our resources is really at the forefront. I think just the most sort of like, you know, forward thinking kind of folks are thinking about this. And it's not like, it's definitely for kind of more, I think, specialized AI. And when that comes to something like enterprise or consumer product, you can kind of more specialize and run on device.

25:19But I think that's certainly – I think it's, yeah, definitely not mainstream yet. Okay.

25:27Aaron Tilley:And last question for you. I mean, you also had reporting on how Apple will be looking to Google Cloud in an increased capacity for its own cloud services. And, you know, we had a discussion about the emphasis on privacy that Apple has and sort of the question mark around, hey, if it's Apple's private cloud, you know, are there any risks there? How does that story then balance with the edge computing that the company is going after? yeah apple's so apple's uh licensing a version of gemini and the full model just can't run on device still that's still really not possible it's in you know trillions of parameters the size of the model so they are they they're going to have to rely on some amount of the cloud for this and their own internal stuff is doesn't work it's running on their own chips and it's not capable of running this.

26:23So they are getting, you know, this is part of the deal with the Gemini and Google. They do have access and opportunity to rely on Google Cloud. As part of that, our understanding is that they recently turned on capabilities with NVIDIA just for confidential compute. So Apple can sort of maintain that privacy guarantee in the cloud with NVIDIA's encryption features on their chips. So all the encryption of the data and AI models is happening during the processing of queries of AI queries. So that's a path they have to take too. But you know, the sort of like big strategy is always moving more and more on the device.

27:07And so this will take, you know, years to unfold, I think this kind of move and that's the direction they're headed. But But for now, there's still going to be some sort of cloud compute component to this.

27:19Aaron Tilley:MARK MIRCHANDANI - Great. Well, Aaron, I want to thank you for coming on. That is Aaron Tilley, our Apple reporter here at The Information. Microsoft is holding its annual build conference for app developers in San Francisco next week. Our Microsoft reporter, Aaron Holmes, wrote about what we can expect from the company. I want to bring him on to talk to us about what he has learned. Aaron, welcome back to the show. It's great to have you here. AARON HOLLANDER - Happy to be here. So what should we expect from the Build Conference next week? Yeah, so as I reported today exclusively, Microsoft is planning to release several new AI models that are homegrown, meaning they are not derived from OpenAI models, which Microsoft already has access to.