What software earnings, the economy could signal for AI adoption
Oracle (ORCL) is among the top software companies prepping to report earnings this week, the cloud company is set to drop its fiscal fourth quarter results on Wednesday.
RBC Capital Markets managing director of software Rishi Jaluria sits down with Josh Lipton for a conversation about the state of the software industry following President Trump's tariff wars, the sector's recession sensitivities, and the adoption trends in AI enterprises.
To watch more expert insights and analysis on the latest market action, check out more Asking for a Trend here.
Oracle gearing up to report fourth quarter earnings tomorrow, giving investors more insight into the software sector, which has largely been considered as tariff resistant. Joining me now is Rishi Jaluria, Managing Director of Software at RBC Capital Markets. Rishi, it is great to see you, especially on set live here. Uh let me ask you this. Right, first question, big question I think for software investors who are listening right now, many might consider the the software sector, Rishi, which you know so well as relatively tariff resistant. Now that we've gone through earning season, you've read through those reports, Rishi, were in all those conference calls, is that your takeaway? Tariff resistance.
I I think that's right. Josh, always great to be with you and especially in person in the studio. I think you're exactly right. I mean, the idea is you cannot actually tariff software as a service. There's there's no real mechanical way to do this. Um and and even if you think about it from a quote reputational standpoint, for most of the large software vendors out there, there aren't really good local alternatives to them as well, right? There aren't any good European alternatives to Microsoft or to Salesforce or anything like that. So I think we have been seeing that. However, what we also have been seeing is maybe some of the underlying cracks are this showing up, whether it's tariff, talks and uncertainty impacting the actual end customer base or whether it's just uncertainty leading to some issues overall as well.
So and those those cracks you're pointing out, in your opinion, Rishi, are those are those priced in at these levels?
You know, candidly, I don't think they are. Uh you know, if you look at it, the software index, the IGV, which is what we use to track, um is at basically near all-time highs in spite of the fact that we are introducing a lot of uncertainty into the equation. We don't know how this is going to play out, but I'm already starting to pick up in my conversations increased deal scrutiny, longer sales cycles. Um there's definitely some of that sort of issue. And I think initially when we went through, especially the March quarter end earnings, it seemed like things were fine, but I worry that some of those cracks were offset by pulled forward business. And now, I think we're going to see a little bit of that. I'm worried that just numbers and expectations may be a little bit higher than where they're actually going to shake out. And so I think we have to it's a stock picker's market. We have to pick and choose our spots too.
Let me ask you, we talked about tariffs. Uh what about the macro? What about expectations of slowing economic growth? That that impacts your coverage universe how, Rishi?
Uh absolutely. And and look, I mean, I think even when we think about recession sensitivity, we we've written a lot on this topic, even relative to recessions, software should be a little bit more resilient than other areas of of the economy. It is a secular growth driver of really the global economy. Uh we're still in very early stages on digital transformation. And by the way, the last time we had a really major recession going back to 08-09, it actually accelerated cloud adoption. And we're now in the middle of a new paradigm shift, which is AI. And you know, there is a case to be made, especially when you think about efficiency gains and cost savings that maybe, God forbid if we do hit an economic slowdown, it may actually accelerate AI adoption.
Let's talk more about AI. What does AI adoption in the enterprise look like right now? What are the trends?
Yeah, look, the trends are are I would say twofold. Number one is we are actually seeing not just up into the right, but I think we've seen an inflection in enterprise AI demand really over the past six months and nine months. And I think it's a function of the technology has just gotten better, the use cases are there, there's more urgency from companies and boards. But also I think the other really interesting trend that we're starting to pick up on is we're seeing adoption of AI in kind of more quote traditional industries because you'd expect the technology sector to see huge AI demand, you'd expect financial services to kind of follow behind that, but we're seeing it in industrials and manufacturing, retail, healthcare, food services. And I think that's because of this viewpoint that can generate real margin expansion. So if anything, the adoption of AI is maybe tracking ahead of previous technological waves.
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