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Good morning, John, Thank you so much. And that is exactly part of the mood here at super Return. What does this industry do with AI? Do they care about AI? We have the perfect man for that, as you say, it's Orlando Bravo of Toma.
Bravo, Orlando, thank you so much for joining this morning, Daddy, great to see you.
So if you look at these public markets, it used to be a frenzy over all of AI. If you mentioned AI and earnings call, your stock goes to the moon.
Lately, something has changed. It's now in.
Videos the winner and we're more skeptical about other companies' abilities to monetize AI. So did we get over our skis in the promise of AI right here and right now?
Well, Daddy, I can give you the enterprise view of AI right the business view, not the consumer view. Now, if you look at the software landscape, cent trillion dollars of marketcap in software publicly traded companies today, about one thousand companies. Some of those software companies of the providing
AI solutions to their customers for decades. In fact, some of those companies are pure AI companies now let's differentiate that when you talk about genai, right, the new form of technology in ai.
This is what's going on today.
Many software companies have produced and delivered and introduced genai solutions to their customers, but they're not charging for them.
They're including that in the bundle of their products. Is that a problem?
We saw that in salesforce that stock sold off because margins on that essentially zero to companies need to get better about finding a way to monetize this.
Yes, they do, but at the same time, the software business has become you have to continuously add value to your product, not only to fend off competition, but to upsell your customers.
So this is a good development. Overall.
Today we have twenty five billion dollars of revenue coming from our software companies, and seventy five percent of those companies have released GENI solutions to those enterprise customers.
Are talking about it's not necessarily extra profit because they're not charging for it. So that promise of huge outsized profit. Is that a little bit misguided because it sounds like you're saying it's just a continuation of value offering, but you should be able to monetize it later.
The key is if you if you really run an efficient operation, you take all your engineering talents and your product management vision for that engineering talent, you do have to move resources around.
How patient should we be for that?
Because these public markets aren't being patient? What should be the timeline we give companies to figure this out?
The investors and we, as a big investor in software, are a private investor in software. We always look at the P and L and is the company achieving the level of earnings that we set out to achieve? And if we are within that, the company can create and innovate and move around resources to fit what they need.
Okay, and software in general, Orlando I mentioned salesforce having a bit of a tough time, not just the issues with AI, but some concerns there that maybe sales weren't as good workday had something similar in the private markets. You see Visa taking a huge down three and a half billion dollars on of their online learning platforms. It's these pockets of software stress. What's going on?
What happened was you know when this happened Q two of twenty twenty two, that's when we first saw a big drop in new business generation by these companies a drop in bookings. Now, always, as an owner, you think about what can you do about it? What we do about it is we protect the P and L. We have to come in and cut cost again to protect the level of earnings that we set out to achieve.
In these companies.
Now, those pockets of weakness are also related to the business model of these companies. You look at JENNYI, and you look at a technological shift in the enterprise software world, but also a business model transition. And people don't talk enough about that. Companies that charge by the user are going to be more challenged that companies that use other forms of price.
Are you still in cost cutting mode?
Now?
We always are protecting the P and L. Not right now.
We have to do that again in twenty twenty two one. It's much better to be early so you don't have to chase your earnings. That way, if the environment improves, you can come back and invest and in them.
If the environment stays the same.
You can basically run your business profitably.
I have to be honest, Orlando. When I've talked to a lot of folks here about AI, A lot of people have said it's not as big of a topic this year, maybe it was last year. We're not really.
Thinking about it that much.
Is this industry behind and having an AI game plan? Do you think all of these various private equity companies with portfolio companies, do they need to have a plan for all of them?
You need to have an AI game plan. In fact, in the SaaS era, which really got started in twenty ten, a bit before that, we used to say that every company needs to think about becoming a software company or their digital side of their business.
Now we say that.
Every company needs to become an intelligent software company. And if you look at the buyers of our companies, all the exits we've had over the last eighteen months, many of them are industry buyers that are looking to transform their companies through software.
Isn't there some of it that's okay?
Mack or Landa like I don't need my refrigerator, for example, to have AI?
Do I?
I mean, isn't some of this we're selling a dream that's not really there.
Sometimes you are.
That's where see, that's where there's so much value in the software incumbents.
There are two reasons for that.
The software incumbents are working with their customers thousands of them, sometimes the entire fortune five hundred customers on solving an important business problem today that they have in a given use case, in a given horizontal in cybersecurity, or in a vertical.
Those are the companies.
That are in the cole position as a trusted advisor to develop GENI solutions that actually have value to those customers. And secondly, and really important, something became very valuable in software enterprise, and that is data, proprietary data. Many of the companies you mentioned are sitting on proprietary data that they can use from their customers that can be used to develop GENEI solutions and train these models.
Huge vast treasure troph of data.
It's no secret.
It's something that regulators have looked at with consolidation in this industry. An investigation is opening up now. We heard this today with Microsoft and open Ai.
It's been a.
Lot of concern about anti trust.
How big of a headwind is it to you?
Have?
You had to approach investing differently given what's happening down.
In DC, very differently, and we take a practical view towards antitrust and the regulatory environment. This is the thing, it's a fact based approach. If you're a center and you believe you can add a lot of value by setting that company on the right price, and if you're a buyer and you think you can add a lot of value by buying that company, you just have to appreciate that there is a public policy underpainning environment sowards this and you have to live with it.
So are there deals you haven't done because of this?
Most of the time, no, because if your facts are right, you have to go forward with and being willing to be creative collaborative with the regulators. And the regulators are smart and now they may look at your deal. It may take nine months to close the deal instead of three months. It may take a year to close the deal. But for something that adds value, you have to just look forward to that and put out the facts on Do you.
Think this regulatory environment is a problem that is problematic, that it's gotten this much more scrutiny, this many more deals want.
I don't think the regulatory environment in software is actually a problem because software is a highly highly competitive industry and the regulators are experience in doing deals. Is the regulators actually understand this industry really well. So in our field of enterprise software is not a problem. The problem is when buyers and centers want to completely shy away from doing the work that it takes to explain it
so they can move forward to with their transactions. We know of a number of very large strategic buyers that from a management perspective, just don't want to deal.
With that environment. You want to give us a nature land, I can't.
You know, I can't because many of those are partners and buyers.
Of our companies. But look, once again, we get paid to.
Undergo these processes and to adapt to these processes, and it's really important that buyers and centers do that.
Okay, Orlando, we're going to have to leave it there. Thank you so much for joining today. Really appreciate your time. John.
That is Orlando.
Bravo, the co founder of Tomo Bravo, talking about this regulatory environment. It's changed things, but he says those that are struggling are not doing the work.