This post first appeared in the Constellation Insight newsletter, which features bespoke content weekly.
Enterprise technology vendors see strong revenue growth ahead due to generative AI, but they're clearly stuck in the hurry up and wait phase when it comes to recognizing sales. In other words, technology vendors are increasingly talking about generative AI pilots, remaining performance obligations (RPOs) and pipeline in lieu of actual revenue.
This focus on future revenue instead of actual revenue has picked up in recent earnings conference calls. Oracle highlighted RPO in its recent second quarter earnings results, which were mixed. Oracle CEO Safra Catz said the company's RPO topped $65 billion with about 48% of that sum expected to be recognized as revenue over the next 12 months. In an SEC filing, Oracle noted that 35% of the $65.5 billion will be recognized as revenue in 13 months to 36 months and 17% recognized more than 3 years from now.
At the very least, 17% of Oracle's RPO should be heavily discounted. Revenue more than three years from now is worth less than if it were collected today.
Catz said that Oracle is building data center capacity to meet demand. Oracle CTO Larry Ellison said: "We have to build 100 additional cloud data centers because there are billions of dollars more in contracted demand than we currently can supply. Oracle Cloud Infrastructure (OCI) demand is huge and growing at an unprecedented rate. In the next few weeks, we expect to sign a couple more billion-dollar Cloud Infrastructure contracts."
Ellison also said OCI will have a growth rate topping 50% in the future due to generative AI and database demand.
RPO was also a topic for Adobe on its fourth quarter earnings call due to several large enterprise transformational deals that gained momentum due to generative AI. RPO for Adobe’s fourth quarter was $17.22 billion, up 13% from a year ago.
C3.ai CEO Tom Siebel recently talked more about pipeline and pilots over RPOs, but the theme was similar. There's revenue growth on the way, but we are not there just yet.
Siebel said:
"In Q2, we closed 62 agreements, including 36 pilots and trials. Our new pilot count is up 270% from a year ago. Notably, 20 of these were generative AI pilots, a 150% increase from Q1. With the lower entry price points of our pilots, we are more easily able to land new accounts. With our pilots, we are engaging customers across a diverse set of industries in this quarter. Our pilots came from manufacturing, federal, defense, aerospace, pharmaceuticals and other industries."
All those pilots sound promising, but so far, C3.ai's revenue has been between $72 million and $73 million for the last three quarters.
Dell Technologies Chief Operating Officer Jeff Clarke recently said on the company's third quarter earnings conference call:
"The pipeline for AI-optimized servers tripled quarter-over-quarter during Q3. Lead times remain 39 weeks, demand is ahead of supply. We continue to work to improve supply. And we're working now to convert that pipeline into real sales into orders, so we can continue to ship and benefit from this exciting time."
The problem with the focus on pipeline, total addressable market and future revenue potential is that it's hard to value. In some cases, this potential revenue may never hit the top line. For technology vendors, generative AI is at a promising yet unfulfilling stage in terms of actual revenue.
Enterprise buyers are interested in the generative AI use cases and may even be recognized as pipeline for many vendors. However, strategies are still being formulated along with budgets. There's also another reason to be a touch skeptical about the pipeline and RPO chatter: Enterprises may agree to spend over time but are also managing payments because they can earn interest income while the vendors wait for the checks.
It's likely that the next round of technology earnings in January and February will feature more RPO and pipeline talk. The key themes to watch are the following:
- RPO increases for vendors as customers commit to longer-term contracts.
- The time frames associated with those long-term contracts and how much is being stretched out beyond 24 months.
- What is the value of revenue two years from now to Wall Street?
- Payment terms. Are annual payments over because enterprise buyers are seeing better returns from interest rates relative to vendor discounts?
