 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. Recent spending intentions data from more than 1700 IT decision makers indicates that executives expect technology budgets to grow at 4.3% this year. That's up from around 3.5% in 2023 and is higher than the expectation in October, which was 3.8%. But the forecast for 2024 are back loaded. Moreover, while some sectors such as energy and regions like APAC expect higher growth, many of the largest companies and biggest spenders plan to grow below the mean. Now the good news is that full year 2023 spending did come in higher than was expected. In October, indicating a strong finish to the year, but looking ahead, 40% of organizations report that generative AI funding is stealing from other budgets. We feel that AI must deliver tangible ROI in order for spending to show sustained growth and strong growth this year and beyond. While we're cautiously optimistic, without an AI boost, it's likely that macro spending will continue to be dependent on the Fed's moves. Hello and welcome to this week's theCUBE research insights powered by ETR. In this breaking analysis, we unpack the ETR January spending data and we'll dig into those areas that are expected to show above average performance and those that are likely to lag. Now we see in the data and encouraging reversal and spending expectations. Let's start by looking at the changing expectations going back to the pandemic's high. This chart below shows, or this chart here shows the expected annual growth rate at different points in time for 2022 and 2023. Now in late 2021 and entering 2022, ZERP or zero interest rate policy was still in full swing, as was the technology spending boom. The war in Ukraine coincided with the downward revision and expectations and we saw that deceleration trend continue through the summer of last year when the Fed stopped tightening. Expectations for full year 2023 remained tepid at 2.9% in the October 2023 survey, but the checkpoint in January, as you can see here, shows that spending actually came in higher for the year at 3.4%, which indicates a strong finish. Moreover, expectations for 2024 are coming in at 4.3% growth. Now the first note of caution, however, is these figures, as I said earlier, are back loaded. Okay, now spending expectations, we're looking at these as stubbornly positive for 2024. So let's look at this data in a little bit more detail. The ETR data that we're showing here shows the IT spending estimates for the specified periods and the gray bars are from July 2023 survey. The blue represents the October survey and the yellow bars show the most recent January 24 survey. So let's start at the right, upper right. We see IT spending last October was forecast by these decision makers for the full year 2024 to grow at 3.8% and it jumps to 4.3% in the latest January survey. So that's the green arrow and that's a positive upward revision. But as we said earlier, it appears the 2023 actuals came in at 3.4% above that October forecast, 2.9%, indicating year-end strength or possible budget flushing and or momentum from the year-end market rally. Now somewhat concerning is if you jump to the second set of bars here from the left, we see Q1 2024 forecast at 2.4% down from the October 23 surveys expectation for Q1 2024. Now from there, if you move to the Q2 2024 outlook, we see it comes in at 3.1% for Q2 2024. That's below the overall 4.3% expectation for the year. So this is an indication that the optimism is back loaded to the second half and it'll be dependent on how companies are performing. Now we often repeat the sentiment of AWS CEO Adam Salipski that we've seen worse times and we've seen better times, but we've never seen more uncertain times and we think that applies here. All right, let's further double click on this data. Let's look at some of the sectors that are performing above or below the average. This ETR data shows the forecast from October, that's again, the blue bar and the most recent January survey. The average is 4.3% spending growth. Note the significant uptick in Asia Pacific. It jumps to 6.2%. Small, medium business remains above average at 5.8%. Energies and utilities show a strong bump to 5.4% and services and consulting is jumping up to 5.1%. However, two key sectors are showing softness, manufacturing industrial and the global 2000. The all important global 2000 show a deceleration in both expectations from October and at 2.3% well below the 4.3% survey average. Now this next chart, we're going to show you looks into those organizations indicating a spend decrease. So ETR said, all right, if you said you're going to decrease spending, how are you going to cut? Reduced staffing is now the top response at 23% with project freezes and reduced outside consulting spend right behind. Customers, some customers are squeezing the hardware budget. That actually ticks up a point. But consolidating redundant vendors and reducing excess cloud spend, they come in next and we've highlighted those two in red because they were notably higher a year ago. Most organizations have not messed around with their SaaS licenses because look, SaaS is very sticky and ripping out software that connects to business process is very disruptive. Maybe it can make some tweaks and turn the dials a little bit but wholesale changes are very difficult to make. So now what we want to do is we want to dig into those two areas that we highlighted earlier. So this chart shows the results from the January 2023 survey compared to Jan 2024. So, you know, year snapshot. Note that consolidating redundant vendors was the number one method of cutting costs a year ago and has dropped from 36% of customers citing that approach down to 12%. So while there's still maybe some juice to squeeze in that limit, it seems we're coming to the tail end of that opportunity. Now we don't have this data by sector but we'll be looking to see if the consolidators in security, namely CrowdStrike, Palo Alto Networks, Zscaler, can they continue to capitalize on the consolidation trend in cybersecurity. And look, given the enormous tools diversity, this may be one sector that is immune to the drop in this method. The other call out here is cloud optimization, which has been a major theme since the pandemic peak, cloud momentum. It seems this approach is settling down as cloud remains the platform of choice for new application deployment, development, and of course innovation. As we said earlier, while there are some opportunities for customers to squeeze their SaaS licenses, it was never really a major factor and is even less so in today's climate. I'm going to show two more big picture data points before we wrap. This data shows net score on the vertical axis which is a measure of spending velocity and presence in the survey or provision within the survey of 1700 for each sector. Now that red line at 40% is important. It indicates a highly elevated net score. Throughout the pandemic, AI containers, cloud and RPA sustained above that line. AI started to move in on the last several quarters was on a deceleration pattern, not the last several quarters, but as the market turned down, AI started to show a deceleration pattern until ChatGPT was announced in late 2022 and then it began a steady climb impacting other sectors and potentially its automation cousin RPA. Cloud and containers have been persistent in our holding serve. Not to that last point, we continue to interpret the data that AI's rise is serving to somewhat dampen other sectors not just the obvious challenges with legacy RPA technologies that haven't evolved but all sectors with some exceptions such as security and data. And this next chart underscores that point. This drill down slide had 415 respondents and shows that 40% of them are funding AI by reallocating from other budgets. Things like non-IT budgets, business process budgets, RPA budgets even. While nearly half is fresh funding, i.e. half of the gen AI spending is coming from new budget data, a big chunk is coming from other budgets. And notably, while we don't show it here, this is most acute in larger firms and as much less a factor in smaller businesses and privately held companies and Asia Pacific. But as you know, the big public companies are also big spenders. So we believe this is having an impact on the overall market. So wrapping up just to summarize, the data shows that IT decision makers expect a 4.3% increase in spending this year, breaking a seven quarter deceleration or flat trend, but that optimism is very much back loaded into the second half of 2024 and visibility remains murky and mixed for many companies. Certain sectors like energy and services expect to grow above the mean as do customers in Asia Pacific and SMB. But the all important global 2000 is expecting spending deceleration this year and growth only two percentage points or actually two percentage points below the mean. So methods to reduce costs are shifting as well. No longer is consolidating redundant vendors or cloud optimization, which were two of the most prominent techniques a year ago as prominent rather staff reductions, project delays and limiting outside consulting spender taking over the top spots. Perhaps the first being a function of AI deployments. We'll see. However, the data still suggests that AI spend is stealing from other budget sectors with 40% of customers indicating such. The bottom line is 2023, we looked at as the year of AI experimentation and in order to see more sustained and accelerated growth, we believe that 2024 has to be the year of AI ROI. Okay, for now, we'll leave it there. I wanna thank Alex Morrison who's on production and manages the podcast, Ken Schiffman as well, Kristen Martin and Cheryl Knight helped get the word out on social media and in our newsletters and Rob Hoth is our editor in chief over at siliconangle.com. Remember, all these episodes are available as podcasts wherever you listen, all you gotta do is search breaking analysis podcast. I publish each week on the cuberesearch.com and siliconangle.com, get in touch, you can email me at david.volante at siliconangle.com or dm at dvolante, comment on my LinkedIn post and please make sure you check out etr.ai. They've got the most current and the most frequent and the best survey data in the enterprise tech business. This is Dave Vellante with the Cube Research Insights powered by ETR. Thanks for watching and we'll see you next time on breaking analysis.