Cybersecurity's AI Edge and the Zombie Companies to Come

SPEAKER_1 (0:00)

To discuss the future of the software industry, let's welcome in our next guest, Fred Voccola, the Chairman and CEO of Simpro Group. Fred, great to have you on. Let's dive into software. I mean, a little bit lower on the session today, but moved higher overall on the week as we saw a really nice pop in some of these cyber names.

AI making software so much easier to build. How are you looking at the sector on the whole right now in the wake of what seems to be at least a temporary recovery from the Sassacre, the Sasspocalypse?

Fred Voccola (0:32)

Sasspocalypse is an interesting term. I think that what investors are starting to realize in the market seeing is how AI is going to impact the software industry overall is not uniform. It happens in several dispersed segments. If you look at areas like cybersecurity, AI is actually a benefit for cybersecurity companies overall. One, it creates more attack vectors, so there's more need for their products. But secondly, unlike other types of traditional workflow software, cybersecurity software is less dependent upon a primary system of record for data.

So because of that, cybersecurity companies are proving to be more resilient to the disruption that's caused by upstart software vendors. Now, software is about 50-100 percent faster and less expensive to build than it was in the past.

So the key point in software is understanding what type of data or knowledge moat is built, and that's determining who the winners and the losers are in the AI era for software companies.

SPEAKER_1 (1:34)

So then you're saying proprietary data has essentially become the most important source of having a competitive advantage here because we can build similar products in a cheaper way, oftentimes using AI.

Fred Voccola (1:49)

It's exactly right. So when you think about what's happening with AI, what AI is enabling to develop are digital workers. That's the term for a business function that can be completely autonomously done by an AI agent or an AI digital worker. For that digital worker to be trained, very similar to the training of a human worker, it requires knowledge of the business.

Knowledge of the business exists in the form of the data that traditional systems of record possess. So, your accounting software, your workflow management software, these types of line of business applications contain all of the knowledge of the business in the form of its data, and the vendors who possess that beachfront property, or those systems of record, or the workflow management software applications that run businesses, are the ones who will be able to develop the next generation of AI digital workers that they can then sell to their customers.

SPEAKER_1 (2:52)

And how important is distribution then in this new model where the proprietary data is really what matters most?

Fred Voccola (2:59)

It becomes paramount, super important. So if I'm a company like Simpro or many others out there, because we are, again, I'm using that phrase, the system of record or the operational software that runs our customers' businesses, we capture all of that data. Not only do we have the data, but we also have the commercial and the financial relationship with our customer.

So it's very easy because it only costs a fraction of the money and the time to release new functionality, in other words, to build these digital workers, and to train them with our data. Then we have the relationship to sell them to our customers, very often at a much cheaper price than what a standalone AI provider would be able to do it for. The system of record software companies are proving that their growth exists in the agentic or the delivery of digital workers.

SPEAKER_1 (3:56)

So as investors have traditionally looked at the space, Fred, a lot of the time the important metrics were recurring revenue, margins, customer retention, their growth rates. Now that we live in this AI first market, how are you looking at the valuation equation? Which metrics really matter here and which ones are becoming less important to you?

Fred Voccola (4:18)

So I think all the metrics you mentioned matter, regardless of it's a software company or any recurring revenue business. But one of the subtleties to look for in a software company's financial and operational performance is, is its growth rate measured by net retention, meaning how much are its customers expanding is absolutely essential. To acquire a new logo or a new customer is often expensive. What makes the most sense are organizations who can monetize their existing customer base, and in the AI era, that happens by showing how much they can sell new AI or new agentic-based technologies into their customer base.