(thoughtful electronic music)
>> From theCUBE studios
in Palo Alto and Boston,
bringing you data-driven insights
from theCUBE and ETR,
this is Breaking Analysis
with Dave Vellante.
>> Enterprise applications
are an enormous market,
and they're enormously important
to organizations globally.
Essentially, the world's businesses
are running on enterprise applications.
Companies' processes are
wired into these systems,
and the investments that
they make in people, process,
and technology are vital to
these companies' success.
But it's complicated because
many of these systems
are decades old.
Markets have changed,
but the ERP system for
example fundamentally hasn't.
Hello everyone,
and welcome to this week's
Wikibon CUBE Insights,
powered by ETR.
This week, we're going
to do a data download
on the enterprise software space,
and put forth some themes in our thesis
around this very important segment.
I'd like to do a shout-out
to my friend Sarbjeet Johal,
who helped me frame this segment,
and he's a strategic thinker
and he shared some excellent
insights for this episode.
What I'd first like to do
is let's lay out the scope
of what we're going to talk about today.
So we're going to focus on
the core enterprise apps
that companies rely on
to run their businesses.
Talkin' about the systems of record here,
the ERP, the financial systems, HR, CRMs,
service management we'll put in there.
We may touch on some of the other areas,
but this is core that
we're going to drill into.
This is a big, big market.
Customers spend many hundreds
of billions of dollars
in this area, you could argue
about a half a trillion.
And it's a mature market,
as you'll see from the data.
Look, it's good to be in the
technology business today.
This business is doing better than most,
and within the technology business,
it's better to be in software
because of the economics and scale.
And if you have a SaaS cloud
model, it's even better.
But the market, it is fragmented,
not nearly as much as it used to be,
but there are many specialized areas
where leaders have emerged.
ServiceNow and ITSM or Workday
and HCM are good examples
of companies that've
specialized and then exploded,
first as we saw ServiceNow
blow past Workday's valuation.
It was nearly 2x at one point.
Now, that was before Workday
crushed its earnings this week.
It's up 15% today.
ServiceNow took a slight
breather earlier this month,
but it's up on Workday sympathy today.
Salesforce also beat earnings,
and of course replaced Exxon
Mobile on the DOW Industrials,
can you imagine that?
But let's bring it back to
this digital transformation
that you hear about.
This is the big cliche
from all the tech companies
and especially software players.
Now a lot of this DX, I sometimes call it,
is related to old systems.
It's especially true for the
mega-caps like Oracle, SAP,
PeopleSoft, JD Edwards,
and even Microsoft.
Take ERP and some of the
mature products for example,
like Oracle R12, or SAP R3 or R4.
Many of these systems were
put in place 15 years ago,
and yeah, they're going
to need to transform.
They are burnt in.
They were installed in what, 2005?
It was before the iPhone,
before social media,
before machine learning and
AI made its big comeback,
and before cloud.
These systems were built
on the 1.0 of cloud.
The businesses have changed
but the software really hasn't.
It happens every 10 to 15 years,
companies have to upgrade or
re-implement their systems,
and optimize for the
way business now runs,
because they had to be more
competitive and more agile.
They can't do it on their old software.
And God help you
if you made a bunch of
custom modifications.
Good lucking tryin' to rip those out.
And this is why pure play
companies in the cloud
like ServiceNow and
Workday have done so well.
They're best-of-breed and they're cloud,
and it sets up this age-old battle
that we always talk about,
best-of-breed versus integrated suites.
So let's bring in some of
the other themes and feedback
that we get from the community.
Now we've definitely
seen this schism play out
between on-prem and cloud plays.
And that's created some
challenges for the legacy players.
People working remotely
has meant less data center,
less on-prem action for
the legacy companies.
Now, they have gone out and
acquired to get to the cloud
and/or they've had to
rearchitect their software
like Oracle has done with Fusion.
But think about something
like Oracle Financials.
Oracle is tryna migrate them to Fusion,
or think about SAP R3,
with R4, SAP pushing HANA.
All this is going to cloud-based SaaS.
So the companies that've
been pure play SaaS
are doing better, and I say
quasi-modern on this slide
because Salesforce, ServiceNow,
Workday, even Coupa,
NetSuite which is now
Oracle, SuccessFactors
which SAP purchased, et cetera,
these are actually pretty old companies,
the earlier part of the 2000s
or in the case of Salesforce, 1999.
And you're seeing some really
different pricing models
in the market.
Things are moving
quickly to an OPEX model.
You have the legacy perpetual pricing,
and it's giving way to subscriptions,
and now we even see companies
like Datadog and Snowflake
with so-called consumption-based
pricing models,
priced as a true cloud.
And we think that that's
going to eventually spill
into the core SaaS applications.
Now one of the concerns that
we've heard from the community
is that some of the traditional players
that were able to hide from
COVID earlier this year
might not have enough
deferred revenue dry powder
to continue to power through the pandemic,
but so far the picture
continues to look pretty strong
for the software companies.
We'll get into some of that.
Now, finally,
this is a premise that I
talked to Sarbjeet about,
the disruption perhaps comes from cloud
and developer ecosystems.
Y'know I remember John Furrier and I
had a conversation awhile back
with Jerry Chen from Greylock.
It was on theCUBE, and it was
kind of like, went like this.
People were talking
about whether AWS was going to
enter the applications market,
and the thesis here is no,
or not in the near future.
Rather, the disruptive play,
and this is really Sarbjeet's premise,
is to provide infrastructure
for innovation,
and a PaaS layer for differentiation,
and developers will build
modern cloud-native apps
to compete with the SaaS
players on top of this.
This is intriguing to me,
and is likely going to play
out over the next decade,
but it's going to take a while,
because these SaaS players are,
they're very large, and
they continue to pour money
into their platforms.
Now let's talk about the
shift from CAPEX to OPEX
and bring in some ETR data.
Of course, this was
well in play pre-COVID,
but the trend has been accelerating.
This chart shows data from
the August ETR survey,
and it was asking people
to express their split
between CAPEX and OPEX
spend, and as you can see,
the trend is clear.
Goes from 48% last year, 55% today,
and moving to over 62%
OPEX a year from now.
It's no surprise, but I think
it could happen even faster
depending on the technical debt
that organizations have to shed.
And hence, the attractiveness again
of the SaaS cloud players.
So now let's visualize
some of the major players
in this space, and do some comparisons.
Here we show one of our favorite views,
and what we're doing here
is we juxtapose net score
on the vertical axis with market share
on the horizontal plane.
Remember, net score is a
measure of spending momentum.
Each quarter, ETR asks buyers,
are you planning to spend more or less,
and they essentially subtract the lesses
from the mores to derive net score.
Market share on the other hand
is a measure of pervasiveness
in the dataset, and it's derived
from the number of mentions
in the sector divided by the
total mentions in the survey,
and you can see each metric
in that embedded table
that we put in there.
So I said earlier, this
was a pretty mature market
and you can see that in the table.
Eh, kind of middle-of-the-road net scores
with pretty large shared ends,
i.e. responses in the
dataset, but a lot of red.
There are some standouts, however,
as you see in the upper right,
namely, ServiceNow and Salesforce.
These are two pretty remarkable companies.
ServiceNow entered the
market as a help desk
or service management player,
and has dramatically expanded its TAM,
really to the point where
they're aiming at $5 billion
in revenue.
Salesforce was the first in cloud CRM,
and is pushing 20 billion in revenue.
I've said many times,
these companies are on a collision course,
and I stand by that,
as any of the next great
software companies,
and these are two, are going to
compete with all the mega-caps,
including Oracle, SAP, and Microsoft,
and they'll bump into each other.
Which brings us to those
super-cap companies.
You see Microsoft with Dynamics,
they show up like they always do.
I'm like a broken record on Microsoft.
I mean they're everywhere
in the survey data.
Now Oracle and SAP,
they've been extremely
acquisitive over the years,
and you can see some of their
acquisitions on this chart.
I've said many times in theCUBE
that Larry Olsen used to
denigrate his competitors
for writing checks instead of code,
but he saw the consolidation
trend happening in the ERT,
ERP space before anyone else did,
and with the $10 billion
PeopleSoft acquisition in 2005,
set off a trend in enterprise software
that did a few things.
First, it solidified Oracle's
position further up the stack.
It also set Dave Duffield
and Aneel Bhusri off
to create a next-generation
cloud software company, Workday,
which you can see in the
chart has a net score up there
with ServiceNow, Salesforce, and Coupa,
and it also led to
Oracle Fusion Middleware,
which is designed as an integration point
for all these software components,
and this is really important
because Oracle is moving
everything into its cloud.
And you can see that
its on-prem net score,
which puts it deep into
negative territory.
Now SAP, take a look at them,
they have much higher
net scores than Oracle,
and you can see it's acquired
SaaS properties like Ariba,
Concur, and SuccessFactors,
which have decent momentum.
But you know, SAP, and we've
talked about this before,
is not without its challenges.
With SAP, HANA is the answer
to all of its problems.
The problem is that it's
not necessarily the answer
to all of SAP's customers' problems.
Most of SAP's legacy
customers run SAP on Oracle
or other databases.
HANA is used for the
in-memory query workload,
but most customers are going to
continue to use other databases
for their systems of record.
So this adds complexity.
But HANA is very good at the query piece.
However, SAP never did what
Oracle did with Fusion,
which as you might recall,
took more than a decade to get right.
HANA is SAP's architectural attempt
to unify the SAP portfolio
and get, (laughs) really
get off of Oracle,
but it's many years away,
and it's unclear when or
if they'll ever get there.
All right, let's move on.
Here's a look at a
similar set of companies,
but I wanted to show you this view
because it gives you a detailed look
at ETR's net score approach,
and it tells us a few things more.
And remember, this is a survey
of almost 1,200 technology buyers.
That's the N, that's the respondent rate.
So this chart shows the
net score granularity
for the enterprise players
that we were just discussing.
Let me explain this.
Net score is actually more
detailed than what I said before.
It comprises responses in four categories.
The lime green is new adoptions.
The forest green is growth
in spending of 6% or more,
the gray is flat spend,
the pink is a budget
shrink of 6% or greater,
and the red is retiring the platform.
So what this tells us is
that there's a big fat middle
of stay the same.
The lime green is pretty
small, but you can see,
NetSuite jumps out for new adoptions
because they've been very
aggressive going after smaller
and mid-sized companies,
and Coupa, the spend
management specialist,
shows reasonably strong new adoptions.
Now ServiceNow is interesting to me.
Not a ton of new adoptions.
They've landed the ship
and really penetrated
larger organizations.
And while new adoptions
are not off the charts,
look at the spending more categories,
it's very very strong at 46%.
And the other really
positive thing for ServiceNow
is there's very little red.
This company is a beast.
Now Salesforce similarly,
not tons of new adoptions,
but 40% spend more.
For a company that size,
that's pretty impressive.
Workday similarly has a very
strong spending profile.
At the bottom of the chart,
you see a fair amount of red,
as we saw on the XY graph.
But now, let's take
another view of net score.
Think of this as a zoom in,
which takes those bar charts
but shows it in a pie format
for individual companies.
So we're showing this here
for ServiceNow, Workday,
and Salesforce, and we've
superimposed the net score
for these three in green, so
you can see ServiceNow at 48%,
very good for a company
headed toward five billion.
Same with Workday, 40% for
a company of similar size,
and Salesforce has a comparable net score,
and is significantly larger
than those two revenue-wise.
Now this is the same view,
this next chart's the same
view for SAP and Oracle,
and you can see substantially lower
than the momentum leaders
in terms of net score.
But these are much larger companies.
SAP's about 33 billion,
Oracle's closer to 40 billion.
But Oracle especially
has seen some headwinds
from organizations spending less
which drags its net score down.
But you're not seeing a lot of
replacement in Oracle's base
because as I said at the top,
these systems are fossilized
and many are running on Oracle.
And the vast majority of
mission-critical workloads
are especially running on Oracle.
Now remember, this isn't
a revenue-weighted view.
Oracle charges a steep premium
based on the number of cores,
and it has a big maintenance stream.
So while its net score is kind
of sucky, its cashflow is not.
All right, let's wrap it up here.
We have a very large and mature market.
But the semi-modern SaaS
players like Salesforce
and ServiceNow and Workday,
they've gone well beyond escape velocity
and solidified their positions
as great software companies.
Others are trying to follow that suit
and compete with the biggest of the bigs,
i.e. SAP and Oracle.
Now I didn't talk much about Microsoft,
but as always they show up prominently.
They're huge and they're
everywhere in this dataset.
What I think is interesting
is the competitive dynamics
that we talked about earlier.
These kind of newer SaaS leaders,
they're disrupting Oracle and SAP,
but they're also increasingly
bumping into each other.
You know, ServiceNow has HR for example,
and they say that they
don't compete with Workday,
and that's true.
But y'know, these two companies,
they eye each other and they
angle for account control.
Same thing with Salesforce.
It's that software mindset.
The bigger a software company gets,
the more they think
they can own the world,
because it's software, and if
you're good at writing code
and you see an opportunity
that can add value
for your customers, you
tend to go after it.
Now, we didn't talk much about M&A,
but that's going to continue here,
especially as these companies
look for TAM expansion
and opportunities to
bring in new capabilities,
particularly around data,
analytics, machine learning,
AI and the like, and don't
forget industry specialization.
You've seen Oracle pick up
a number of industry plays
and as digital transformation continues,
you'll see more crossing
of the industry streams
because it's data.
Now, the disruption
isn't blatantly obvious
in this market right now,
other than SaaS clouds
going after SAP and Oracle,
and it's because these
companies are deeply entrenched
in their customer organizations
and change is risky.
But the cloud developer,
the open source API trend,
it could lead to disruptions,
but I wouldn't expect
that until the second half
of this decade
as cloud ecosystems really
begin to evolve and take hold.
Okay, well that's it for today.
Remember, these Breaking
Analysis episodes,
they're all available as
podcasts wherever you listen
so please subscribe.
I publish weekly on Wikibon.com
and SiliconANGLE.com,
so check that out,
and please do comment
on my LinkedIn posts.
Don't forget, check out ETR.plus
for all the survey action.
Get in touch on Twitter, I'm @dvellante,
or email me at
David.Vellante@siliconangle.com.
This is Dave Vellante
for theCUBE Insights,
powered by ETR.
Thanks for watching everybody.
Be well, and we'll see you next time.
(thoughtful electronic music)
