Deciphering Winners and Losers in SaaS, PaaS and IaaS

Transcription

1 SMAC Part -2 - Cloud Industry Report Deciphering Winners and Losers in SaaS, PaaS and IaaS April 2014 Shejal Ajmera [email protected]

2 Table of Contents Cloud Overview What is Cloud all about? Why does it matter? What are the different service models? How are cloud services deployed? How are cloud services expected to evolve? How are enterprises embracing cloud? What is the value in embracing cloud? How is IT enterprise architecture evolving due to cloud? Saas, PaaS, IaaS Key Leaders in SaaS Salesforce.com, Marketo, Netsuite, Workday, Demandware, Manhattan Associates Key Leaders in IaaS Amazon, CenturyLink technology, Rackspace Key Leaders in PaaS Microsoft, Google Initiating Coverage on Seven Companies CRM, MKTO, N, WDAY,DWRE, MANH, RAX 2

3 What is Cloud all about? Key Characteristics On-Demand Self Service Consumer can provision computing capabilities, such as server time and network storage, as needed automatically without requiring human interaction with each service s provider Essential Characteristics Rapid Elasticity Capabilities can be rapidly and elastically provisioned, in some cases automatically, to quickly scale out, and rapidly released to quickly scale in Wider Access Capabilities are available over the network and accessed through standard mechanisms that promote use by heterogeneous thin or thick client platforms (e.g. mobile platform) Cloud Computing a style of computing where massively scalable IT-enabled capabilities are delivered as a service to external customers using internet technologies Measured Service Cloud systems automatically control and optimize resource use by leveraging a metering capability at some level of abstraction appropriate to the type of service Resource Pooling The provider s computing resources are pooled to serve multiple consumers using a multi-tenant model with different physical and virtual resources dynamically assigned and reassigned according to demand Tiers Of Service Consumer can leverage different tier of services SaaS, IaaS, PaaS 3

4 Why does it matter? Enterprise benefits Cost Lower upfront capital cost by reducing overall capex Resource pooling provides a lower TCO (total cost of ownership) Cost scale with business allowing companies to pay only for what they consume Agility & Flexibility Rapid provision provides shorter time to market for new capabilities Highly elastic supply allows for additional capacity to be added in real time Allows companies to focus on their core competencies instead of undifferentiated IT services Lower switching costs reduce risk of vendor lock-in Source: IDC Enterprise Panel 3Q09, n=263 Scalability High availability service on demand Quickly scale up to meet unanticipated or seasonal demand Cloud-computing services consumed from external service providers (ESPs) are estimated to be 10.2 percent of the spending on external IT services Gartner July 2010 (surveyed 1,587 respondents in 40 countries ) Source: IDC Enterprise Panel 3Q09, n=263 4

5 What are the different service models? Cloud service models Software as a Service (SaaS) Vendor developed applications on the cloud are made available to consumers. These are accessible via various devices through a thin interface such as a web browser Features No control over the infrastructure including network, servers, operating systems, storage, or even individual application capabilities No control over the application. Limited customization Platform as a Service (PaaS) Programming tools and environment that allow consumers to create applications in the cloud Features No control over the infrastructure including network, servers, operating systems, or storage Does have control over the deployed applications and possibly application hosting environment configurations Infrastructure as a Service (IaaS) Foundational computing resources such as processing, storage, and networks that are provided in the cloud for developers to run their applications on Features No control over the infrastructure Does have control over operating systems, storage, deployed applications, and possibly limited control of select networking components (e.g., host firewalls) 5

6 How are cloud services deployed? Cloud deployment models Private Clouds The cloud infrastructure is operated solely for an organization. It may be managed by the organization or a third party and may exist on premise or off premise Pros Better data control Leverage existing infrastructure Cons Not cost effective Limited scalability Community Clouds The cloud infrastructure is shared by several organizations and supports a specific community that has shared concerns (e.g., mission, security requirements, policy, and compliance considerations). It may be managed by the organizations or a third party and may exist on premise or off premise Pros Higher level of privacy, security & compliance Cons Expensive to deploy Public Clouds The cloud infrastructure is made available to the general public or a large industry group and is owned by an organization selling cloud services Pros Lower cost as resources are shared No large upfront infrastructure costs Cons Security issues due to multi tenancy Data compliance issues Hybrid Clouds The cloud infrastructure is a composition private and public clouds that remain unique entities but are bound together by standardized or proprietary technology that enables data and application portability Pros Allows to reap benefits of both private and public cloud Cons May involve complex implementation 6

7 How are cloud services expected to evolve? IDC Worldwide Cloud Services Forecast Worldwide IT Cloud Services Revenue Share, ($M) 30,000 26,259 25,000 20,000 15,000 13,040 12,564 15,332 16,252 17,470 20,291 20,580 10,000 5,000 8,118 1,647 6,783 10,431 2,264 9,479 3,130 4,325 6,075 8, Software as a Service (SaaS) Platform as a Service (PaaS) Infrastructure as a Service (PaaS) Key take-aways SaaS accounted for $8118m in It is expected to grow to $20580m by 2014 with a CAGR of 20% PaaS accounted for $1647m in It is expected to grow to $8618m by 2014 with a CAGR of 39% IaaS accounted for $6783m in It is expected to grow to $26259m by 2014 with a CAGR of 31% Source: IDC Worldwide Software as a Service Forecast - June

8 How are Enterprises embracing the cloud? Cloud Based Infrastructure Benefits to Client Multiple data centers Duplicate applications like order entry for different products Data center consolidation Application inventory rationalization ERP migration typical time bound initiatives resulting into significant infrastructure cost savings Migrate Exchange to BPOS: Move to online CRM: Leverage cloud storage: Migrate custom apps to cloud: Shared services model for servers, DB Desktop as a service Traditional Model Service management SLA automation Billing & subscription automation Cloud Model $25 / user - month $9 / user - month $100 / user - month $44 / user - month $12 / year - GB $3 / year - GB $1000 / month $230 / month Storage as a service On-demand compute resources Hosted Savings 64% 56% 75% 77% 30-50% Saving over traditional IT Operations & Services 30% Reduction in timeto-market to build IT infra for biz initiatives 50% Reduction in CAPEX by moving towards OPEX bizmode LEADING GLOBAL ISV USD 7MN savings on licensing by migration to Azure LEADING DATA STORAGE OEM Private cloud for infrastructure automation 8

9 How are Enterprises embracing the cloud? OnDemand Business Enterprises 34% Sales Revenue Lead generation Campaign management Opportunities segmentation After sales Services Responding to Customer queries Warranty & Returns Mgmt Social Communities Idea Forums Ask & Answer Networks Custom Biz Processes & Apps 33% Sales Productivity 52% Lead Volume 9

10 Shareholder Value Free Cash Flow Assessing Value from Cloud Transition Where will value be created? Value Drivers Increase Revenue Reduce Costs Improve Fixed Asset Efficiency Reduce time to market [Revenue from reduced cycle time] Reduce cost of services & infrastructure Improve Application Performance Increase asset utilization What needs to transform and how can it be measured? Operational Levers Improve IT Agility [reduce provisioning cycle time] Reduce Scalability Cost [Cost per incremental capacity] Reduce maintenance & warranty costs [Cost of maintenance & warranties] Reduce costs of licensing [Cost of licensing] Reduce costs of hardware [Cost of hardware] Reduce energy costs [Cost of power consumption] Reduce implementation costs [Cost of consulting services] Improve application stability (Unplanned downtime) Improve application availability [Planned downtime] Improve application performance and responsiveness Improve process cycle time [Cycle time for process activity] Reduce defect rate [Rate of defects] Reduce unused capacity (Asset utilization) 10

11 We like the following most 15 influential cloud companies. We are initiating coverage on 7 of these companies Name Mcap Description Rating Current Market Price Target Price Horizon Salesforce.com $32.0 Bn CRM HOLD $52 $ months Workday $12.3 Bn HR and Finance HOLD $67 $ months Servicenow $6.5 Bn IT helpdesk NR $46 Not rated NA NetSuite $5.6 Bn Accounting, ERP and CRM HOLD $74 $ months Racksapce $4.0 Bn Infrastructure as a service BUY $28 $ months Concur Technologies $4.7 Bn Business travel and expense NR $82 Not rated NA Ultimate Software Group $3.3 Bn Human resources and payroll NR $113 Not Rated NA Manhattan Associates $2.4 Bn Supply Chain Effectiveness BUY $31 $ months Medidata Solutions $2.0 Bn Clinical trials NR $38 Not Rated NA Dealertrack Technologies $1.9 Bn Car finance qualification NR $43 Not rated NA Cornerstone on Demand $1.8 Bn Enterprise training and recruiting NR $35 Not Rated NA Demandware $1.7 Bn Cloud based ecommerce HOLD $48 $ months RealPage $1.4 Bn Property management service NR $18 Not Rated NA Fleetmatics Group $1.1 Bn GPS based fleet management NR $29 Not Rated NA Marketo $1.1 Bn Marketing Automation BUY $26 $ months 11

12 Corporate Operations Customer Operations Product Operations Where is cloud impacting the Enterprise Architecture? Product Operations Product Lifecycle Pricing Manufacturing Production Scheduling SOFTWARE AS A SERVICE (SAAS) Discreet Manufacturing Process Manufacturing Shop Floor Asset Asset Legends: Maturing Supply Chain Supply Chain Planning Warehouse Procurement Inventory Order Service Parts Global Trade Reverse Logistics Transport Emerging Marketing E-Commerce Channel Marketing Resource Segmentation & Partner E-Marketing E-Selling List Campaign Lead E-Service Channel Marketing Channel Sales Channel Service Perspectives Sales Sales Planning Territory Account Opportunity Contract Incentive Telesales Sales Knowledge Service Service Order Service Contract Service Request & Complain Mgmt Warranty & Exchange Resource Planning Field Service Finance Financial Accounting Managerial Accounting Risk & Compliance Human Capital HR Information HR Self Service Workforce Treasury Account Receivable Account Payable Time & Expenses Learning Performance Credit Payroll Benefits Information Technology Master Data Business Intelligence Project Portfolio Integrated Services IT Services Legal Legal Facilities Facilities PLATFORM AS A SERVICES (PAAS) Development Platform Multi-tenant Web Batch Platform Services Analytics Social Commerce Service Composition INFRASTRUCTURE AS A SERVICES (IAAS) Infrastructure Services Database Storage Compute Messaging Connectivity Virtualization 12

13 SaaS Key Segments Overview and Players 13

14 Executive Summary (Software as a Service SaaS) (1/2) SaaS (Software as a Service) remains a bright spot from an adoption standpoint. Adoption of SaaS is strong in both the consumer and in enterprise space. SaaS segment is expected to grow at a CAGR of 21 through 2017 which is more than 2-3 times the traditional software and overall IT spend. IT spend is expected to grow at a CAGR of 3.6% while enterprise application spend is expected to grow at a CAGR of 8.2% as per Gartner We are initiating coverage on this segment by rating the following stocks Salesforce.com Marketo Netsuite Workday Demandware Increasingly there are vertical specific cloud companies emerging on the horizon. This is a trend across multiple sectors such as healthcare, insurance, retail etc. Success stories include Veeva Systems, which provides cloud based business solutions for the life sciences industry built on salesforce.com s Force platform, and Guidewire Solutions, which provides software solutions for the properties and casualty insurance industry. Guidewire solutions has done well in terms of stock returns largely due to its vertical specific SaaS model 14

15 Executive Summary (Software as a Service SaaS) (2/2) We also like security as a theme in the cloud space. Another space that has done well is the marketing cloud which enables marketers create campaigns across multiple digital channels (mobile, apps, , social channel, website, internet). These campaigns need integration with other applications, data and analytics. Marketing has emerged as a strategically important part of a corporation s IT spend, with some industry analysts estimating that CMOs could spend more than CIOs on technology in the next ten years. The competition in the SaaS space will likely heat up as more legacy players like Adobe, Microsoft, SAP and Oracle make move from legacy way to building, selling and delivering software to a more cloud centric approach There have been several large acquisitions in the SaaS space in the past 4-5 years sizeable among them are SAP acquiring SuccessFactors for $3.4 Bn, SFDC acquiring ExactTarget for $2.5 Bn, Oracle acquiring Responsys for $1.5 Bn and Taleo for $1.9 Bn. Most of the SaaS acquisitions in the last few years have occurred at EV/ Revenue multiples of 4-7x which gets justified if the companies continued to grow profitably 15

16 SaaS spend is expected to grow at a CAGR of 21% from Figures in USD Million Web Conference and Social Enterprise Resource Planning Other App software CRM 17,641 3,225 6,750 21,978 3,861 8, % 32,501 26,741 2,811 3,646 3,170 5,337 4,492 13,707 10,858 38,915 3,355 4,171 6,457 16,728 45,838 1,236 3,998 3,614 4,738 7,194 20,157 Digital Content Creation Business Intelligence Applicati Project and Portfolio Managem Enterprise Content Manageme Office Suites Supply Chain E 2014E 2015E 2016E 2017E 16

17 CRM, BI applications and few other applications will grow much faster than the industry average CAGR percentage SaaS Spend Avg CAGR Office Suites 38.9 Digital Content Creation 35.8 Project and Portfolio Business Intelligence Applications CRM Supply Chain Enterprise Content Enterprise Resource Planning 15.9 Web Conference and Social

18 Sales Deep Dive Level of Maturity Industry Highlights Perspectives Emerging Matured Gartner Sales Force Automation Magic Quadrant Context The focus of the sales function continues to be on core functional capabilities including planning, accounts, contacts and opportunities management Research performed by Gartner conclude that organization continues to invest in this space despite the economic slowdown Key Capabilities offered in Cloud Sales Planning, Account, Contact, Opportunity, Sales Knowledge Areas of Opportunities Incentive, Territory, Telesales Source: Gartner July 2010 Major Players Cloud Based Sales Salesforce.com software on-demand solution Sage Sage SalesLogix Oracle CRM on Demand NetSuite 18

19 Salesforce.com Industry Leadership through Growth About Salesforce salesforce.com, inc. is a provider of enterprise cloud computing and social enterprise solutions. The Company provides a customer and collaboration relationship management (CRM), applications through the Internet or cloud. Cloud computing refers to the use of Internet-based computing, storage and connectivity technology to deliver a variety of different services. The Company delivers its service through Internet browsers and mobile devices. It markets its social enterprise applications and platforms to businesses on a subscription basis, primarily through its direct sales efforts and indirectly through partners. In May 2013, salesforce.com Inc acquired Clipboard Inc. In July 2013, salesforce.com, Inc. completed its acquisition of ExactTarget Inc. 19

20 Executive Summary Salesforce.com Industry Leadership through Growth (1/2) We are initiating coverage on SFDC aka Salesforce.com. SFDC provides cloud-based CRM services across multiple digital channels to customer s sales force. SFDC also provides PaaS offerings through Force.com We strongly believe in dumbbell effect (not exactly same as winner takes all) in the High Tech world where the top 2-3 players command leadership position due to early mover or technological advantage followed by a long-tail of players in either a fragmented or a consolidated market. SFDC is clearly on the heavier side of dumb-bell with a stronger brand and delivering on growth faster than its smaller peers. SFDC is also becoming a diversified player with higher growth of services outside of core CRM / SFA solutions. We also believe that SFDC operates in a sweet spot from a buyer / decision maker / value offering perspective. SFDC s IT value proposition is direct (enable revenue uplift or improve sales effectiveness) and in most cases sells directly to CMO (Chief Marketing Officer) or Line of Business Head who are prepared to pay premium if they see direct value in enhancing their business or functional effectiveness. This relationship will be critical for SFDC s future growth. SFDC currently generates bulk of its revenues from Americas (69%). Its growth is reserved as it expands more aggressively in EMEA (contributing to 18% of revenues) and APAC (contributing only 13% to total SFDC s revenues) SFDC had sales of approximately $4.071 Bn in FY14 (year ending Jan 2014). SFDC s next major goal is to pass $10Bn in revs and exceed SAP in size (~$23Bn in revs) 20

21 Executive Summary Salesforce.com Industry Leadership Through Growth (2/2) Due to strong billings, renewals, successful post-merger integration, we are expecting SFDC to post a 30%+ growth at the top and bottom line level. However even with this 30% growth we are unable to justify the stock that is trading at 148 trailing PE and a very high EV/ Sales ratio. We believe that while the stock has corrected itself by 21% from its peak price, we believe there is still room for additional 10% correction in stock. We are initiating CRM / SFDC at a 6 month target price of $48 per share. This is purely a valuation call and we advise investors to consider entering in the stock from a long term perspective once the stock corrects from its current levels 21

22 Marketing Deep Dive Level of Maturity Industry Highlights Perspectives Emerging Matured Forrester Marketing Automation Players Context A standard marketing platform has yet to emerge. A number of vendors offer softwareas-a-service (SaaS) marketing automation capable of sophisticated lead scoring, complex prospect profiling, and multistep nurturing campaigns. Yet the relatively small size of each of these vendors means that none command substantial market share, keeping the market open for new entrants and firms crossing over from adjacent spaces Key Capabilities offered in Cloud Planning, Campaign, Lead, Segmentation, Analytics and Reporting, Customer Relationship Areas of Opportunities End to end marketing solution Source: Forrester Research Inc September 2009 Major Players Cloud Based Marketing Eloqua Eloqua Conversion Suite Marketo Marketo Lead /Sales Insight Silverpop Silverpop Engage B2B 22

23 Marketo About Marketo Marketo, Inc. (Marketo) provides cloud-based marketing software platform that enables organizations to engage in modern relationship marketing. The Company s software platform is designed to enable the execution, management and analytical measurement of marketing activities, helping organizations to acquire new customers. The Company s platform includes marketing automation, social marketing, sales insight and revenue analytics. Its customer base includes 2,000 customers across a range of industries, including business services, consumer, financial services, healthcare, manufacturing, media, technology and telecommunications. The Company provides its solutions on a subscription basis. The Company designs, builds and markets a suite of integrated applications to address the needs of modern marketing professionals. 23

24 Executive Summary Marketo, Inc Early Days but Solid Growth (1/2) Marketo is an emerging leader in marketing automation software category. Marketing automation as a category is growing and the estimated TAM for Marketo could be well upwards of $5 Bn Marketo, although small as continued to innovate with product development and new market expansion. We are estimating Marketo to continue to grow between 30-50% CAGR over the next few years. CMOs (Chief Marketing Officers) have greater budget spend than traditional CIOs and this could be a good demand driver in the marketing automation category in which Marketo operates We like some of the new product innovations brought up by Marketo 1)Marketo Marketing Calendar, which enables marketers to connect marketing plans and changes to execution activities in their campaign automation systems, and 2) Marketo Search Engine Optimization (SEO), a tool that helps customers discover site content, analyze keyword rankings, as well as recommending web page optimization. Marketo announced new partnership with enterprise data and analytics company Acxiom. Partnership should result in helping marketers utilize data insights toward marketing content and offers. Marketo ended 2013 with revenues of 95.9 Mn USD. The company operates at a healthy gross margin of 61.9% but has an extremely high sales expense (60 Mn USD) making it loss making at an operating level. Marketo made a loss of 37 Mn USD in the year 2013, however it is sitting on a cash of 128 Mn USD which would allow it to fund losses in the upcoming year We are initiating coverage on Marketo with a 12 month target price of $32 based on Price to Sales multiple of 10X giving it a one year forward valuation of $1.3 Bn. This translates to 1-year target price of $32, providing a nearly 30% upside from the CMP of $25 24

25 Executive Summary Marketo, Inc Early Days but Solid Growth (2/2) Marketo is a direct competitor to Salesforce's ExactTarget and Pardot divisions. Marketo works to nurture these leads to the point where they are ready to buy. The firm's module that tracks this process is called Streams. 25

26 Executive Summary Marketo, Inc Early Days but Solid Growth Product Comparison 26

27 Finance Deep Dive Level of Maturity Context Industry Highlights Perspectives Emerging Matured CPA Technology Advisor 2009 Review of Small Business Accounting Systems: Tier II (Over $1,000) Per Saugatech Advisory, through 2012, adoption of SaaS-based financial solutions will be led by small-to-midsize companies; however, by that time more than fifty percent of finance organizations of all sizes will have adopted the SaaS model for one or more of their core financial systems Key Capabilities offered in Cloud Financial Accounting, Accounting, Account Receivable/Payable, Analytics Areas of Opportunities Risk & Compliance, Treasury, Credit Major Players Cloud Based Financial Netsuite Netsuite Financials Source: CPA Technology Advisors 2009 Intacct Intacct Cloud Financial and Accounting Software 27

28 Netsuite About Netsuite NetSuite Inc. (NetSuite) is a provider of cloud-based financials / Enterprise Resource Planning (ERP) software suites. In addition to financials/erp software suites, the Company offers a broad suite of applications, including accounting, Customer Relationship (CRM), Professional Services Automation (PSA) and Ecommerce that enable companies to manage their core business operations in its single integrated suite. The Company s real-time dashboard technology provides an easy-to-use view into up-to-date, role-specific business information. It also offers customer support and professional services related to implementing and supporting its suite of applications. The Company delivers its suite over the Internet as a subscription service using the software-as-a-service (SaaS) model. In January 2013, the Company acquired Retail Anywhere. In May 2013, NetSuite Inc acquired OrderMotion Inc from CommercialWare Inc. 28

29 Executive Summary Netsuite Profitable cloud leader in the segment Netsuite is on a strong trajectory to become a $1 Bn software company. Clearly after SFDC this is one company that is scaling well and in the High Tech world of winner-takes-all, the growth is mandatory for long term business sustenance Netsuite has provided a guidance of 29% growth in this fiscal year with flat operating margins The competitive intensity is favorable for Netsuite especially for behemoths like SAP and Microsoft. SAP is primarily focused on enterprise segments and not as much focused on the SMB market. On the other hand Microsoft seems to be more interested in CRM than ERP with their Dynamics efforts. NetSuite had a fabulous Q4 delivering $115.0 million which exceeded analyst consensus estimates. Company subscription revenues grew 36.5% YOY. The operating margin while nominal stayed in the positive territory of 6.4% margin which again was higher than the consensus estimates. Operating cash flows are positive and equalled $17.3 Mn in Q4. NetSuite's two-tier ERP systems and Commerce-as-a-Service platforms are experiencing increased adoption, which should continue to benefit OneWorld and SuiteCommerce products. Netsuite is currently valued at over $5.56 Bn and the market is giving it a trailing Price to Sales valuation of 13.4 times. The share price currently trades at USD which has come down significantly from its peak of 120 USD in February This correction is already to the tune of 40%. We continue to believe that Netsuite has a long run way ahead of itself and we conservatively estimate Netsuite s 1-year forward valuation of 10 P/S which will give the company a valuation approximately $5.4 Bn. This means that there might be still some small correction left and advise buy on Netsuite around the entry price point of $70. We like the quality of revenues in cloud software company as against the lumpy license revenues and lumpy R&D spend in traditional software companies. We believe Netsuite will exceed its profit expectations as it scales its business in future 29

30 Human Capital Deep Dive Level of Maturity Context Industry Highlights Perspectives Emerging Matured Forrester Wave : HR Systems, US Although on-premise, licensed software continues to be the predominant deployment model for HCM applications, SaaS revenue is growing at a 14% rate, twice as fast as the HCM segment as a whole Half of the eight vendors in the Forrester Wave ADP, Ceridian, Ultimate Software, and Workday offer SaaS as a primary deployment option (for Workday, SaaS is the only deployment option) Midmarket, Q Source: Forrester Research Inc. Key Capabilities offered in Cloud Personnel, Benefits, Payroll, Compensation, Compliance, and Self Service Major Players Cloud Based Human Capital Automatic Data Processing (ADP) Enterprise HR Ceridian Ceridian HR/PR Ultimate Software - UltiPro Workday Human Capital Mgmt 30

31 Workday About Workday Workday, Inc., is a provider of enterprise cloud-based applications for human capital management (HCM), payroll, financial management, time tracking, procurement and employee expense management. It is focused on the consumer Internet experience and cloud delivery model. Its applications are designed for global enterprises to manage complex and dynamic operating environments. The Company provides its customers the applications to manage critical business functions for their financial and human capital resources. In February 2014, Workday Inc acquired Identified Inc, a provider of online recruitment analytics services. 31

32 Executive Summary Workday Fantastic category leader, excellent growth but all priced in despite 40% correction We believe that in HCM cloud space a story similar to Cloud CRM will playout over the next 5 years. Workday has a great growth profile and is disrupting even larger addressable markets; we also believe the company could approach a $2bn run-rate in close to a 5 year timeframe However unlike CRM the HR managers do not have large dollar spends available Besides Workday has already run up very strongly and currently trades at a price to sales multiple of over 26 times. This is despite a correction of over 40% from its peak price of $115 USD in Feb The stock is currently trading at $67. The great part is that Workday has consistently beaten consensus billings and has grown from a quarterly revenue run rate of approx $50 Mn to over $200 Mn in less than 18 months. That is a phenomenal growth. We strongly believe that the company will keep growing further at a CAGR of 50-60% over the next two years and for FY16 we estimate the company to have hit revenue of $1.6 Bn. We provide a forward P/S multiple of 8 times for 2016 revenues and accordingly value the company at 12.8 Bn market cap. This provides a small upside from its current price of about 4%. We are initiating coverage on Workday with a target price of $70. This is a bit unfortunate as most of the growth seems to have been priced in. 32

33 Ecommerce Deep Dive Level of Maturity Industry Highlights Perspectives Emerging Matured Forrester Wave : B2C ecommerce Platforms, Q4 10 Context A recent study by Forrester conclude that ecommerce technology investment remains strong, with 57% of online retailers having increased their ecommerce technology spending in 2010 Gartner research suggests that by 2013, 40% of e-commerce deployments will use a complete SaaS e-commerce solution Key Capabilities offered in Cloud Hosting, Content, Webstore, Order, Customer Self Service, emarketing, esales, Analytics Areas of Opportunities Social Media Source: Forrester Research Inc. Major Players Cloud Based ecommerce IBM WebSphere Commerce Hybris B2C Commerce ATG ATG Commerce on-demand Demandware Demandware Commerce Venda ecommerce Solution 33

34 Demandware About Demandware Demandware, Inc. (Demandware) is a provider of software-as-aservice e-commerce solutions that enable companies to design, implement and manage their own customized e-commerce sites, including Websites, mobile applications and other digital storefronts. The Company sells subscriptions to its on-demand software and related services through both a direct sales force and indirect channels. Its customers consist of retailers and branded consumer product manufacturers that operate principally in the vertical markets, including apparel, general merchandise, health and beauty, home and garden, sporting goods and other vertical categories. The Company derives most of its revenue from subscriptions to its on-demand platform and related services. In January 2014, Demandware Inc acquired privately-held Mainstreet Commerce, a provider of cloud-based order management solutions. 34

35 Executive Summary Demandware Growth Priced In Demandware had revenues of $104 Mn in At the market capitalization of $1.72 Bn Its trailing P/S ratio is currently 16.5 times. Demandware s gross margin profile is attractive at over 70% and has been growing at 30%+ on yoy basis. We would like Demandware to show more growth. Demandware s stock price corrected itself from a high of $81 in March 2014 to $48 in April 2014 which is a correction of over 40%. This has made the stock more attractive. We estimate the company to continue growing at 30% yoy for the next 2-3 years. We value Demandware at a forward multiple of 8 times for FY16 sales. This provides a 6% upside on the stock from its current levels. This story of 40% correction and most growth priced in continues in most cloud based stocks. We are initiating coverage on Demandware with a 3-year price target of $51. DWRE s acquisition of Mainstreet Commerce provides key order management assets that DWRE was previously partnering for Having raised the equity of 163 Mn in USD, the company is sitting on a cash and cash equivalents of 242 Mn USD. This will fund its R&D and sales engine and take the company in the next orbit of revenue and growth profile. 35

36 Supply Chain Deep Dive Level of Maturity Context Perspectives Emerging Matured ARC Advisory claims that since 2005, the Supply Chain (SCM) market has grown at a 7% (CAGR). However, during that time frame, SaaS based SCM solutions grew by a CAGR in excess of 20 percent Per Gartner, SaaS based SCM is still in the preliminary stages. Only Transportation has seen considerable traction Industry Highlights Gartner Magic Quadrants, Transportation Systems Transportation Systems Key Capabilities offered in Cloud Supply chain planning, procurement, order management, global trade management, transportation management, warehouse management, inventory management and service parts management Areas of Opportunities SaaS based SCM in its preliminary stages and the capabilities as a whole is considered as an area of opportunity Source: Gartner July 2010 Major Players Cloud Based Transportation LeanLogistics JDA/I2 Manhattan Associates MercuryGate, OneNetwork, Sterling Commerce, Transplace 36

37 Manhattan Associates, Inc About Manhattan Associates Manhattan Associates, Inc. (Manhattan) is a developer and implementer of supply chain software solutions that help organizations optimize their supply chain operations from planning through execution. The Company is engaged in developing, selling, deploying, servicing, and maintaining supply chain commerce software solutions for retailers, wholesalers, manufacturers, governments, and other organizations. The Company has three segments, based on geographic location: the Americas; Europe, Middle East and Africa (EMEA), and Asia Pacific (APAC).The Company s supply chain commerce software solution portfolios : Manhattan Supply Chain Architected for Logistics Execution (SCOPE) and Manhattan Supply Chain Architected for Logistics Execution (SCALE) are designed to leverage its platform investments to deliver both the profitability benefits typically associated with supply chain improvements and top line revenue gains created by commerce initiatives. 37

38 Executive Summary Manhattan Consistent Execution, Prefer it over all other Cloud SaaS Players Manhattan Associates had revenues of $415 Mn in 2013 and continues to demonstrate steady growth combined with margin expansion and demonstrates healthy profits and cash flow generation Manhattan Associates is not a pure play cloud player but has products and offerings deeper in the Supply Chain space and competes well with other diversified playes such as SAP, Oracle or IBM (Sterling). Manhattan however is making an aggressive move in the cloud space. It also competes with JDA / Red Prairie and Highjump Manhattan also has a rapidly expanding Omni Channel e-commerce product. This product is growing rapidly in terms of sales. Manhattan s business is driven largely from retail and consumer verticals. Manhattan s products allow its customers to 1) connect the upstream supply chain (i.e., the warehouse) with the retail shelf and 2) implement an omni-channel retail environment that aligns the supply chain (inventory availability), fulfillment (direct ship), customer service (mobile in-store price matching), e- commerce and operations (buy online/pick-up in store) around the specific needs of the customer. Manhattan also did well in expanding its operating margin an attribute not seen with many other cloud focused companies. Manhattan continues to show solid, consistent execution with 10 straight quarters of consistent execution in its license business, continued strong margin leverage and strong free cash flow generation. Manhattan operates at 55% gross margin and has net margin of over 16%. This is quite a feat in an industry where sales expenses eat up any good gross margins. Manhattan is currently trading at P/S multiple of 5.9 times and a Price Earnings multiple of We see valuation upside of atleast 200 basis points on Price to Sales ratio. We estimate Manhattan to grow at 15% and we provide a 12 month price target of $48. This will provide more than 50% upside over current market price of $31. 38

39 IaaS Key Segments Overview and Players 39

40 Infrastructure as a Service Deep Dive Level of Maturity Context Perspectives Emerging Matured Per research conducted by IDC, IaaS accounted for $9479m in It is expected to grow to $26259m by 2014 with a CAGR of 97%. By 2014, PaaS and IaaS will play bigger roles in Cloud Services Virtualization is considered as the foundation to cloud computing providers that provide infrastructure as a service. Vendors use virtual machines or containers as the foundation of their cloud computing services No single vendor does everything well. Vendor selection will depend on unique client situations Major Players Infrastructure Services Gartner Magic Quadrant: Web Hosting and Hosted Cloud System Infrastructure Services Source: Gartner May 2010 Gartner Magic Quadrant: Server Virtualization Infrastructure Key Capabilities offered in Cloud Database, Storage, Compute, Messaging, Connectivity, Virtualization, Source: Gartner June

41 Rackspace About Rackspace Rackspace Hosting, Inc., is the open cloud company. The Company offers a diverse portfolio of cloud computing services, including public, dedicated and private cloud, and hybrid hosting. The Company is a global company, selling its services to business customers in more than 120 countries. The Company also has operations located in multiple cities across the United States, as well as in London, Amsterdam, Zurich, Hong Kong, and Sydney. As of December 31, 2012, it served more than 200,000 business customers, and managed more than 90,000 servers and 3.1 million accounts. The Company s Fanatical Support is designed to generate customer experience and is incorporated into all aspects of its hosting services. Effective March 28, 2013, the Company acquired Exceptional Cloud Services. 41

42 Executive Summary Rackspace Tough fight ahead with AWS (1/2) IaaS provides the capability to lease capacity on physical infrastructure such as servers, storage arrays, and networking and security systems. Customers can pay according to usage, thereby providing increased flexibility and reduced capex vs. purchasing on-premise equipment. Customers control the software and applications that utilize the infrastructure. Well-known examples of IaaS providers include Amazon, Rackspace, Google Compute,Microsoft Azure, and numerous other of the cloud IaaS platforms we discuss in this report. Fighting AWS is a tough battle as there are estimates that AWS has increased its market share to 56% of the total IaaS market in 2013 and this is expected to grow further. AWS revenue is already expected to be at $2.5 Bn in 2013 Providing IaaS is a capital intensive business. As a sign of the demand, AWS is spending close to $2 billion a year on infrastructure. These are million square foot buildings with massive amounts of potential electrical power (power substations with capacity in excess of 50 MW, or for a million square data center, 5 watts per square foot). AWS has nine of these primary datacenters and there is also an investment required in building out hundreds of edge nodes up from the 45 or so it is currently operating Rackspace tries differentiating itself on customer service but that is a high reward / risk strategy. Rackspace is filling niches of the IT infrastructure that AWS isn t focused on serving. OpenStack in particular is shaping up to be the primary alternative to AWS, and Rackspace is a leader in open source.besides RAX is well positioned with enterprises that want a hybrid cloud architecture that is integrated with high levels of customer care. Rackspace has also made management changes to drive higher focus in the enterprise segment as opposed to SMB segment. Company hired the former CMO at VMWare (Rick Jackson) to head up global marketing strategy and Todd Cione (formerly at Microsoft) to lead the Americas Acquisition Sales division 42

43 Executive Summary Rackspace Tough fight ahead with AWS (2/2) Rackspace stock has corrected by more than 45% from its high of $53 in October This has been largely a reaction to cut in prices from its competitor Amazon Web Services and Google Compute Engine. AWS cut EC2 prices by 30% 38% for new generation instances and 10% 40% for previous generation instances. AWS also cut storage by an average of 51%. On the EC2 price cuts, it looks like AWS has essentially matched Google Compute Engine (GCE). Now both GCE and AWS are priced almost 60% below Rackspace Pricing Rackspace is currently having a revenue run of $1.5 Bn and is expected to keep growing at 20% CAGR. On the valuation front Rackspace now trades at EV/ EBITDA of 9.2 times and EV / Sales ratio of 2.7 times. On a forward valuation basis for FY15 we expect this ratio to come down to 8 times which is relatively attractive compared to data center peers who are trading at 10X 2014 EBITDA expectations IBM softlayer acquisition happened in the EV/Sales multiple of 4-5 times which if used as a reference can provide a large upside to Rackspace We are initiating coverage on Rackspace with a target price of $34 based on 24 month EBITDA expectations at $610 Mn and based on EV / EBITDA expected multiples of 8 times. We have pared down the EBITDA multiples in view of price war initiated by Google and AWS and based on market share gain that AWS is having in the market place. Also the multiple of 8 times is conservative in comparison with other data center peers who are trading at much higher multiples. Our 2-year target price provides an upside of 20% over the current market price of $28 43

44 PaaS Key Segments Overview and Players 44

45 Platform as a Service Deep Dive Level of Maturity Perspectives Emerging Matured Notable Players Platform as a Service Context Platform as a Service is considered as a emerging space and is expected to evolve in the next 3 years Per Gartner, most leading enterprise application infrastructure vendors will offer a new, shared-everything APaaS, with built-in support for multitenancy, Key Capabilities offered in Cloud A runtime, programmable platform for application software. Buyers acquire the credentials to access the platform, which is deployed and run by the provider Areas of Opportunities An emerging space which is expected to evolve and/or consolidate in the next few years Source: 45

46 About CrispIdea CrispIdea is a financial and information services firm focused on providing equity research, portfolio management, personal wealth management and brokerage services. On the information services side, it provides communications consulting and research services to a host of clients. CrispIdea tracks a limited number of companies and sectors but strives to provide quality insights through straight forward analysis with an objective of creating longterm wealth with moderate to low risk. CrispIdea leverages a large number of inhouse and external experts operating within the industry who have strong financial, operational and strategic background. For more details visit

47 Disclaimers & Disclosures This report was produced by Crispidea. This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set out herein. The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient s own independent verification or taken in substitution for the exercise of judgment by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group accepts any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed herein. 4 7

48 Recommendation Structure Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is SELL. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and SELL calls and are limited to at most five key buys and five key sells in each market at any point in time. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. *In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value CRISPIDEA 4 8

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