Tag Archives: software

Unboxing Core Themes

General Themes

  • White box hardware

Red Hat

  • Acquisition of 3scale for APIs
  • RHEL is currently the cash cow
  • JBoss Middleware enables applications to speak together
  • OpenShift PaaS / rapid application development through microservices (PaaS)
  • OpenStack:

Amazon

  • Mix shift to higher profitability cloud, which is expected to be the highest portion of revenue
  • Moving upstream from SMB to enterprise
  • At recent event, had GM, Coca Cola speak, speaking to effectiveness of enterprise strategy
  • Most developers prefer AWS
  • Aurora is gaining traction (SQL database)
  • RedShift has solid traction (data warehouse)
  • Workspaces competes with VMWare and Citrix
  • Solid security in public cloud
  • Roll-out of QuickSight
  • Chosen by GuideWire for IaaS
  • Chosen by Salesforce as preferred IaaS hosting

Best-In-Class Offerings

  • ServiceNow: opportunity to also penetrate ITSM market; very strong customer renewal rates
  • ServiceNow: current beachead in service management (incident, problem, service catalog); moving to operations management (servers, application, storage, virtualization, cloud, network) – this model enables ServiceNow to penetrate a business model typically dominated by incumbents (IBM, CA, Microsoft, BMC)
  • Workday: opportunity to move down-stream to penetrate SMB market; incumbents (Oracle, SAP) slower to move to cloud)
  • Other higher growth opportunities include marketing / customer service targeting SMB space: Hubspot (inbound marketing); Zendesk (leader in customer services software)
  • Slow GDP growth resulting in investments in front office
    • Accounting / Enterprise / ERP
    • Productivity Applications
    • Sales and Marketing Applications

Market has had a defensive posture this year, positively benefiting infrastructure players

  • Red Hat
  • Oracle
  • VMWare

Value Play: BI / Analytics Uncertainty

  • Larger players increasing competition for the likes of Tableau with fears of Microsoft, Qlik, and Amazon (QuickSight) getting in the way

Red Hat Overview

Industry

  • Faster innovation cycles
  • Increased security

Positives

  • Unique open source business model
  • Low cost technology
  • Anchor: Red Hat Enterprise Linux
  • Growth lever is OpenStack adoption + storage / middleware (JBoss) + PaaS (OpenShift)
  • Positioned to be leader of OpenStack movement
  • Positioned to deliver OpenStack across AWS and Azure
  • Increasing deal sizes
  • High renewal and fast growing renewal rates

Risks

  • Susceptible to decreased IT spend (in poor economic environment)
  • Ability to de-throne Microsoft
  • Growth is driven by non-RHEL products
  • Move to public cloud could make AWS linux more appealing
  • Most customers are from indirect sales channels
  • New products being adopted slower than expected

Updates

  • Increased headcount this year

Next Project

Just finished the most recent project mapping software functions and companies. Ideas for next project include:

  • Find groupings for functions
  • Tie groupings to P&L
  • Create “representative” P&L on the basis of average spend for companies

Grounding Software Multiples

Software companies are generally valued for their high growth while profitability measures are often overlooked. Twilio, a recent software IPO, is currently trading at 17x it’s next twelve months estimated revenue. In an effort to “ground” software valuations, I backsolved fundamental indicators which enable us to observe a company’s fall from the sky towards a valuation closer rooted to traditional fundamentals.

The model works as follows:

  • Share price x basic shares outstanding
  • Adjust for capital structure (add cash, subtract debt) to arrive at enterprise value
  • Input a required rate of return (we’ll use 15%, for our example)

[iframe src= “http://kfguiang.co/xls/Software/Theorems/RequiredIRR.htm” width=”100%” height=”400″]

Here, we observe Twilio’s financial profile. We analyze its current growth rate, and its current cost structure. There are two possible drivers of returns:

  • High growth, low margins
  • Low growth, higher margins

As we see here, companies with a higher rate of growth typically have lower margins
[iframe src= “http://kfguiang.co/d3/scatter/index.html” width=”100%” height=”420″]

Furthermore, our analysis reveals that at below $1.0bn in annual revenue, growth is typically expected in the range of 15 – 20%
[iframe src= “http://kfguiang.co/d3/growth/index.html” width=”100%” height=”420″]

At this point, we can start rationalizing our target’s growth rate: for how long can it sustain its current growth? Once we determine this, we can observe how aggressively our target is currently investing in growth:
[iframe src= “http://kfguiang.co/d3/barchart/index.html” width=”100%” height=”420″]

We can further refine our analysis by observing cost structures across all companies within the software universe to ground expectations in where costs can be optimized or whether certain cost structures are sustainable:
[iframe src= “http://kfguiang.co/d3/boxplot/index.html” width=”100%” height=”420″]

Here, we can “sanity check” where we believe growth will come from. The following table sensitizes margin achieved versus implied revenue:

[iframe src= “http://kfguiang.co/xls/Software/Theorems/GrowthImplied.htm” width=”100%” height=”420″]

 

 

 

Tableau Competitive Positioning

Question (Brent Bracelin Pacific Crest Securities – Analyst): I just want to drill down there a little bit. What question can you answer that I can’t get Microsoft, PowerBI try to answer, you got to get a concrete example of that.

Response (Francois Ajenstat Tableau Software, Inc. – VP of Product Development): So, a good concrete example, let’s say you want to look at your year-over-year difference in sales, very simple question, what is the difference this year compared to last year? In Tableau, that’s a three second solution. Three clicks, you’re done. And PowerBuoy or even tools like Qlik, you’ll have the right code, you’ll write complex calculations that would get you there. Which means, in order to do that, very few people, only specialists can do it, where what we want to do is expand the opportunities for the number of people that can do that. It’s a very simple question, right. Even in a running sum. What’s our running sum of sales this quarter. Really simple question. Extremely hard to do in any other tool. Three clicks in Tableau.

  • Ajenstat also notes that DATA is available in cloud or on-prem (as well as deployable in AWS). He notes that PowerBI is Cloud-Only (and not AWS compatible) and that Qlik is on-prem only with no cloud option. Note that Qlik was recently acquired by Thoma Bravo