Disclosure: I am long WDAY, and have had (now closed) positions in ORCL and GOOG in the past 6 months.
Cloud technology is one of the least understood topics in today’s tech industry. As an SI consultant specializing in Cloud implementations, I aim to clear up what the cloud is, explain how it is different, and put into real terms how it affects the enterprise landscape. At the bottom I briefly discuss Oracle and Workday.
The Cloud cuts costs for enterprises
At almost all points in the solution’s lifecycle, a Cloud solution will have a lower TCO (Total Cost of Ownership) than a COTS (Commercial-off-the-Shelf) Solution with comparable abilities.
The Cloud taps into economies of scale
Shared networks mean shared computing resources between cloud customers and less infrastructure maintenance cost/customer.
The Cloud is cheaper and faster to install into enterprise networks
It requires less maintenance, less customization, and less IT resources to stand up a Cloud Environment, all of which are incredibly expensive, and resources often difficult to find/hire.
Every customer operates on same version and structure
In the past, you could have 10 customers on ten different versions of the same COTS solution at the same time.
The Cloud allows companies to smooth cash expenditures
The Cloud is associated with a shift from the CAPEX model where a company buys an asset and depreciates that asset over time to a yearly subscription model.
First – what is the Cloud? The Cloud is a concept of network architecture that allows a program to be completed over a distributed network of computers, accessed through a thin client aka an internet browser. Instead of each program/user needing its own technical backend to be executed, the cloud allows many users and devices (cloud clients) simultaneous access to hosted services/servers.
What does that mean?
We will talk in terms of Microsoft Word (COTS) and Google Docs (Cloud). In order to use Microsoft Word, what do you have to do? Spend $100, download an install package from Microsoft.com, use x MBs of space on your hard drive, and run it. Anything you write is yours, and any problem with the application is your problem. Downloaded a virus that uses word to access online poker? Your issue. A new version comes out the day after you buy? Tough. Google Docs- you only need access to an internet browser to use. You don’t maintain Google Docs security, Google does. Everyone is on the same version at all times, and you can collaborate on Google Docs, because everyone is connected to the same thing at the same time. You access Google docs through an internet browser, and it doesn’t take any space on your machine, other than when you want to pull down a copy of something to your local machine. FYI- this is why a Chromebook can’t run Microsoft Office- it is essentially an internet browser in an aluminum case.
Most if not all cloud companies use a subscription model- for instance, you pay $99 right of the bat for Word, but Google Docs you pay as you use i.e. advertising revenue for Google. This has direct impacts on company financial ratios, and is one of the reasons Cloud Tech Companies command high valuations based on current sales and P/E ratios (if the company isn’t in the red).
Example: Oracle vs. Workday.
Oracle trades at a P/E of 15, and a Price-to-Sales Ratio of 4. Workday trades at a PSR of ~34, and is still losing money so a PE doesn’t mean much. Oracle charges a ton for the upfront cost of COTS packages, a ton for the up-front customization, and a ton for the annual maintenance charges it bills businesses (a huge source of recurring revenue). Workday charges an annual subscription fee to customers, ties them up in multi-year contracts, and hopes to turn that customer into a repeat customer for the next millennium by virtue of better useability, easier customization of its data, and Graphical User Interface (GUI) simplicity.
Workday locks in customers with an initial 3 year service contract on average. The revenue of that customer is not recognized up front, but over the same 3 year period, and therefore will make the PSR of Workday look exorbitant when compared to Oracle’s. Workday’s cloud model is easily scalable, and therefore can handle the 77% YoY revenue growth that is derived mostly from new customer acquisition. The customer growth of cloud services is based on the 5 points mentioned above.
How difficult would it be for Oracle to offer cloud services of their own if they wanted to? Does WDAY have something special that Oracle does not?
Also, i don't understand how booking revenue over a longer period of time justifies a higher price/sales ratio. I'd rather have the money now, rather than later.
Oracle CEO Larry Ellison has spent a few years talking down "the cloud" - even going into full-on rants about the idiocy of the term cloud computing. See: http://www.datacenterknowledge.com/archives/2009/09/28/larry-ellison-ra…
He spent about a year sticking his foot in his mouth, and to answer your question, Oracle is now full on into the cloud and touting cloud benefits in combination with its Oracle Fusion applications straight out of the box.
WDAY infrastructure is very built out and advanced in comparison to competitors like NetSuite. Their Studio application is developer-friendly, and their community is from what I hear head and shoulders above competition. If Oracle put all effort going forward into offering Cloud services instead of COTS solution, it might take them a few years to catch up. Workday already has a library of pre-built connectors to third party providers, and the infrastructure to customize to global HR idiosynchrasies.
For the second question, I agree with you, which is why I balk at some of the metrics that arise when talking about Workday shares. To answer questions like yours on earnings calls, WDAY touts some ~98% customer retention year over year. Best I can say is - first mover advantage commands quite a premium. And accelerating revenue growth is in high demand. Oracle is experiencing growth in low single digits. Workday is doubling in revenue every year. They probably all have something to do with the high share price.
As you said, most if not all cloud computing companies use a SaaS model, but I think an important distinction is that cloud is a technical issue while SaaS is a business model issue.
Also, I was wondering what you think about the long-term consequences for cloud computing companies due to the fact that they now have to bear the cost of upgrading software rather than customers paying to upgrade their applications?
This previous model seems like a more immediate and 'safer' business model than SaaS, although revenue is definitely lumpier in the traditional model (immediate payment with revenue locked down, at least for this iteration of the software vs a rental model).
Cloud/SaaS isn't my strong suit, so please feel free to correct me if I'm way off base.
Cloud computing companies bearing cost of upgrades I think we be ignored for the same way Amazon losses are ignored- ideally at some point, a crucial load of customers will negate the fixed cost of upgrades and infrastructure expansion. Long term consequence I believe will be some consolidation in the industry as infrastructure for smaller players, who can't turn a profit, get absorbed by the larger players, same way VoIP players consolidated in late 90s.
The thing that people forget when talking about this model shift is that the risk is overstated when taking into account close to 100% renewal rates and customer satisfaction. The previous model is safer over a 5 year period, a subscription model works better in my opinion over a 25 year period.
Do you hold a view on Xero?
Only topically, but enlighten me on the details if you have them. What is the difference between a Xero and an online version of Quickbooks?
In the context of specialized cloud services such as Akamai or DGIT (focusing on content delivery) what would you say stops competitors from replicating the service offered and eating into the share of the larger players, besides reputation? Thanks!
The infrastructure is much harder and more complex to replicate than even imaginable. This includes security concerns (which are eased by reputation as you mentioned). You are talking HEAVY expenditure in all areas of development, security, sales, etc.
The discerning variable in my opinion is first mover advantage. Much the same way Youtube is far and away the best video sharing platform on the internet, or Ebay is the preeminent self-auction service. Once these things get popular, they are tough to stop.
SaaS I would venture to say has less of a first mover advantage than Platform-as-a-Service, BC successful PaaS/IaaS gets and maintains a critical mass of customers. As a customer, it doesn't make sense to switch to a new up and comer when you are already receiving tremendous value from your current provider.
What do you think?
i would argue the first mover advantage you are referring to does not apply in the cloud case.
Ebay, Youtube, Facebook, and Twitter get a first mover advantage because they rely on the network effect. Everyone is on Facebook, so there's no point in joining Google+. There's no point in starting your own auction site, because you can just put your item on Ebay where there are already tons of users. No one can start a new video sharing service because all the videos are already on Youtube with lots of other users and comments.
With the cloud, any customer can pick any provider, and will often do it based on price. There is no interaction between customers and hence no network effect.
I don't understand why moving first would be an advantage in this case.
The only question you should be asking about cloud computing is, "What will happen when it rains?!"
//www.youtube.com/embed/AnxrJiS5uKU
That man is lightyears ahead of his time.
I can agree with both of your points, ric vans and job.resume. Lets just say a newcomer were to take on the capital requirements to create a comparable cloud service and undercut the market leader in terms of pricing, then I agree that reputation can help to some extent. But to job's point, wouldn't customers pick providers based on price?
I guess I'm just having a hard time grasping if there is a major player who built the infrastructure, what stops someone else from doing the same?
I didn't read the OP carefully but I will say that I'm on the old fashioned side here, I still use external hard drives - I don't trust my files floating around on a cloud somewhere.
That's certainly fair. The cloud infrastructure is only as secure as the servers hosting it. Consolidating that amount of enterprise data into one central location begs for security concerns, whether it is a public cloud, community cloud, or private cloud.
ric vans, do you know how many percent of the F500 (or F1000) has switched to cloud based storage? I am guessing not a lot, or the ones that already did still keep a traditional storage, since the cloud based storage is still a fairly new business to be experimented.
As for the security side, how effective do you think these cloud companies protect their storage? It seems to me that cloud companies can attract more attentions from hackers than individual companies.
Who are the major players in cyber security ric vans?
Fireeye, McAfee, Symantec, SourceFire, EarthLink
Clearswift, checkpoint...
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