SaaS

Mapping 2011: Secular Overtakes Cyclical

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We expect 2011 to be a “normal” IT spending year and hence we lift our global IT spending forecast to 6%, given ongoing macroeconomic improvements. This is composed of 5% growth in developed economies and 10% in emerging markets. Feedback from our CIO panel also has our IT spending indices continuing their upward trend, giving us further confidence. The indices are now back to their highest levels since mid- to late 2007.

We entered 2010 with an attractive view of almost every tech sector, buoyed by the strong combination of a cyclical refresh combined with an early secular shift to Cloud. With the cyclical refresh largely behind us and tougher comps weighing on sectors such as semiconductors, hardware, and commtech, we view 2011 as a more stock-specific year, rather than buying tech as a whole. We do, however, maintain an “Attractive” coverage view in software as secular growth should disproportionately benefit here.

This excerpt from our recent CIO survey report looks at the overall IT spending plans for the coming year, the top tech sectors for accelerated spending, and the vendors which CIOs say will grow in strategic importance.

IT Spending Returning to Normal Levels; CIOs Optimistic

Our latest IT spending indices are at their highest levels since mid- to late 2007 (see chart below). Our total IT spending index (this includes salaries, services, depreciation, occupancy, etc.) increased to 68.7 from 61.0 in our prior survey in October. Our tech capital spending index (representing spending only on new equipment and software) increased to 64.1 from 61.5. The IT spending index surpassing our capital spending index likely indicates that pent-up demand for tech capital goods may be easing relative to other areas of IT spending. This is in line with our IT hardware team’s view of server shipments slowing next year to 5.2% growth after 16.1% growth in 2010.

Overall, however, our respondents are optimistic on the IT spending outlook based on the IT spending indices returning to pre-downturn levels.

Exhibit 12

Areas of IT Spending Acceleration for 2011

Despite some investor concerns of maturation in this market, we believe we are still in the earlier stages of virtualization penetration on the server side (30% or less of x86 servers virtualized), with headroom to move toward 100% over time given the compelling benefits of utilization, agility, and resiliency. VMware remains the de facto standard in the enterprise and is positioned to take significant share in the management and automation arena as enterprises take significant steps toward “private cloud” infrastructure in 2011. We note that IT operations management software also ranked highly at No. 6, likely indicative of private cloud investment intentions for 2011. (See chart below.)

Exhibit 14
  • PCs and servers still rank as the highest priorities for hardware refresh, but enterprise segment not enough to buoy overall industry growth. PCs and servers were identified by 83% and 62% of respondents as the key hardware product areas expected to be refreshed in 2011. See Exhibit 15. In PCs, this is encouraging news for the corporate segment of the market, where we expect 2011 unit growth of 11.4% in corporates with more than 500 employees. Unfortunately, these customers account for only 9% of overall PC units and may not be enough to counter the slowdown in other segments of the market. As a result, we continue to expect overall PC unit growth to slow to 8.0% in 2011E (from 14.9% in 2010E). For servers, we believe that virtualization will continue to drive a steady shift to fewer, more richly configured systems, and as a result, we forecast fairly modest ASP declines of 3%. Tougher comps in the first half also compress the growth impact of a continued refresh, and we forecast unit growth of 5.2% for all of 2011.
  • Business intelligence and analytical applications also a top priority at No. 3, which should benefit on-premise and SaaS vendors. Consistent with checks, analytics to effectively get more from data held within current applications remains a key area of focus for enterprises. The BI space has largely been consolidated into the bigger IT incumbents – Oracle, IBM and SAP – but we expect this to remain a focal area of investment. Oracle’s investment in Exadata and Exalogic continue to provide a dramatic performance improvement in data management, while SAP’s acquisition of Sybase was partly driven by its ongoing investment in in-memory technology to provide faster analytic capabilities. TIBCO is a vendor that has shown improved organic growth driven largely by the value proposition of its real-time event processing analytics capabilities. In addition, SaaS vendors bring a new layer to analytics capabilities in two important ways: (1) Most SaaS vendors integrate some level of analytics into their core offerings rather than treating analytics as an additive purchase; and, (2) the SaaS architecture enables analytics across all customer data in a multitenant environment.
  • Enterprise SaaS adoption spreading; should accelerate the secular shift at the expense of on-premise applications. SaaS ranks fourth in spending priorities into 2011, with 25% of enterprise CIOs we surveyed intending to accelerate SaaS investments, up from tenth last year and just 19% of respondents. In sharp contrast, on-premise enterprise applications come in at the bottom of the list, with just 6% of respondents prioritizing higher spending in this area. Pure-play SaaS vendors with enterprise offerings all stand to benefit, includingSalesforce.com, SuccessFactors, Taleo, Concur and RightNow.
  • Survey results aligned with our view that desktop virtualization spending will accelerate in 2011; we expect the VDI market to near $1 billion in 2011.VDI spending ranks as the fifth-highest area of spending acceleration by CIOs surveyed with 23% of responses. Traction for desktop virtualization deployments accelerated noticeably in 2010, as companies took advantage of a PC refresh cycle, operating system upgrades, and a slew of new mobile devices to improve how desktops would be deployed and managed going forward.

Most Strategic Vendors Today – and in Three Years

The largest vendors are still most strategic, but disrupting technologies such as Cloud are opening the door to non-traditional entrants. Not surprisingly, some of the largest technology companies – Microsoft, Dell, HP, Cisco, IBM, and Oracle – are the most strategic to customers today and will remain key vendors in the coming years due to a variety of factors, including their incumbency position and breadth of offerings, ability to bundle these multiple offerings into large scale Enterprise License Agreements (ELAs) and hence provide a lower TCO, experience in servicing enterprise-level requirements, and ability to move into new or adjacent markets through acquisitions (Exhibit 16).

Rate of change greatest for a number of “newer” names on the enterprise front –namely Google, VMware, Red Hat, and Amazon. The charts below highlight the absolute change in “strategic” importance based on our panel’s responses. While the change is small in magnitude, directionally it indicates that a not insignificant portion of newer spend may be directed to these either new (VMware) or non-traditional (Google, Amazon) entrants.

Exhibits 16 and 17

Sarah Friar is a high technology analyst at Goldman Sachs. This is an excerpt from the latest IT Spending Survey and software market analysis. To receive a copy of this reports, email Sarah at Sarah.Friar@gs.com.

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