If ever there was a growth story in the next 2-3 years, especially during potential economic uncertainty, then infrastructure-as-a-service (IaaS) is it. This past week, Amazon’s IaaS offering, AWS, reported sales growth of 45% from $5.11 billion to $7.43 billion, with operating income increasing 61% to $2.18 billion up from $1.35 billion. Microsoft’s IaaS offering, Azure, was up 76 percent (same as last quarter) reaching $4 billion in revenue. Microsoft’s overall commercial cloud computing revenue which includes software grew 48 percent to $9 billion. If both companies continue on this trajectory in 2019, then Microsoft will narrow its gap from 3:1 to 2:1 with Amazon.
2018 CLOUD IAAS REVENUES
$26 billion AWS
$10 billion MS
UPDATED PROJECTED 2019 if growth continues at current rate
$16 billion MS
$30 billion AWS
Amazon, Microsoft and Google Revenue Trend Chart
Note: I’ve written quite a bit of analysis over the last few months about the duopoly between Microsoft and Amazon. To quickly summarize, my first analysis discussed the strategic acquisition of Github. My second analysis discussed the great efforts Microsoft has put into become a serious bidder for the Pentagon contract.my first analysis discussed the strategic acquisition of Github. My second analysis discussed the great efforts Microsoft has put into become a serious bidder for the Pentagon contract.
Truly, there is plenty of green field for both players. The investment window for the IaaS market is far from over as it took twelve years for the IaaS market to reach $40 billion and it will take only three years to double to $80 million – and this figure is on the low end of estimates.
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Here are a few of the projections for this space from various analysts:
Amazon’s Cloud Business could reach $71 billion by 2022 with a valuation of $350 Billion (source Jefferies – which tends to be more bullish on AWS than MS).
Microsoft’s Cloud Business Could Be Bigger Than Windows by 2021 with $26.4 billion in revenue in 2021 fiscal year vs. $20.3 billion from Windows (source: Keybanc – most estimates on MS are low, which is why there’s still a growth story here)
Global cloud IT market will triple between 2015 and 2020 with IaaS being the segment with the largest growth of 27% compared to SaaS growth of 18% (source: Bain and also SoftwareStrategistBlog.com)
Global IT Revenue Chart Growth source: Bain Analysis
IaaS Cloud is Secular
On a micro-level, the tech industry is in a state of transition. Mobile is hitting saturation, social media faces privacy regulations, chip makers are getting hurt in the trade war, and meanwhile, 5G, artificial intelligence, and autonomous vehicles are too nascent to see returns in the near term. This is one reason I continue to hammer on IaaS as a safe, secular bet. Companies are going through a major transition right now by transferring work loads into the cloud.
As these transitions take place, IaaS will be as essential to companies as food, gas and cigarettes are to consumers. The company that has transferred to the cloud cannot exist without budgeting for this operating expense. Meanwhile, the companies who have not transferred to the cloud risk losing on competitive advantages such as artificial intelligence, machine learning, and scaling quickly through server virtualization.
As it currently stands, IaaS is Amazon’s largest revenue segment and Microsoft’s fastest growing revenue segment – although there is plenty of addressable market left for both players. Amazon’s capex spending (which includes all capex; not AWS specific) was at $14 billion in 2018 while Microsoft reported capex of $12 billion. One major drawback is that these are not pure play IaaS stocks which introduces risk from other revenue segments. You can read my follow up analysis on 6 pure play cloud stocks here.6 pure play cloud stocks here.
In 2019, the biggest cloud customer in the world will be the United States Department of Defense. The DoD is currently reviewing bids to award a single cloud provider a multi-year contract. Obviously, this isn’t your typical enterprise IT department, transferring from on-premise servers, or a startup who needs the flexibility of cloud infrastructure to scale. The program is called the Joint Enterprise Defense Initiative, or JEDI, and its purpose is to move the DoD’s massive computing systems into the cloud. This one contract is worth $10 billion, or 25% of the current market, which currently stands at $40 billion in annual revenue.
Many prognosticators and reporters unanimously believe the contract will go to Amazon Web Services. This belief is so strong that vendors, such as Oracle and IBM, made a rebuttal to Congress, believing the terms of the proposal favored Amazon. However, the majority of these forecasts overlook Microsoft’s strength in security and IT, and the alliances Microsoft has been forming with the DoD since Satya Nadella became CEO in 2014. Admittedly, guessing a company other than Amazon will win the Pentagon contract is a pure gamble, however, there are strong indicators for Microsoft that should not be overlooked
The Pentagon contract will move 3.4 million users and 4 million devices off private servers and into the cloud. The security risks of using servers outside the Pentagon’s domain are offset by physically separated government regions and hybrid solutions that extend on-premise servers by adding the cloud where necessary. The benefits of artificial intelligence, deep learning, and other technologies like virtual reality are essential for modern warfare as real-time data will inform missions when soldiers are in the field and also help to prepare them for combat.
“This program is truly about increasing the lethality of our department and providing the best resources to our men and women in uniform,” the Defense Department’s chief management officer, John H. Gibson II, told industry leaders and academics at a public event. Developing the system “will revolutionize how we fight and win wars.”
The DoD will not be the first to make a big move to the cloud. John Edwards, the CIO of the CIA, called moving to the cloud in 2013 ‘the best decision we’ve ever made.” According to Edwards, the 4,000 developers across the intelligence community work in the cloud environment, rather than individually provisioned workstations, which means the scalability does not come at the cost of the security. The Intelligence Community’s Cloud Services contract, called C2S for short, enhances security by not connecting to the internet. The results are better than expected as what used to take 180 days to provision a single server, improved to 60 days, and now takes a few minutes due to virtualization.
One point of contention during the request for proposals, released on July 26th, was the stipulation that the contract be awarded to a single cloud provider. This provision caused a rebuttal to be sent to Congress as it narrows down who can compete on these terms. There are nine tech companies who have voiced opposition to the government awarding the JEDI contract to a single provider, including Oracle, Microsoft, IBM, Dell, Hewlett-Packard, Red Hat, and VM Ware.
While some cloud providers argue it will make the JEDI program less secure to be with one provider, this isn’t necessarily true as working with multiple providers introduces new vulnerabilities. One reason for this is that “managing security and data accessibility between clouds currently requires manual configuration that is prone to human error or resource limitation and therefore introduces potential security vulnerabilities,” as stated in the Pentagon’s response.
There are further disadvantages to storing data in separate silos across multiple vendors, which can weaken machine learning and artificial intelligence capabilities, reduce training performance and lower accuracy. The DoD is seeking to remove data silos as they move from their legacy systems, which are scattered across 500 individual cloud efforts.
The Case for Amazon
Amazon’s significant market share is one reason it is favored to win the contract. To put it simply, Amazon has the infrastructure and security clearances to meet the proposal’s guidelines while the majority of cloud contenders are too specialized to contend, such as Oracle with its flagship databases, or VM Ware with virtual machines. These limitations ultimately prevent these companies from meeting all of the proposal’s criteria.
Proponents for Amazon also point to the CIA contract that was awarded to AWS in 2013, which was a $600 million computing contract that services all 17 agencies in the intelligence community. Notably, for the last five years, Amazon has proven it can manage sensitive government information. Last April, Defense secretary Jim Mattis praised Amazon to lawmakers at a hearing when he said, “We’ve examined what CIA achieved in terms of availability of data” and “also security of their data, and it’s very impressive.”
The CIA contract was decided in 2013, but it wasn’t until 2014 that Satya Nadella started his tenure as CEO that the MS cloud platform Azure began its rise. Nadella worked his way up through the company over the course of nineteen years to president of the cloud business. At this point, Nadella who is not backing down with recent Level 6 security clearances anticipated in Q1 2019, which will put Azure on par with AWS with top-level security (more on this below).
There are many instances in the last four years where the DoD continued to choose Microsoft for software and operating systems. For instance, in May of 2018, the United States Intelligence Community extended its agreement to use MS products such as Azure Government, Office 365 for US Government, and Windows 10 in a joint licensing agreement with Dell. In this announcement, MS stated that over “10 million government customers from every federal cabinet level, including the Department of Defense” rely on MS’s Cloud for Government.
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In 2016, MS won a five-year contract to provide technical support to the Defense Information Systems Agency (DISA). In 2016, the original Windows 10 agreement that took effect in 2017 included 4 million laptops, desktops and mobile devices. More recently, in November of 2018, MS won a $480 million contract with the U.S. government to bring 100,000 augmented reality headsets into the military’s arsenal. The two-year contract will help soldiers prepare for combat training.
The question that remains is if the Pentagon will want to use Amazon for cloud infrastructure while using Microsoft for operating systems and software? If the Pentagon truly wants one provider, then Microsoft can offer an end-to-end solution for the DoD. This will be especially important as we see edge device computing built out, which Microsoft is preparing for with Azure Sphere.
We can also see from the timeline of MS’s press releases that the company is preparing to be a strong contender with Amazon on security:
In early 2017, Microsoft granted access to the Azure Government Department of Defense regions at Impact Level-5*, per their website.
In August of 2018, MS announced that Azure Stack, the hybrid solution, is available for government customers. This allows customers to maintain their own data centers while using cloud services for its advantages.
MS announced Azure Government Secret in October of 2017, which helps U.S. agencies handle classified data in areas such as energy research or law enforcement.
In October of 2018, when the Pentagon contract bids were due, MS posted on its blog that by the first quarter of 2019, Azure Government Secret will support “Secret U.S. classified data or Defense Information Systems Agency (DISA) level 6 workloads*.”
*Level 5 security is what Microsoft currently holds while Level 6 is what will be required by the Pentagon and is what Amazon currently holds. Microsoft will achieve Level 6 by Q1 2019. Here is a snapshot of the different levels of security authorizations (image source: Defense Information Systems Agency)
Levels of Security Authorization Chart
Takeaway:
Microsoft has had a long relationship with the government that precedes the 2013 CIA contract. At the time of this contract, MS was not a cloud contender, but Satya Nadella was determined to change this. MS will soon be an apples-to-apples contender with AWS on security, hybrid solutions and government cloud regions. Meanwhile, MS has secured the operating systems and software used by the Pentagon, through licensing with Dell. If the DoD were to choose Amazon, they’d still have to work with Microsoft on security, and would technically be working with two vendors. However, if the Pentagon wants one provider for end-to-end cloud computing, software, operating systems, and edge device computing software such as Azure Sphere, then Microsoft is the clear choice.
The cloud infrastructure market is expected to reach $83.5 billion by 2021, up from $40.8 billion in 2018. Amazon Web Services was launched in 2006, which means it took twelve years for the infrastructure-as-a-service (IaaS) market to reach $40 billion – but will take only three years for the next $40 billion to accumulate. Therefore, the investment window for cloud infrastructure stocks is far from over.
The IaaS segment is currently Amazon’s most profitable revenue stream comprising 55% of its quarterly operating profit, and is also the top growth-driver for Microsoft at 89%. Considering these are two of the three companies vying for most valuable company in the United States, it’s easy to see why IaaS could be the determining factor on who will remain in this position. AWS has a formidable lead in cloud infrastructure with estimates of $26 billion in sales last year compared to Microsoft’s $10 billion.
However, there was an important strategic acquisition Microsoft completed last month which will narrow its position in second place – and it’s my prediction that this specific acquisition will be a primary driver that will propel MS into first place in the next 2-3 years. Before I discuss the acquisition, I think it’s important to provide an overview of the IaaS segment.
Gartner analysis bumped Oracle and IBM from the leader quadrant this year, while placing Google Cloud in third behind AWS and Microsoft. For all intents and purposes, these are the three cloud infrastructure companies remaining for serious stock investors after a period of fierce consolidation. At one point, Amazon had more market share than the trailing 14 cloud infrastructure companies combined. It now has the market share of the trailing 5 companies combined. This reflects Microsoft and Google’s growth as the territory Amazon has forfeited was primarily gained by MS Azure and also Google Cloud Platform (GCP).
AWS has an outstanding lead at 33% of the market, with Microsoft at 13% and Google at 5-6%. These margins are why Amazon posts 40% growth while Microsoft posts 98% growth – there is simply more territory that MS can gain as a second-place participant. GCP claims the most growth because its revenue is small enough to post these gains.
Suffice to say, current revenue is not a solid indicator of who will capture the $40 billion projected growth over the next three-year period. In fact, I believe AWS will have its hardest years ahead as Microsoft’s singular focus has been to grow Azure, and this strategy will be reflected in earnings between 2019-2022. AWS is the most mature provider in this category, but Microsoft has deeper experience with strategic IT dominance. The effort at which Microsoft is driving adoption to .NET CORE and Azure is, surprisingly, not something we see with AWS (more on this below).
To some extent, this reason could easily be explained by Amazon’s ever-expanding focus. The company may be too distracted with growing its e-commerce dominance, such as Prime deliveries and also Prime OTT streaming, plus the Whole Foods acquisition, as well as its plans to disrupt the healthcare industry and the connected home. It’s easy to see how Amazon might lack the focus in strategic investments that the competitive cloud infrastructure market will demand. Microsoft, on the other hand, is putting its entire weight behind IaaS, and the next couple of years will be interesting to see how this plays out.
Microsoft’s Strategic Move to Acquire the World’s Largest Open Source Repository
Microsoft’s dedication to become the cloud infrastructure leader was demonstrated last month with the acquisition of Github for $7.5 billion, which is a repository for developers to upload projects and files. There are 28 million active developers collaborating on GitHub. In other words, every single developer in the world is on GitHub. In fact, GitHub’s user base is larger than the total number of developers globally, which is an impossibility the founder pointed out last year, proving the platform’s omnipresence.
“Git” refers to version control systems, which developer-talk for an open version of all the modifications made to projects (like writing code), that is stored in one central repository. Collaboration and sharing are at the essence of open-source software, and Github provides a social environment for this to occur. There is a ton of innovation which happens here, and almost every developer hosts their code and projects here for the world to see (or even for employers to review during job interviews). Developers can “fork’ a project, or split a project, by creating a new project off an existing one. Or they can issue a pull request to have the original developers of a project incorporate new code.
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Ironic is the best word to describe Microsoft’s venture into open source technologies and repositories. At one time, the company was loathed by the developer community for their closed standards, as the Founder Bill Gates adamantly believed software should be proprietary. In the late 90s, leaked documents showed Microsoft had attempted to contain the open source movement, and to prevent Linux from competing with Microsoft software by locking customers into proprietary protocols. (Linux is the free and open-sourced software operating system that launched in the early 90s and Android is built on today; Windows is the anti-thesis to this operating system).
Developers seek open source environments so they can learn from each other, and to support more innovation. Today, AWS excels when it comes to open source development due to being an early supporter of Linux. However, Microsoft is attempting a complete one-eighty by embracing the open-source community, and if MS succeeds, it will pay in dividends for Azure as it goes head to head with AWS.
This venture into open-source advocacy has been planned for some time. Over the last few years, Microsoft became the top contributor on Github with 2 million projects, which helps position Microsoft as an advocate while evangelizing the .NET framework and the .NET CORE that runs on Windows, MacOS, and Linux. Microsoft now claims that 40% of Azure’s virtual machines are running Linux.
Furthermore, MS acquired Xamarin two years ago, the leading mobile application development platform. The tools help developers navigate across the various programming languages required by different platforms, such as iOS and Android on native, web applications, or a mix of both with 75% of the code re-usable. This greatly reduces development time and resources, and also demonstrates that MS is ready to host and support competing operating systems in order to gain on cloud infrastructure.
Takeaway: Microsoft is courting developers because they are a primary decision maker as to which cloud service a company will use. MS Azure’s current customers are enterprise level, such as Fortune 500 companies. Microsoft’s strength is that most businesses at this level have a significant investment in MS products, and it is easier to go with MS because it is what they know, and the transition is easy as the IT department won’t have to be trained on AWS or Google Cloud.
However, Microsoft’s blaring weakness is open source, and the some 28 million developers that are on smaller teams, and who socialize on Github, are decidedly open source. For $7.5 billion, Microsoft has done what every great company should do – acquire to address your weakness.
Both Xamarin and Github are highly strategic acquisitions. Microsoft paid 25 times the value of Github, which has revenue of about $300 million. Alphabet was also interested in purchasing Github, according to inside sources.
Tech stocks are getting slammed right now, and Nvidia may be one of Wall Street’s biggest losers in the sell-off that began last month and continued into this week. Nvidia’s stock has seen a 30-day high of $292 and a whiplash low of $176 – equaling a 40% plunge in the matter of four weeks. Today, it stands at $197.60.
Economic indicators and earnings from tech companies have not exactly warranted this reaction from the market. Fears the semi-conductor industry is slowing down based off Advanced Micro Devices earnings report were negated when Intel reported strong Q3 earnings. And while Apple may be on the precipice of a capped out $1 trillion-dollar market cap due to possible iPhone saturation, Nvidia’s outlook is quite the opposite in regards to public-company growth trajectory. The market may continue to have volatility, but Nvidia investors who are patient will be rewarded due to competitive advantages in GPU-powered cloud performance and developer adoption of Nvidia’s platform.
Brief Overview of Nvidia’s Revenue Segments
To summarize, gaming claims the majority of Nvidia’s revenue at $1.81 billion, up 52% YoY. Gaming will get a nice boost in 6-12 months from the new GeForce RTX 2070, RTX 2080 and 2080 Ti chips, which introduce the possibility of hybrid rendering through ray-tracing. In layman’s terms, ray-tracing mimics how light behaves in the real world by mapping out rays from 3D illumination sources. The imagery is much more realistic as a result. Electronic Arts released the first raytracing game today (November 14th) whereas 6 months ago, the gaming industry did not think raytracing would even be possible. Companies who have signed up for the new Turing architecture include Adobe, Pixar, Siemens, Black Magic, Weta Digital, Epic Games (maker of Fortnite) and Autodesk.
Data center revenue has been picking up speed at 83% YoY, or $760 million, as GPU chips are powering more of the cloud for machine learning and artificial intelligence applications. Data center revenue, once a small blip, claims 24% of the company’s total sales. This will continue to grow steadily into the near future due to the computing power and flexibility GPUs provide over CPUs, which is what Intel sells, or TPUs and FPGA, which are custom machine-learning chips by Google and used by Microsoft that are too specific to one platform for widespread adoption – more on these points below.
Source: TechCrunch
Smaller segments by Nvidia include professional visualization and automotive, which grew to $281 million and $161 million, respectively, up 20% and 13% year over year.
Two Impenetrable Moats: GPU-Cloud and Developer Adoption
Revenue segments are your typical Nvidia stock coverage. But can Nvidia take market share from Intel? Will Google, Microsoft, Facebook and Apple design their own custom chips to compete with Nvidia? This is what investors need to answer for themselves especially if we continue into correction territory.
Regarding Intel, the cloud is too competitive to forego the performance and efficiency that Nvidia delivers. Recently, the Turing T4 GPU became the fastest adopted server GPU of all time in just two short months of hitting the market. Prior to the release of the Turing T4 GPU, Nvidia’s data center growth was 3x compared to Intel. Intel posted 26% growth YoY whereas Nvidia posted 83% YoY. However, Nvidia’s data center revenue is 1/6th compared to Intel’s at $760 million vs. $6.1 billion. This revenue segment will continue to grow as the GPU-powered cloud is built out. Unfortunately for Intel, GPUs are the better choice for cloud customers as the usage pattern is constantly in flux, demanding a wide variety of models and different software frameworks. Intel’s CPU Xeon Processor cannot compete with the performance-per-watt of what Nvidia offers in the cloud. Per the announcement on September 13th, 2018, Microsoft, Google, Cisco, Dell EMC, Fujitsu, HPE, IBM, Oracle and Supermicro plan to release servers with Nvidia’s T4 GPU on board.
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Google and Microsoft have both made chips for their data centers. Microsoft adopted the field-programmable gate array (FPGA) which is used for AI apps. And Google has built a custom chip called the Tensor Processor Unit (TPU) for Google’s TensorFlow deep learning framework. Competing, customized chips will become the new norm as tech giants prefer to use proprietary tech. The biggest weakness that competing customized chips face like TPUs, from Google, and FPGA, used by Microsoft, is that they may be too specialized for developers to adopt. The drawbacks will continue to be price and difficulty, as programming for FPGA is an area not many engineers have expertise in. The same goes for Google Cloud Platform (GCP). They’ll have to get developers to adopt GCP and keep them locked into TensorFlow. Even so, there are alternate frameworks such as PyTorch from Facebook which add further to the fragmentation of developer frameworks. In addition, even if Google uses TPUs for inferencing, it may still use Nvidia’s GPU for training neural networks.
Let’s use mobile application development as an example. One of the reasons mobile is a duopoly between Android and iOS is that developers can only learn so many tools and development environments before the process becomes inefficient. In order to truly excel at a language, it has to be universal. For instance, Microsoft attempted to launch a Windows phone, which was met by resistance as developers did not care to learn a new operating system that could not prove itself with user adoption. In turn, mobile users did not buy the Windows phone because their favorite applications were not available to download. iPhone’s success was due to iOS developers who learned tools like XCode to create applications. Android became the competing universal language for the remaining manufacturers, such as Samsung, LG, Sony, Pixel, etcetera. The next wave of AI applications and machine learning inferences will follow the same path of limited competition due to development bandwidth. Developers will self-regulate the number of competitors for processing units due to a need for a universal platform that supports all frameworks.
Here’s a quote from Marc Andreessen of Andreessen-Horowitz, one of the most successful venture capitalists in Silicon Valley:
“We’ve been investing in a lot of startups applying deep learning to many areas, and every single one effectively comes in building on Nvidia’s platform. It’s like when people were all building on Windows in the ’90s or all building on the iPhone in the late 2000s.”
There is an even greater need to simplify artificial intelligence and machine learning than exists for mobile standards. There are thousands of variants emerging each year in AI as neural networks evolve and expand in depth, complexity and architecture. There are multiple frameworks supported by major industry players and Nvidia’s GPUs are flexible enough to accelerate all of these frameworks and workflows including Caffe2, Cognitive Toolkit, Kaldi, MXNet, PaddlePaddle, Pytorch and TensorFlow.
In addition, AI occurs beyond the cloud and Nvidia’s GPUs are available in what is called edge devices, such as self-driving cars, desktops, workstations, data centers and across all major cloud providers.
Conclusion
Nvidia is already the universal platform for development, but this won’t become obvious until innovation in artificial intelligence matures. Developers are programming the future of artificial intelligence applications on Nvidia because GPUs are easier and more flexible than customized TPU chips from Google or FGPA chips used by Microsoft. Meanwhile, Intel’s CPU chips will struggle to compete as artificial intelligence applications and machine learning inferencing move to the cloud. Intel is trying to catch-up but Nvidia continues to release more powerful GPUs – and cloud providers such as Amazon, Microsoft and Google cannot risk losing the competitive advantage that comes with Nvidia’s technology.
The Turing T4 GPU from Nvidia should start to show up in earnings soon, and the real-time ray-tracing RTX chips will keep gaming revenue strong when there is more adoption in 6-12 months. Nvidia is a company that has reported big earnings beats, with average upside potential of 33.35 percent to estimates in the last four quarters. Data center revenue stands at 24% and is rapidly growing. When artificial intelligence matures, you can expect data center revenue to be Nvidia’s top revenue segment. Despite the corrections we’ve seen in the technology sector, and with Nvidia stock specifically, investors who remain patient will have a sizeable return in the future.
Summary: Infrastructure as a service (IaaS) is the fastest growing cloud segment and will continue to be with AI, machine learning and connected cars. Gartner, an authority in tech analysis, placed Oracle in the “niche player quadrant” (not the leader quadrant) for Infrastructure as a Service (IaaS) May 22. In addition to IaaS, Oracle’s Data as a Service business model will weaken as marketers fail to get proper consent for ad targeting.
Cloud infrastructure is hot right now and for good reason. The world increasingly relies on cloud data centers due to server virtualization, smartphones, movies and entertainment, chatbots, office productivity, software as a service, and social media, to name a few.
Gartner predicts the worldwide public cloud services market will grow to 21.4 percent in 2018 to $186.4 billion. The fastest growing segment is infrastructure as a service (IaaS) forecast to grow 35.9 percent in 2018. As we store more data in the cloud from AI and machine learning, this sector will continue to expand. For instance, fully automated cars will produce an estimated 25 Gigabytes of data per hour or 300 TB per year. Therefore, any savvy investor should place bets in this sector for 2021 and beyond.
No Medal for 4th Place in Cloud Infrastructure
Oracle (ORCL) is a long-time enterprise cloud powerhouse with billions invested in engineering and strategic acquisitions. On the quest to build and defend a range of cloud services, the company is expanding hybrid-cloud technologies, investing in customer-success programs, and benefiting from a less-than-expected decline in on-premise revenue. On the other hand, the transition to the cloud is taking longer than expected, according to Keybanc analysts, and is at risk for lagging behind Amazon (AMZN), Microsoft (MSFT) and Google (GOOG) in the Infrastructure as a Service category, the fastest growing category in public cloud services.
Last quarter, Oracle beat earnings estimates but came in slightly below expectations for revenue at $9.77 billion vs. $9.78 billion. The adjusted earnings of 83 cents beat the consensus estimate of 72 cents and was up 20% for its fiscal third quarter, which ended February 28. The better than expected earnings were not enough to convince investors in Q3 as the stock fell 4 percent after earnings were reported, then fell an additional 8 percent in pre-market trading. The stock is at $46.16 today compared to $52.90 before Q3 earnings.
One major concern is Oracle’s low share of cloud infrastructure and platform revenue, which came in at $415 million with 28 percent growth compared to Amazon at $5.11 billion revenue at 45 percent growth. It doesn’t help that Gartner, an authority for accurate tech analysis, placed Oracle in the “niche player quadrant” in the Magic Quadrant (not the leader quadrant) for Infrastructure as a Service (IaaS). Notably, financial analysts from JP Morgan and Murphy lowered Oracle targets yesterday, however, Gartner published this magic quadrant on May 22nd and it is likely what these analysts based their predictions on.
Meanwhile, in another category, cloud software (SaaS) revenue was up 33% last quarter for Oracle at $1.15 billion with notable competitors SAP and SalesForce. The remaining revenue is primarily on-premise revenue of $6.42 billion, and software license revenue of $1.39 billion.
While Oracle has maintained a name for itself in cloud services, it’s offerings are not strong enough to earn a medal as a front runner, which will spell trouble for earnings as Data as a Service (DaaS) undergoes regulations.
DaaS: Programmatic Will Crash
Oracle pursues many strategies and acquisitions for cloud services because it knows it has to be seen as a cloud company in order for Wall Street to invest in its future. However, one of Oracle’s main market positions is Data as a Service (DaaS). From 2012 to 2014, Oracle went on a tear of acquisitions to increase their marketing stack and to cement their position in the digital advertising space. In May of 2012, Oracle bought social marketing solutions provider Virtue for an estimated $300 million, the marketing automation firm Eloqua for $810 million in December of 2012, Responsys for $1.5 billion which is a business to consumer solution and the data management platform, BlueKai, for $400 million in 2014. This totaled an estimated $3 billion in collective marketing tech acquisitions to enhance DaaS.
Programmatic is the automatic trading of advertising which is augmented by data for superior digital advertising. Oracle’s DaaS is essentially a way for companies to upload their data and potentially enrich their data by anonymously sharing and matching data sets. Oracle calls this “making your data smarter.”
Notably, BlueKai was a private company that captured the data boom with 9,245% growth from 2009-2012 – although competitors in the market saw a whopping 21,337% revenue growth (Data Xu). BlueKai was originally a buyer and seller of consumer data and pivoted to become a seller of data analytics and management technologies. These acquisitions were designed to help Oracle enable private data sharing. This is where the marketing ecosystem ingests first-party data and brokers marketing communications (MarCom) and advertisements in a second- party data transaction. While the data is not being sold, the information is being shared to third-parties without consent for the purpose of more advertisements.
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As the Oracle BlueKai deck states, here are some examples:
Hotel chain sharing data with a bank to target customers who do not have bank rewards cards
Online broker sharing data with a social media site for audience based targeting
Social media site sharing data with a technology company
While Oracle Blue Kai may not come directly under regulation because they are the middleman, and not the company with a direct relationship to the user, their business model is likely to weaken due to the way the data is being used. Marketing platforms and data management platforms will increase a marketers liability if they choose to transfer and trade private, first-party data. For these marketers, under the GDPR, consent must be given for each processing operation need and cannot be bundled together. Therefore, there will be less advertising and Marcom data to process, lowering Oracle’s revenue.
My Prediction: Cloud infrastructure will continue to grow as data storage increasingly provides the infrastructure for technological advancement. Amazon, Microsoft and now Google have been upgraded while Oracle has been downgraded during a key growth stage for IaaS. In addition, Oracle acquired many companies in the DaaS space which will continue to wane as regulations increase on customers using Oracle for targeted data. Couple this with fierce competitors in the IaaS and SaaS space, and Oracle will see lower than expected earnings this year.
Prior to the advent of mobile computing, security was limited to corporate IT assets that were often physically secured in facilities owned and managed by the company. According to a recent SANS Institute study, organizations spend as much as 12 percent of their IT budget on security.
In a Ponemon Institute study, it was found that organizations have a 27.7 percent probability of having a material data breach in the next 24 months at an average cost of $3.62M.
Meanwhile, the world of computing has changed. Security is not just about physically secure data centers and corporate controlled computing assets. Instead, end users have gone mobile, connecting to cloud enabled services, often with their own personal devices. And with the rise of the Internet of Things, there will be billions of connected computing devices on the planet in the next several years.
The primary consequences of applications getting hacked include financial loss, destroyed brand reputation, exposure to liability, and regulatory risk. Over 7 billion identities have been stolen in data breaches over the last eight years equal to one data breach for every person on the planet. Meanwhile, mobile’s rapid expansion has introduced a complicated and potentially hostile environment that is difficult to manage and protect.
64 percent of security practitioners said they were very concerned about the use of insecure mobile applications in the workplace with an average of 472 mobile applications reported as actively used in organizations.
Prior to the advent of mobile computing, security was limited to corporate IT assets that were often physically secured in facilities owned and managed by the company, on a network behind a managed firewall, and possibly in a datacenter with multi-factor access, physical security, and armed guards. Because the company owned those assets, they were able to dictate what applications could run on those machines, and actively manage and monitor them, providing the latest patches, endpoint security, and other controls dictated by corporate IT. Assets located in such places were implicitly trusted.
Today, the situation has changed. Mobile devices dominate the market, often as the primary or only way users access the Internet and the many cloud services available. These devices also have very little, if any, physical security. It is a well-worn path hackers use to access such devices to reverse engineer or tamper with the applications running on them, often through rooting, jailbreaking or hoodwinking the user.
This shift has created all sorts of new business models to take advantage of the popularity of mobile devices.
These new business models come with new security problems:
New forms of payment using near field communications (NFC) on mobile devices are becoming popular in recent years. These applications require that credentials to authenticate users must be stored on the device. If those credentials are compromised, then a hacker can execute fraudulent transactions.
Mobile devices are being used in the automotive industry to enable remote parking from your smartphone. A compromise of the device could pose a serious safety risk.
In healthcare, patients are using mobile devices to manage sensitive information collected from various devices ranging from fitness monitors to blood glucose monitors to improve care and create data driven treatment options. A compromise of such a device can lead to a loss of privacy and sensitive information. Or even worse, if a device is hacked, it could potentially lead to life-threatening consequences for the patient.
Internet of Things
By 2025, the total global worth of IoT technology will reach USD 6.2 trillion with the most value coming from health care devices (USD 2.5 trillion) and manufacturing (USD 2.3 trillion). Meanwhile, we see a persistent lack of IoT security investment with 67 percent of medical device makers expecting an attack on their devices while only 17 percent taking measures to prevent an attack. These numbers are staggering when you consider U.S. hospitals have an average of 10 to 15 connected devices per bed with some hospitals registering 5,000 beds — totaling 50,000 connected devices per hospital.
Furthermore, traditional security solutions do not port well to the IoT world, due to differences in system architectures and resource constraints. Therefore, IoT security solutions have not evolved enough and are prone to numerous vulnerabilities.
