by Anil Nain
IT innovation engendered by cloud computing could generate $1.1 trillion a year in new business revenue and create nearly 14 million jobs globally, by some estimates. While small companies have been using cloud services for years, larger enterprises have typically been slower to adapt, typically citing security and trust as impediments to adoption.
That may be changing. Cloud decisions are being made increasingly more by business managers (45%) than IT folk (46%), and firms are moving more incrementally towards the cloud, according to a recent survey of 460 IT leaders and senior business managers by consulting firm Capgemini. More than 60% of all enterprises will have adopted some form of cloud computing in 2013, according to Gartner Research.
The cloud market is slated to grow to $131 billion worldwide this year, or 18.5% over the $111 billion last year. In its 2013 State of the Cloud Report that surveyed over 1200 IT professionals, IT-reseller CDW found 39% of organizations are already using some form of cloud solution, an 11% increase over 2011.
Gartner has also said that the "cloud business process services segment (BPaaS) is the second-largest market segment after cloud advertising, comprising 28 percent of the total market in 2012, followed by cloud application services (software as a service [SaaS]) at 14.7 percent, cloud system infrastructure services (IaaS) at 5.5 percent, cloud management and security services at 2.8 percent, and cloud application infrastructure services (platform as a service [PaaS]) at one percent." Interestingly, North America is expected account for 59% of all new cloud spending through 2016.
If a greater number of enterprises continue to view the cloud as an integral part of their operating models, here are a few names that may be positioned to benefit. Like all strategies with market-beating potential (see one method that has beaten the S&P historically), it's important to keep a close watch on every industry's biggest players.
Two weeks ago, Salesforce (CRM) announced Q4 revenues of $835 million, up 32% from same quarter one year earlier. For the full year, the company made just over $3 billion in revenue-an increase of 35% from 2011-with full-year operating cash flow of $737 million. The company also raised its first quarter guidance for the 2014 fiscal year, and it expects to generate revenue in the range of $882-$887 million-- about 28% higher than the first quarter of FY2013.
While 2012 proved to be an excellent year for Salesforce, the company's margins have been declining over the past few years, and competition from the likes of Microsoft (MSFT) and Oracle (ORCL) will likely intensify, potentially increasing new customer acquisition costs.
Earlier this year, Citrix Systems (CTXS) reported Q4 FY2012 results. Quarterly revenue was up 19% over the same quarter one year earlier, to $740 million. Fourth quarter cash flow from operations was up 34% year over year to $227 million. Notably, in the fourth quarter of 2012, the company completed 55 deals in excess of $1 million, of which 42 were for their XenDesktop product.
Equally as important, Citrix added about 4,000 new XenDesktop customers in this period. Shares have responded well year-to-date, jumping by more than 10%. This has benefited hedge fund bulls like John Zaro and George Soros (check out Soros's top picks here), who are both long CTXS. Yes, an increasing shift to tablets may prove to be a challenge for the company, but the stock's appreciative potential looks intact over the short-to-intermediate term.
Meanwhile, VMware's (VMW) annual revenue grew 22% to $4.61 billion in the fourth quarter of 2012, and net income for this period was $206 million, largely flat compared to the $200 million posted one year earlier. Full-year revenues derived from the U.S. grew 22% from FY2011 to $2.23 billion, and international revenues expanded by an identical growth rate.
VMware expects revenues to grow by 15% in 2014, and as much as 20% in the subsequent 24 months. The cloud and virtualization giant has made a number of acquisitions in recent years, which have added about 6,700 employees, but it expects to lay off about 900-or 7%-of its workforce in the face of headwinds in the first half of this year. The stock is down about 18% since the late-January layoff announcement, and five hedge fund managers sold off their stakes entirely last quarter (see what this group of hedge funds was buying).
For its quarter ending December 31, 2012, Rackspace (RAX) generated net revenue of $353 million-- a 25% year over year. Net income of $30 million grew by 19%, and adjusted free cash flow came in at a company-record $119 million compared to -$8 million in 2011. The company, which is powered by Openstack-- an open source method for creating "clouds"-- is an intriguing company to watch in this space, much like Red Hat (RHT).
Red Hat is set to announce its Q4 earnings next Wednesday, and while revenue is expected to rise in the high teens, the company's outlook remains unclear amid concerns that Linux may be slowing. Redhat's OpenShift uses Amazon's AWS, which allows Linux users to house their apps on Amazon.
Even as debates over security, flexibility and cost persist, enterprises' collective comfort level regarding their deployment into the cloud environment looks bullish. Ardent investors should watch the companies we've discussed above.
Disclosure: I am long MSFT.