 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. Enterprise applications are an enormous market, and they're enormously important to organizations globally. Essentially, the world's businesses are running on enterprise applications. Companies processes are wired into these systems, and the investments that they make in people, process and technology are vital to these companies' success. But it's complicated because many of these systems are decades old. Markets have changed, but the ERP system, for example, fundamentally hasn't. Hello everyone, and welcome to this week's Wikibon Cube Insights, powered by ETR. This week, we're going to do a data download on the enterprise software space and put forth some themes in our thesis around this very important segment. I'd like to do a shout-out to my friend, Sarbjit Johal, who helped me frame this segment, and he's a strategic thinker, and he shared some excellent insights for this episode. What I'd first like to do is let's lay out the scope of what we're going to talk about today. So we're going to focus on the core enterprise apps that companies rely on to run their businesses. Talking about the systems of record here, the ERP, the financial systems, HR, CRM, service management we'll put in there. We may touch on some of the other areas, but this is the core that we're going to drill into. This is a big, big market. Customers spend many hundreds of billions of dollars in this area. You could argue about a half a trillion. And it's a mature market, as you'll see from the data. Look, it's good to be in the technology business today. This business is doing better than most. And within the technology business, it's better to be in software because of the economics and scale. And if you have a SaaS cloud model, it's even better. But the market, it is fragmented, not nearly as much as it used to be, but there are many specialized areas where leaders have emerged. ServiceNow and ITSM or Workday and HCM are good examples of companies that have specialized and then exploded. For instance, we saw ServiceNow blow past Workday's valuation. It was nearly 2X at one point. Now, that was before Workday crushed its earnings this week. It's up 15% today. ServiceNow took a slight breather earlier this month, but it's up on Workday sympathy today. Salesforce also beat earnings and of course replaced ExxonMobil on the Dow industrials. Can you imagine that? Well, let's bring it back to this digital transformation that you hear about. This is the big cliche from all the tech companies and especially software players. Now, a lot of this DX, I sometimes call it, is related to old systems. It's especially true for the mega caps like Oracle, SAP, PeopleSoft, JD Edwards, and even Microsoft. Take ERP and some of the mature products, for example, like Oracle R12 or SAP R3 or R4. Many of these systems were put in place 15 years ago and yeah, they're going to need to transform. They are burnt in. They were installed in, what, 2005? That was before the iPhone, before social media, before machine learning and AI made its big comeback. And before cloud, these systems were built on the 1.0 of cloud. The businesses have changed, but the software really hasn't. It happens every 10 to 15 years. Companies have to upgrade or reimplement their systems and optimize for the way business now runs because they had to be more competitive and more agile. They can't do it on their old software. And God help you if you've made a bunch of custom modifications. Good luck trying to rip those out. And this is why PurePlay companies in the cloud like ServiceNow and Workday have done so well. They're best of breed and they're cloud. And it sets up this age old battle that we always talk about, best of breed versus integrated suites. So let's bring in some of the other themes and feedback that we get from the community. You know, we've definitely seen this schism play out between on-prem and cloud plays. And that's created some challenges for the legacy players. People working remotely has meant less data center, less on-prem action for the legacy companies. Now they have gone out and acquired to get to the cloud and or they've had to re-architect their software like Oracle has done with Fusion. But think about something like Oracle financials. Oracle is trying to migrate them to Fusion or think about SAP R3 with R4, SAP pushing HANA. All this is going to cloud-based SaaS. So the companies that have been PurePlay SaaS are doing better. And I say quasi-modern on this slide because Salesforce, ServiceNow, Workday, even Koopa, NetSuite, which is now Oracle, SuccessFactors, which SAP purchased, et cetera. These are actually pretty old companies. You know, the earlier part of the 2000s or in the case of Salesforce, 1999. And you're seeing some really different pricing models in the market. Things are moving quickly to an OPEX model. You have the legacy perpetual pricing as giving way to subscriptions. And now we even see companies like Datadog and Snowflake with so-called consumption-based pricing models priced as a true cloud. And we think that that's going to eventually spill in to the core SaaS applications. Now one of the concerns that we've heard from the community is that some of the traditional players that were able to hide from COVID earlier this year might not have enough deferred revenue dry powder to continue to power through the pandemic. But so far the picture continues to look pretty strong for the software companies. We'll get into some of that. Now, finally, this is a premise that I talked to Sarbjit about. The disruption perhaps comes from cloud and developer ecosystems. You know, I remember John Farrier and I had a conversation a while back with Jerry Chen from Greylock. He was on the Cuban and it was kind of like, went like this. People were talking about whether AWS was going to enter the applications market. And the thesis here is no, we're not in the near future. Rather the disruptive play, and this is really Sarbjit's premise, is to provide infrastructure for innovation and a pass layer for differentiation. And developers will build modern cloud native apps to compete with the SaaS players on top of this. This is intriguing to me and is likely going to play out over the next decade, but it's going to take a while because these SaaS players are, they're very large and they continue to pour money into their platforms. Now let's talk about the shift from CapEx to OPEX and bring in some ETR data. Of course, this was well in play pre COVID, but the trend has been accelerating. This chart shows data from the August ETR survey and it was asking people to express their split between CapEx and OPEX spend. And as you can see, the trend is clear. Goes from 48% last year, 55% today and moving to over 62% OPEX a year from now. You know, it's no surprise, but I think it could happen even faster depending on the technical debt that organizations have to shed. And hence the attractiveness again of the SaaS cloud players. So now let's visualize some of the major players in this space and do some comparisons. Here we show one of our favorite views and what we're doing here is we juxtapose net score on the vertical axis with market share on the horizontal plane. Remember, net score is a measure of spending momentum. Each quarter ETR asks buyers, are you planning to spend more or less and they essentially subtract the lesses from the mores to derive net score. Market share, on the other hand, is a measure of pervasiveness in the data set and it's derived from the number of mentions in the sector divided by the total mentions in the survey. And you can see each metric in that embedded table that we put in there. So I said earlier, this was a pretty mature market and you can see that in the table. Yeah, kind of middle of the road net scores with pretty large shared ends, i.e responses in the data set, but a lot of red. There are some standouts, however, as you see in the upper right, namely ServiceNow and Salesforce. These are two pretty remarkable companies. ServiceNow entered the market as a help desk or service management player and has dramatically expanded its time. Really to the point where they're aiming at $5 billion in revenue. Salesforce was the first in cloud CRM and is pushing 20 billion in revenue. I've said many times, these companies are on a collision course and I stand by that. As any of the next great software companies, and these are two, are going to compete with all the mega caps including Oracle, SAP and Microsoft and they'll bump into each other. Which brings us to those super cap companies. You see Microsoft with Dynamics, they show up like they always do. I might get broken record on Microsoft. I mean, they're everywhere in the survey data. Now Oracle and SAP, they've been extremely acquisitive over the years and you can see some of their acquisitions on this chart. I've said many times in theCUBE that Larry Ellison used to denigrate as competitors for writing checks instead of code, but he saw the consolidation trend happening in the ERP space before anyone else did and with the $10 billion PeopleSoft acquisition in 2005 set off a trend in enterprise software that did a few things. First, it solidified Oracle's position further up the stack. It also set Dave Duffield and Anil Boushry off to create a next generation cloud software company in Workday which you can see in the chart has a net score up there with ServiceNow, Salesforce, and Koopa. And it also led to Oracle Fusion Middleware which is designed as an integration point for all these software components. And this is really important because Oracle is moving everything into its cloud and you can see that it's on-prem net score which puts it deep into negative territory. Now SAP, take a look at them, you got much higher net scores than Oracle and you can see it's acquired SaaS properties like Ariba, Concur, and SuccessFactors which have decent momentum. But you know, SAP, and we've talked about this before is not without its challenges. With SAP, HANA is the answer to all of its problems. The problem is that it's not necessarily the answer to all of SAP's customers problems. Most of SAP's legacy customers run SAP on Oracle or other databases. HANA is used for the in-memory query workload but most customers are going to continue to use other databases for their systems of record. So this adds complexity. But HANA is very good at the query piece. However, SAP never did what Oracle did with Fusion which, as you might recall, took more than a decade to get right. HANA is SAP's architectural attempt to unify the SAP portfolio and really get off of Oracle but it's many years away and it's unclear when or if they'll ever get there. All right, let's move on. Here's a look at a similar set of companies but I wanted to show you this view because it gives you a detailed look at ETR's net score approach and it tells us a few things more. Now remember, this is a survey of almost 1,200 technology buyers. That's the end, that's the respondent rate. So this chart shows the net score granularity for the enterprise players that we were just discussing. Let me explain this. Net score is actually more detailed than what I said before. It comprises responses in four categories. The lime green is new adoptions. The forest green is growth in spending of 6% or more. The gray is flat spend. The pink is a budget shrink of 6% or greater and the red is retiring the platform. So what this tells us is that there's a big fat middle of stay the same. The lime green is pretty small but you can see NetSuite jumps out for new adoptions because they've been very aggressive going after smaller and mid-sized companies and Coupa, the spend management specialist shows reasonably strong new adoptions. Now service now is interesting to me. Not a ton of new adoptions. You know, they've landed the ship and it really penetrated larger organizations and while new adoptions are not off the charts look at the spending more category it's very, very strong at 46%. And the other really positive thing for service now is there's very little red. This company is a beast. Now Salesforce similarly, not tons of new adoptions but 40% spend more. For a company that size, that's pretty impressive. Workday similarly has a very strong spending profile. At the bottom of the chart you see a fair amount of red as we saw on the XY graph. But now let's take another view of NetScore. Think of this as a zoom in which takes those bar charts but shows it in a pie format for individual companies. Who was showing this here for service now, Workday and Salesforce. And we've superimposed the NetScore for these three in green. So you can see service now at 48%. It's very good for a company headed toward five billion. Same with Workday, 40% for a company of similar size and Salesforce has a comparable NetScore and is significantly larger than those two revenue-wise. Now this is the same view, this next chart's the same view for SAP and Oracle. And you can see substantially lower than the momentum leaders in terms of NetScore. But these are much larger companies. SAP's about 33 billion, Oracle's closer to 40 billion. But Oracle especially is seeing some headwinds from organizations spending less which drags its NetScore down. But you're not seeing a lot of replacement in Oracle's base because as I said at the top, these systems are fossilized and many are running on Oracle. And the vast majority of mission critical workloads are especially running on Oracle. Now remember, this isn't a revenue weighted view. Oracle charges a steep premium based on the number of cores and it has a big maintenance stream. So while its NetScore is kind of sucky, its cash flow is not. All right, let's wrap it up here. We have a very large and mature market but the semi-modern SaaS players like Salesforce and ServiceNow and Workday, they've gone well beyond escape velocity and solidified their positions as great software companies. Others are trying to follow that suit and compete with the biggest of the bigs, i.e. SAP and Oracle. And I didn't talk much about Microsoft but as always they show up prominently, they're huge and they're everywhere in this data set. What I think is interesting is the competitive dynamics that we talked about earlier. These kind of newer SaaS leaders, they're disrupting Oracle and SAP but they're also increasingly bumping into each other. You know, ServiceNow has HR for example and they say that they don't compete with Workday and that's true. But these two companies they eye each other and they angle for account control. Same thing with Salesforce. It's that software mindset. The bigger a software company gets, the more they think they can own the world because it's software and if you're good at writing code and you see an opportunity that can add value for your customers, you tend to go after it. Now, we didn't talk about M&A but that's going to continue here especially as these companies look for TAM expansion and opportunities to bring in new capabilities particularly around data, analytics, machine learning, AI and the like. And don't forget industry specialization. You've seen Oracle pick up a number of industry plays and as digital transformation continues, you'll see more crossing of the industry streams because it's data. Now, the disruption isn't blatantly obvious in this market right now other than SaaS clouds going after SAP and Oracle and it's because these companies are deeply entrenched in their customer organizations and change is risky but the cloud developer, the open source API trend could lead to disruptions but I wouldn't expect that until the second half of this decade as cloud ecosystems really begin to evolve and take hold. Okay, well that's it for today. Remember these breaking analysis episodes they're all available as podcasts wherever you listen so please subscribe. I publish weekly on wikibon.com and siliconangle.com so check that out and please do comment on my LinkedIn posts. Don't forget, check out etr.plus for all the survey action. Get in touch on Twitter. I'm at dvolante or email me at david.volante at siliconangle.com. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching everybody. Be well and we'll see you next time.