 From the SiliconANGLE Media office in Boston, Massachusetts, it's theCUBE. Now, here's your host, Dave Vellante. Everyone and welcome to this week's episode of Wikibon's CUBE Insights powered by ETR. In this breaking analysis, we take a deeper dive into the world of robotic process automation, otherwise known as RPA. It's one of the hottest sectors in software today. In fact, Gartner says it's the fastest growing software sector that they follow. In this session, I want to break down three questions. One, is the RPA market overvalued? Two, how large is the total available market for RPA? And three, who are the winners and losers in this space? Now, before we address the first question, here's what you need to know about RPA. The market today is small, but it's growing fast. The software only revenue for the space was about $1 billion in 2019. And it's growing at between 80 to 100% annually. RPA has been very popular in larger organizations, especially in back office functions, really in regulated industries like financial services and healthcare. RPA has been successful at automating the mundane, repeatable, deterministic tasks, and most automations today are unattended. The industry is very well funded with the top two firms raising nearly $1 billion in the past couple of years. They have a combined market value of nearly $14 billion. Now, some people in the R community have said that RPA is hyped and looks like a classic pump and dump situation. We're going to look into that and really try to explore the valuation and customer data and really try to come to some conclusions there. We see big software companies like Microsoft and SAP entering the scene, and we want to comment on that a little later in this segment. Now, RPA players have really cleverly succeeded in selling to the business lines and often have bypassed IT. Now, sometimes that creates tension in organizations. As I said, customers are typically very large organizations who can shell out the $100,000 plus entry point to get into the RPA game. The TAM is expanding beyond back office into a broader automation agenda. Hyper automation is the buzzword of the day, and there are varying definitions. Gartner looks at hyper automation as the incorporation of RPA along with intelligent business process management, IBPM and I-PASS or intelligent platform as a service. Gartner's definition takes a holistic view of the enterprise incorporating legacy on-prem apps as well as emerging systems. Now, this is good, but I question whether the hyperterm applies here. As we see hyper automation as the extension of RPA to include process mining to discover new automations or new automation opportunities and the use of machine intelligence, ML and AI applied to process data, data where that combination drives intelligence analytics that further drives digital business process transformation across the enterprise. So the point is that we envision a more agile framework and definition for hyper automation. We see legacy BPM systems informing the transformation but not necessarily adjudicating the path forward. We liken this to the early days of big data where legacy data warehouses and ETL processes provided useful context, but organizations had to develop a new tech stack that broke the stranglehold of technical debt. We're seeing this emerge in the form of new workloads powered by emerging analytic databases like Redshift and Snowflake with ML tools applied and cloud driving agile insights in that so-called big data space. So we think a similar renaissance is happening here with automation really driven by the mandate for digital business transformation along with machine intelligence. And that tooling applied for really driving automation across the enterprise in a form of augmentation with attended bots at scale becoming much, much more important over time. Okay, now let's shift gears a little bit. Question, is the RPA market overhyped and overvalued? Now to answer this, let's go through a bit of a thought exercise that we've put together and look at some data. What this chart shows is some critical data points that will begin to help answer the question that we've posed. In the top part of the chart, we show the company, the VC funding, projected valuations in revenue estimates for 2019 and 2020. And as you can see, UiPath and Automation Anywhere are the hot companies right now. They're private, so much of this data is estimated but we know how much money they've raised and we know the valuations that have been reported. So the RPA software market is around a billion dollars today and we have it almost doubling in 2020. Now the bottom part of this chart shows the projected market revenue growth and the implied valuations for the market as a whole. So you can see today, we show a market that is trading at about 15 to 17 times revenue, which seems like a very high multiple, but over time we show that multiple shrinking and settling in mid-decade, just over 5x, which for software is pretty conservative, especially for high growth software. Now what we've done in this next chart is we brought down that market growth and the implied valuation data and highlighted 2025 at 75 billion dollars. The market growth will have slowed by then to 20% in this model and this thought exercise with a revenue multiple of 5.4x for the overall market. Now eventually as growth slows, RPA software will start to throw off profits, at least it better. So what we show here is a sensitivity analysis assuming a 20%, 25%, 30% and 35% EBITDA for the market as a whole, we're using that as a proxy. And we show a 20x EBIT multiple, which for a market growing, a software market growing this fast, we think is pretty reasonable. Consider that tech overall typically is going to have an EBITDA multiple of 10 to 15X. Here really it should be EV or enterprise value over EBIT. It's really a more accurate measure, but this is back in napkin, I don't know the balance sheet data, I'm not going to forecast all out, but we're trying to just sort of get to the question is, is this market overvalued? And as you can see in the FAR column, given these assumptions, we're in the range of that 75 billion dollar market valuation with that delta. Now in reality, you're going to have some companies growing faster than the market overall and we'll see a lot of consolidation in this space. But at the macro level, it would seem that the company which can lead and win the spoils is going to really benefit. Okay, so these figures actually suggest in my view that the market could be undervalued. That sounds crazy, right? But look at companies like ServiceNow and Workday and look at Snowflake's recent valuation at 12 billion dollars. So are the valuations for UiPath and automation anywhere justified? Well, in part it depends on the size of the market, the TAM, total available market, and their ability to break out of back office niches and deliver these types of revenue figures and growth. You know, maybe my forecasts are a little too aggressive in the early days, but in my experience, the traditional forecasts that we see in the marketplace tend to underestimate transformative technologies. You tend to have these sort of ogives where it takes off and really steepens and has a sharp curve and then tapers off. So we'll see. But let's take a closer look at the TAM. But first, I want to introduce a customer viewpoint. Here's Eric Lex, who's an RPA pro at GE, talking about his company's RPA journey. Play the clip. I would say in terms of our journey, 2017 was kind of our year to prove the technology. We wanted to see if this stuff could really work long term and operate at scale. Given that I'm still here, obviously we proved that was correct. And then 2018 was kind of the year of scaling and operationalizing kind of a sustainable model to support our business units across the board from an RPA standpoint. So really building out a proper structure, building out the governance that goes along with building robots and building kind of a resource team to continue to support the bots that we were at scale at that point. So maintaining those bots is critically important. That's the direction we're moving in 2019. We've kind of perfected the concept of the back office robot and the development of those and running those at scale. And now we're moving towards a whole new market share when it comes to attended automation and citizen development. So this is a story we've heard from many customers and we've tried to reflect it in this graphic that we're showing here. Start small, get some wins, prove out the tech, really in the back office and then drive customer facing activities. We see this as the starting point for more SME driven digital transformations where business line pros are rethinking processes and developing new automations. Either in low code scenarios or with centers of excellence. Now this vision of hyper automation we think comes from the ability to do process mining and identify automation opportunities and then bring RPA to the table using machine learning and AI to understand text, voice, visual context and ultimately use that process data to transform the business. This is an outcome driven model where organizations are optimizing on business KPIs and incentives are aligned accordingly. So we see this vision as potentially unlocking a very large TAM that perhaps exceeds $30 billion globally. Now let's bring in some of the spending data and take a look at what the ETR data set tells us about the RPA market. Now the first thing that jumps out at you is RPA is one of the fastest growing segments in the data set. You can see that green box and that blue dot at around 20%. That's the change in spending velocity in the 2020 survey versus last year. Now the one caveat is I'm isolating on global 2000 companies in this data set and as you can see in that red bar up on the left. Now remember RPA today is really hot in large companies but not nearly as fast growing when you analyze the overall respondent base which includes smaller organizations. Nonetheless, this chart shows net scores and market shares for RPA across all respondents. Remember net score is a measure of spending velocity and market share is a measure of pervasiveness in the survey. And what you see here is that RPA net scores are holding steadily at a nice rate and market shares are creeping up relative to other segments in the data set. Now remember this is across all companies but we want to use the ETR data to understand who is winning in this space. Now what this chart shows is net score or spending velocity on the vertical axis and market share pervasiveness on the horizontal axis for each individual player. And as we run through this sequence from January 18 survey through today across the nine surveys, look at UiPath and Automation Anywhere. But look at UiPath in particular, they really appear to be breaking away from the pack. Now here's another look at the data. It shows net scores or spending velocity for UiPath, Automation Anywhere, Blue Prism, Pegasystems and Work Fusion. Now these are all very strong net scores which are essentially calculated by subtracting the percent of customers spending less from those spending more. The two leaders here, UiPath and Automation Anywhere are strongest but the rest are actually quite good in the green. But look at this, look what happens when you isolate on the 349 global 2000 respondents in the survey. UiPath jumps into the 80% net score territory. Again, spending velocity. Automation Anywhere dips a little bit. Pegasystems interestingly jumps up nicely but look at Blue Prism, they fall back in the larger global 2000 accounts which is a bit of a concern. Now the other key point on this chart is that 85% of Ui customers and 70% of Automation Anywhere customers plan to spend more this year than they spent last year. That is pretty impressive. Now as you can see here in this chart, the global 2000 have been pretty consistent spenders on RPA for the past three survey snapshots. UiPath again showing net scores or spending intensity solidly in the 80% plus range. And even though it's a smaller end, you can see Pega with a nice uptick in the last two surveys within these larger accounts. Now finally, let's look at what ETR calls market share which is a measure of pervasiveness in the survey. This chart shows data from all 1000 plus respondents and as you can see, UiPath appears to be breaking out from the pack. Automation Anywhere and Pega are showing an uptick in the January survey and Blue Prism is trending down a little bit which is something to watch but you can see in the upper right all four companies are in the green with regard to net score or again spending velocity. So let's summarize and wrap up. Is this market overhyped? Well, it probably is overhyped, but is it overvalued? I don't think so. The customer feedback that we have in the community and the proof points are really starting to stack up. So with continued revenue growth and eventually profits, you could make the case that whoever comes out on top will really do well and see huge returns in this market space. Let's come back to that in a moment. How large is this market? I think this market can be very large. A TAM of 30 billion plus is not out of the question in my view. Now that realization will be a function of RPA's ability to break into more use cases with deeper business integration. RPA has an opportunity in our view to cross the chasm and deliver lower code solutions to subject matter experts in business lines that are in a stronger position to drive change. Now a lot of people poo poo this notion and this concept but I think it's something that is a real possibility. This idea of hyper automation is buzz-worthy but it has meaning. Companies that bring RPA together with process mining and machine intelligence that drives process analytics has great potential. If organizational stovepipes can be broken down. In other words, put process data and analytics at the core to drive decision making and change. Now who wins? Let me say this, the company that breaks out and hits escape velocity is going to make a lot of money here. Now, unlike what I said in last week's breaking analysis on cloud computing, this is more of a winner take all market. It's not a trillion dollar TAM like cloud. It's tens of billions and maybe north of 30 billion but it's somewhat of a zero sum game in my opinion. The number one player is going to make a lot of dough. Number two will do okay and in my view, everyone else is going to struggle for profits. Now the big wild card is the degree to which the big software players like Microsoft and SAP poison the RPA well. And here's what I think. I think these big software players are taking an incremental view of the market and are bundling in RPA as a check off item. They will not be the ones to drive radical process transformation. Rather they will siphon off some demand but organizations that really want to benefit from so-called hyper automation will be leaning heavily on software from specialists who have the vision, the resources, the culture and the focus to drive digital process transformation. All right, that's a wrap. As always, I really appreciate the comments that I get on my LinkedIn posts and on Twitter. I'm at at D. Volante. So thanks for that and thanks for watching everyone. This is Dave Volante for theCUBE Insights powered by ETR and we'll see you next time.