 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. The technology spending outlook is not pretty and very much unpredictable right now. The negative sentiment is, of course, being driven by the macroeconomic factors and earnings forecasts that have been coming down all year in an environment of rising interest rates. And what's worse is many people think earnings estimates are still too high. But it's understandable why there's so much uncertainty. I mean, technology is still booming. Digital transformations are happening in earnest. Leading companies have momentum and they got cash runways and moreover, the CEOs of these leading companies are still really optimistic. But strong guidance in an environment of uncertainty is somewhat risky. Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we share takeaways from ETR's latest spending survey, which was released to their private clients on October 21st. Today, we're going to review the macro spending data. We're going to share where CIOs think their cloud spend is headed. We're going to look at the actions that organizations are taking to manage uncertainty and then review some of the technology companies that have the most positive and negative outlooks in the ETR dataset. Let's first look at the sample makeup from the latest ETR survey. ETR captured more than 1,300 respondents in its latest survey, its highest figure for the year and the quality and seniority of respondents just keeps going up each time we dig into the data. We've got large contributions as you can see here from C-level executives and a broad industry focus. Now, the survey is still North America centric with 20% of the respondents coming from overseas and there is a bias toward larger organizations. And nonetheless, we're still talking well over 400 respondents coming from SMBs. Now, ETR for those of you who don't know conducts a quarterly spending intention survey and they also do periodic drill downs. So just by the way of review, let's take a look at the expectations in the latest drill down survey for IT spending. Before we look at the broader technology spending intentions survey data, followers of this program know that we reported on this a couple of weeks ago spending expectations that peaked last December at 8.3% are now down to 5.5% with a slight uptake expected for next year as shown here. Now, one CIO in the ETR community said these figures could be understated because of inflation. Now, that's an interesting comment. Real GDP in the US is forecast to be around 1.5% in 2022. So these figures are significantly ahead of that. Nominal GDP is forecast to be significantly higher than what is shown in that slide. It was over 9% in June, for example. And one would interpret that survey respondents are talking about real dollars, which reflects inflationary factors in IT spend. So you might say, well, if nominal GDP is in the high single digits, this means that IT spending is below GDP, which is usually not the case. But the flip side of that is technology tends to be deflationary because prices come down over time on a per unit basis. So this would be a normal and even positive trend. But it's mixed right now with prices on hard to find hardware. They're holding more firm software. You know, software tends to be driven by lock-in and competition and switching costs. So you have those countervailing factors. Services can be inflationary, especially now as wages rise, but certain sectors like laptops and semis and NAND are seeing less demand and maybe even some oversupply. So the way to look at this data is on a relative basis. In other words, IT buyers are reporting 280 basis point drop in spending sentiment from the end of last year. Now, something we haven't shared from the latest drill-down survey, which we will now, is how IT buyers are thinking about cloud adoption. This chart shows responses from 419 IT execs from that drill-down and depicts the percentage of workloads that organizations have in the cloud today and what the expectation is three years from now. And you can see it's 27% today and it's nearly 50% in three years. Now, the nuance is if you look at the question that ETR asked, they asked about IAS and PAS, which to some could include on-prem. Now, let me come back to that. In particular, financial services, IT, telco, and retail and services industry cited expectations for the future three years out that were well above the average, the mean adoption levels. Regardless of how you interpret this data, there's most certainly plenty of public cloud in the numbers. And whether you believe cloud is an operating environment or a place out there in the cloud, there's plenty of room for workloads to move into a cloud model well beyond mid this decade. So, as ho-hum as we've been toward recent as a service models announced from the likes of HPE with GreenLake and Dell with Apex, the timing of those offerings may be pretty good actually. Now, let's expand on some of the data that we showed a couple of weeks ago. This chart shows responses from 282 execs on actions their organizations are taking over the next three months. And the deltas are quite traumatic from the early part of this chart on the left hand side. The brown line is hiring freezes, the black line is freezing IT projects and the green line is hiring increases and that red line is layoffs. And we put a box around the sort of general area of the isolation economy timeframe and you can see the wild swings on this chart. By mid last summer, people were kick starting things and more hiring was going on and the black line shows IT project freezes came way down and now we're on the way back up as our hiring freezes. So we're seeing these wild swings and organizational actions and strategies which underscores the lack of predictability as with supply chains around the world. This is likely due to the fact that organizations pre-pandemic, they were optimized for efficiency, not a lot of waste rather than business resilience. Meaning, again, not a lot of fluff in the system or if there was it got flushed out during the pandemic. And so the need for productivity and automation is becoming increasingly important, especially as actions that solely rely on headcount changes are very, very difficult to manage. Now let's dig into some of the vendor commentary and take a look at some of the names that have momentum and some of the others possibly facing headwinds. Here's a list of companies that stand out in the ETR survey. Snowflake once again leads the pack with a positive spending outlook. HashiCorp, CrowdStrike, Databricks, Freshworks and ServiceNow, they round out the top six. Microsoft, they seem to always be in the mix as do a number of other security and related companies including CyberArch, Zscaler, Cloudflare, Elastic, Datadog, Fortinet, Tenable and to a certain extent, Akamai, you can kind of put them sort of in that group, CDN, they got to worry about security, everybody worries about security, but especially the CDNs. Now the other software names that are highlighted here include Workday and Salesforce. On the negative side, you can see Dynatray saw some negatives in the latest survey, especially around its analytics business. Security is generally holding up better than other sectors but it's still seeing greater levels of pressure than it had previously, so lower spend and defections relative to its observability peers. That's really for Dynatrace. Now the other one that was somewhat surprising is IBM. You see the IBM was sort of in that negative realm here but IBM reported an outstanding quarter this past week with double digit revenue growth, strong momentum in software, consulting, mainframes and other infrastructure like storage. It's benefiting from the kindral restructuring and it's on track IBM to deliver $10 billion in free cash flow this year. Red Hat is performing exceedingly well and growing in the very high teens. And so look, IBM is in the midst of a major transformation and it seems like a company that is really focused now with hybrid cloud being powered by Red Hat and consulting and a decade plus of AI investments finally paying off. Now the other big thing we'll add is IBM was once an outstanding acquirer of companies and it seems to be really getting its act together on the M&A front. Yes, Red Hat was a big pill to swallow but IBM has done a number of smaller acquisitions I think seven this year, like for example, Turbinomic, which is starting to pay off. Arvind Krishna has the company focused once again and he and Jim Kavanaugh IBM CFO seem to be very confident on the guidance that they're giving in their business. So that's a real positive in our view for the industry. Okay, the last thing we'd like to do is take 12 of the companies from the previous chart and plot them in context. Now these companies don't necessarily compete with each other, some do, but they are standouts in the ETR survey and in the market. What we're showing here is a view that we like to often show it's net score or spending velocity on the vertical axis and it's a measure, that's a measure of net, the net percentage of customers that are spending more on a particular platform. So ETR asks are you spending more or less? They subtract less from the mores. I mean I'm simplifying but that's what net score is. Now in the horizontal axis, that is a measure of overlap which measures presence or pervasiveness in the data center. So bigger the better. We've inserted a table that informs how the dots in the companies are positioned. These companies are all in the green in terms of net score and the right, that right most column in the table insert is indicative of their presence in the data set, the end. So higher again is better for both columns. Two other notes. The red dotted line there you see at 40%, anything over that indicates a highly elevated spending momentum for a given platform. And we purposefully took Microsoft out of the mix in this chart because it skews the data to its large size. Everybody else would cluster on the left and Microsoft would be all on the right so we take them out. Now as we noted earlier, Snowflake once again leads with a net score of 64%, well above the 40% line. Having said that, while adoption rates for Snowflake remain strong, the company spending velocity in the survey has come down to earth. And many more customers are shifting from where they were last year and the year before in growth mode, i.e. spending more year to year with Snowflake to now shifting more toward flat spending. So a plus or minus 5%. So that puts pressure on Snowflake's net score just based on the math as to how ETR calculates its proprietary net score methodology. So Snowflake is by no means insulated completely to the macro factors. And this was seen especially in the data in the Fortune 500 cut of the survey for Snowflake. We didn't show that here, just giving you anecdotal commentary from the survey which is backed up by data. So it showed steeper declines in the Fortune 500 momentum, but overall Snowflake, very impressive. Now, what's more, note the position of Streamlit relative to Databricks. Streamlit is an open source Python framework for developing data driven data science oriented apps. And it's ironic that its net score at shared end is almost identical to those of Databricks. As the aspirations of Snowflake and Databricks are beginning to collide. Now, however, the Databricks net score has held up very well over the past year and is in the 92nd percentile of its machine learning and AI peers. And while it's seeing some softness, like Snowflake in the Fortune 500, Databricks has steadily moved to the right on the X axis over the last several surveys, even though it was unable to get to the public markets and do an IPO during the lockdown tech bubble. Let's come back to the chart. ServiceNow is impressive because it's well above the 40% mark and it has 437 shared end on this cut, the largest of any company that we chose to plot here. The only real negative on ServiceNow is more large customers are keeping spending levels flat. That's putting a little bit pressure on its net score, but that's just conservatism. It's kind of like Snowflake, same thing, but at a larger scale. But it's defections, ServiceNow as in Snowflake as well. Its defections remain very, very low, really low churn, below 2% for ServiceNow, in fact, within the dataset. Now, it's interesting to also see fresh works hit the list. You can see them as one of the few ITSM vendors that has momentum and can potentially take on ServiceNow. Workday on this chart, it's the other big app player that's above the 40% line. And we're only showing Workday HCM FYI in this graphic. It's Workday Financials, that offering is below the 40% line, just for reference. Now let's talk about CrowdStrike. We attended Falcon last month, CrowdStrike's user conference, and we're very impressed with the product vision, the company's execution, it's growing partnerships, and you can see in this graphic, the ETR survey data confirms the company's stellar performance with a net score at 50%, well above the 40% mark, and importantly, more than 300 mentions. That's second only to ServiceNow amongst the 12 companies that we've chosen to highlight here. Only Microsoft, which is not shown here, has a higher net score in the security space than CrowdStrike. And when it comes to presence, CrowdStrike now has caught up to Splunk in terms of pervasion in the survey. Now CyberArk and Zscaler are the other two security firms that are right at that 40% red dotted line. CyberArk, for names with over 100 citations in the security sector, is only behind Microsoft and CrowdStrike. Zscaler, for its part in the survey, is seeing strong momentum in the Fortune 500 unlike what we said for Snowflake, and its pervasion on the X axis has been steadily increasing. Again, not that Snowflake and CrowdStrike compete with each other, but they're two prominent names, and it's just interesting to compare peers and business models. Cloudflare, Elastic, and Datadog are slightly below the 40% mark, but they made the sort of top 12 that we showed to highlight here, and they continue to have positive sentiment in the survey. So, one of the big takeaways from this latest survey, this really quick snapshot that we've taken, as you know, over the next several weeks we're going to dig into it more and more. As we've previously reported, the tide is going out and it's taking virtually all the tech ships with it. But in many ways, the current market is a story of heightened expectations coming down to earth, miscalculations about the economic patterns and the swings, and imperfect visibility. Leading, Barclay's analyst, Ramo Lenshaw, to ask the question to guide or not to guide in a recent research note he wrote, his point being, should companies guide or should they be more cautious? Many companies, if not most companies, are actually giving guidance. Indeed, when companies like Oracle and IBM are emphatic about their near-term outlook and their visibility, it gives one confidence. On the other hand, reasonable people are asking, will the red-hot valuations that we saw over the last two years from the likes of Snowflake, Crowdstrike, MongoDB, Akta, Zscaler, and others, will they return? Or are we in for a long, drawn-out, sideways exercise before we see sustained momentum? And to that uncertainty, we add elections and public policy. It's very hard to predict right now. I'm sorry to be like a two-handed lawyer, you know, on the one hand, on the other hand, but that's just the way it is. Let's just say, for our part, we think that once it's clear that interest rates are on their way back down and will stabilize at under 4%, and we have clarity on the direction of inflation, wages, unemployment, and geopolitics, the wild swings and sentiment will subside. But when that happens is anyone's guess. If I had to peg, I'd say 18 months, which puts us at least into the spring of 2024. What's your prediction? You know, it's almost that time of year. Let's hear it. Please keep in touch and let us know what you think. Okay, that's it for now. Many thanks to Alex Meyerson. He is on production and he manages the podcast for us. Ken Schiffman, as well, is our newest addition to the Boston studio. Kristen Martin and Cheryl Knight, they helped get the word out on social media in our newsletters. And Rob Hoef is our EIC editor-in-chief over at SiliconANGLE. He does some wonderful editing for us, thank you all. Remember all these episodes? They are available as podcasts, wherever you listen to search, breaking analysis podcasts. I publish each week on wikibon.com and siliconangle.com. Or you can email me at david.volante at siliconangle.com or DM me at dvolante. Or feel free to comment on our LinkedIn posts and please do check out etr.ai. They've got the best survey data in the enterprise tech business. If you haven't checked that out, you should. It'll give you an advantage. This is Dave Vellante for theCUBE Insights, powered by ETR. Thanks for watching, be well, and we'll see you next time on Breaking Analysis.