 From theCUBE Studios in Palo Alto in Boston, connecting with thought leaders all around the world, this is a CUBE Conversation. We've been reporting that the COVID pandemic has created a bifurcated IT spending outlook. Legacy on-prem infrastructure and traditional software licensing models, they're giving away to approaches that enable more flexibility and business agility. Automation initiatives that reduce human labor, labor that's not value add, has really been gaining traction for the past 18 months. The pandemic has only accelerated the focus on such efforts and robotic process automation or RPA, along with machine intelligence, have been the beneficiaries relative to other segments of the IT stack. Welcome to this week's Wikibon CUBE Insights powered by ETR. My name is Dave Vellante and in this breaking analysis, we're going to update you on the latest demand picture for the red-hot RPA sector. We'll also focus on two main areas today. First, we're going to review the basics of the RPA space for those that may or may not be as familiar with the market. Next, we'll share with you the spending data and outlook in the RPA space from ETR and we'll really dig into the COVID impact on this market segment and take a look at the competitive outlook. We're going to pay particular attention to the leaders in this space. And then we're going to wrap up. So let me start with kind of the RPA basics. If you're not familiar with RPA, here's what you really need to know. RPA gained traction by taking software robots and pointing them at existing applications to mimic human behavior and automate repeatable and well understood processes, keyboard behavior that is. Now a challenge with early RPA implementations is that most customers chose to point these bots at legacy backend office systems, you know, that open emails and fill out forms and the like. So that's great because it digitizes processes around legacy systems, awesome ROI. But the problem is that these bots, well, they interact with a user interface of that application. And many of these apps, they really don't have an API. So any change in data or the interface breaks the automation down. Now more recently, automations are interacting to apps through APIs. That makes them less brittle. But of course, you know, the quality of APIs, as you well know, will vary. So enter machine intelligence into the equation. There's been a lot of discussion around the intersection of RPA and AI. And that's allowed organizations to automate more processes and do so in a way that takes an augmentation approach using things like natural language processing or speech recognition and machine learning to iterate and improve automations. And you know, this trend holds a lot of promise and there's a lot of talk about it in the marketplace, particularly in the form of really trying to understand which processes to automate and where the best ROI can be achieved for organization. But it's important to note, it's really still early days with this AI intersection. Nonetheless, investors, you know, they're ahead of the game. They've poured money into the space as we've been reporting now for, you know, well over a year or two. UiPath and Automation Anywhere have raised close to $2 billion and have been growing very, very rapidly. We're going to talk more about that. Existing players like Blue Prism, they've actually benefited from the automation tailwind and other, you know, process, business process players take for example, like Pegasystems. I mean, they started in the early 80s. They've added RPA to their platform, as have many others. By the way, including Microsoft who has barely been trying to crack into this market for a while. In fact, Microsoft just bought a small company called Soft Emotive. And to really try to shore up its RPA game. But, you know, just a quick aside, in our view Microsoft is they're well behind the leaders. It's going to take years for them to get where the leaders are today. Yeah, but it's Microsoft. So you don't want to ignore them. Now the big buzzword here is hyper automation. Evidently it's a term coined by Gartner and UiPath has picked up on this in a big way. And so is automation anywhere. Now both those companies are in hyper growth, so it plays. More established companies, for example, Pega, you know, they look at the term differently. You know, of course their vision is, RPA is a small portion of their vision. These established firms, they want to incorporate their business process automations that have been built over decades into a systems view of the organization using existing platforms. The upstarts, of course, they want to build from new platforms. What's really happening in the marketplace, and like in many situations, is this emergence of a hybrid, a quasi equilibrium. Here we saw this in mainframes, we certainly saw it in middleware, enterprise data warehouses, and we've seen it in the cloud. You know, where most companies don't just throw away the investments that they've made in legacy systems. You know, they're stable, they're operationalized, and rather what they do is they overlay the more modern technologies, and they kind of create an abstraction layer of their business that incorporates the old and the new. But the growth is much, much higher in the new, as we know, and that leads me to the TAM, the total available market. Let's look at the RPA TAM. You know, we think the TAM expansion opportunity is pretty substantial. We put this chart together a while back that really underscores that progression of RPA from simple bots automating back office functions to really infusing automations in virtually all applications. You know, if you expand the definition beyond RPA software into the broader automation opportunities, you know, think about it, this could be much, much larger than depicted here, maybe well over a hundred billion dollar TAM as AI-powered automation becomes fundamental to every organization in their operating model. Anyway, it's a big opportunity, and the data suggests that it's growing rapidly. So let's turn to the data, let's look at the spending and bring ETR into the equation. So which technologies are showing new adoptions in tech? On balance, the tech sector has done pretty well despite this pandemic. At the time of this video, the NASDAQ composite is up about a point and a half year to date. And as we know from previous surveys that heading into 2020, there was a pullback and a narrowing of new technology adoptions as organizations began to operationalize their digital initiatives and place bets. This chart shows new adoptions across three survey dates. The gray is April last year. The blue is January, which is pre-pandemic really. And the survey of more than 1200 IT buyers is really the latest one, which is the April. So this survey took place at the height of the US lockdown. And you can see, look at RPA, it's got 22% new adoptions. What does that mean? It means that 22% of the customers in the survey were planning RPA spend that are planning for RPA spend are planning new adoptions. That's a figure that's as high as machine learning and artificial intelligence. And of course, as we said, these two technologies are increasingly playing a role together. So RPA adoptions more than containers, more than video conferencing, which has had this tailwind from work from home and more than cloud, more than mobile device management. So it's really one of the hottest sectors in terms of new adoptions. Now let's look at some of the players in RPA and try to really better understand their positions. Here's a chart that uses the two primary metrics metrics that we've been sharing over the past year. Net score or spending momentum is on the Y axis and market share, which is a measure of pervasiveness in the data set is on the X axis. The chart plots RPA players in the ETR data set. And you can see UI path and automation anywhere, the two market leaders, they show both spending momentum and market awareness. Then you see blue prism and Pegas in there and the rest of the pack. Now I'll say this about Pegasystems. I recently spoke to their CEO, Alan Trefler. He's an amazing self-made billionaire. He's got a great business. Pegas really doesn't see itself anyway as an RPA player. I don't either. RPA is really a small part of their story, but they're in the data set and certainly automation related. So it's worth showing, but it's a bit of an oranges and tangerines comparison. Now, notice in the upper right of this chart, you can see that the net scores are in the green shade and there's a little bit of red in there. But remember, net score is a simple metric, sort of like net promoter score, NPS. It subtracts customer spending less from those spending more and nets the difference. And you can see very, very strong net scores for both UI path and automation anywhere. And I'm going to discuss that more in a moment. But there's lots of green in the chart. And even PEGA, as I said, it's really not an RPA specialist. They got a solid net score. Now let's look at a time series of this net score and the spending momentum. What we do here is this chart takes the three leaders, UI path, automation anywhere, and blue prism, and it plots their net scores over time. Goes all the way back to the January 18 survey. Now let me make a couple of points here. UI path in automation anywhere, 70% plus net scores is very impressive and amongst the highest in the data set. Even though you see some of the loss in momentum in the UI path line and the convergence with automation anywhere, they're both very, very strong. And you can see in the upper right, you can see the shared N, which is an indicator of the presence of the company in the data set, how many responses out of the 1200 plus. So you might say, well, wait a minute, UI path, they had layoffs last fall and automation anywhere. They more recently just recently had layoffs. How can they show such strength? Well, I'll make a few points here. First, fast growing companies like this that have raised nearly a billion dollars each, they've got investors to serve and they're going to course correct when they feel like there's some slack in the system. To me, it's not a sign of fundamental trouble. Second, both of these companies are going to continue to invest heavily on research and development. UI path has 60 openings on its website, mostly in engineering, automation anywhere. They only have nine openings, but I would expect both companies to up their engineering hiring, especially given the Microsoft acquisition today. Third, remember, this is not an indicator of the amount of money spent in absolute dollars. Rather, it looks at spending momentum in dollar terms. As well, if you were to cut the data by larger companies, let's say the Fortune 1000, where the average contract values are higher, you'd see that UI paths and net score jumps to 77%. Automation anywhere would drop into the 60s and loot prison would stay about the same where it is today. So let's look, for example, in the global 2000. So we'll expand that notion of Fortune 1000. Let's go to the global 2000 where there's more of an end to slice. And you can see the picture changes from the overall data sample. This chart shows the net scores in the global 2000 where the ends are more than 25 responses across all the three surveys. Gray is last April, blue is January, yellow is April 2020. And you can see the year on year decline and the modest step down during the COVID lockdown, which again, surveyed in April, but still very elevated net scores for UI path and automation anywhere, and respectable for the other. So the point is COVID has not really crushed the RPA market. I mean, if anything is witnessed by the new adoptions, it's maybe, it's certainly better off than most IT sectors. Now let's dig into the net scores of the two leaders a little bit more, UI path and automation anywhere. Remember, net score is a very important metric and I want to spend a moment explaining how we use it. You see this wheel chart, this red, green, gray, it really shows how the net score method is applied. Now we've taken the UI path example from the April survey. Net score works by asking buyers relative to last year, are you adopting new, that's the 28%, are you increasing spend by 6% or greater, that's 51%, are you expecting flat spending, that's 15%, or a decrease in spend of 6% or more, or finally, are you replacing the vendor, chucking them out. So look at this, you can see for UI path added up, 79% of respondents expect to increase spending in 2020, relative to 2019. Again, remember, this survey was taken at the height of the COVID lockdown. Let me show you the data for automation anywhere. Same exact methodology. 72% of automation anywhere customers plan to spend more, only 1% plan to spend less with zero replacements. So very strong fundamentals as it relates to spending momentum for both UI path and automation anywhere. Now, how is presence or what we call market share in the dataset changing on a year and year basis? Well, this is a last data point that I want to show and it relates to that metric of market share, which again is the measure of pervasiveness. It's calculated by dividing the number of mentions of a vendor in a sector by the total mentions of that sector, in this case, RPA. And this chart shows the year on year change in customer growth, comparing market share from the April 20 survey with that from the April 19 data. And you can see the yellow line at 11% is the sector average. UI path has the fastest growth, automation anywhere is growing faster than the market average and blue prism is below the average. Now this looks back to last year and it'll be interesting to see how this picture changes with the next survey based on what we're seeing with the next net scores, which is a forward looking metric. All right, let's wrap. So we're seeing that the bifurcated market is highlighting that the automation trend generally is real and that the RPA drill down specifically shows us an example in action. We think that had COVID-19 not hit, these numbers would actually be higher by maybe as much as 10%. But in the near to midterm, we would expect a pretty fast return to normal patterns of demand if they put normal on air quotes for RPA. In fact, we don't expect a real V shape recovery across the board, but RPA is one of those areas where we actually may see such a rebound. The pandemic really underscores the need to accelerate digital transformations. RPA, we think is going to be a central player in that movie along with AI and cloud. All right, we have to leave it there for now. So remember, these episodes, they're all available as podcasts. So just all you have to do is search breaking analysis podcasts. Please subscribe to the series. We'd appreciate that. And check out ETR.plus for all the data. I also publish a full report every week on wikibon.com tons of data there as well and siliconangle.com has all the news and I publish there. All right, this is Dave Vellante. Thanks for watching this episode of theCUBE Insights powered by ETR. We'll see you next time.