Last week, I was in San Francisco attending Deutsche Bank’s 2010 Technology Conference (September 14-16). The following post is a high-level summary of my key takeaways, intended to inform you of key industry themes and changes within a brief reading (rather than a lengthy detailed vendor-by-vendor report).
I had an opportunity to hear from, and speak with, many more organizations than the few I discuss below. However, the late-quarter timing of the conference left little new information to be divulged (or to be allowed to be divulged). As such, I have chosen to write about both the items that stood out to me as I watched and listened and those vendors who received the most attention, positive or negative. At the end of my summary, I have provided a list of tickers for all the conference participants with whom I had some level of interaction. I encourage questions and feedback regarding the comments below and will be sure to respond to any requests for information.
End Market Volatility Continues Unabated
End market volatility is far from being a new topic of discussion. However, I was surprised – at least mildly – at how a trend has yet to be established in either direction. The upbeat attitude from one management team was frequently a full-spectrum attitude change from the morose and more-than-cautionary feedback from the next team. I am sure the conference timing influenced the cautionary tone of many participants. Stability trends, however, have yet to emerge regardless of industry, vertical, or geographic market.
Consolidation Seemed the Only Investor Topic
Consolidation was THE key topic of discussion, and the market volatility has left many investors impatiently seeking return and blatantly asking participants when it would be time to consider volunteering an acquisitive sale to a larger competitor. The full-spectrum differences in vendor experiences during this economic cycle has separated the wheat from the chaff, and struggling vendors are open to merger discussions but are blaming the speculative nature of the markets for hyping premiums that now make initiating these discussions difficult.
Vendors who have had a history of significant financial resources and a focus on market-leading development (such as IBM) were highly critical of their high-level peers’ lack of R&D during the most recent downturn, as evidenced by recent M&A activity. IBM, among others, believe that its cyclical downturn investments will help it lead at even the earliest signs of an upturn while peers will be left scrambling for last-minute technology-based acquisitions, over-paying in the midst of speculative premiums, and lagging due to timely and costly integrations.
Speaking generally, I would tend to agree with the capitalistic commentary of IBM. However, IBM’s commentary is built on two assumptions: (1) competitors do not have time to integrate, and (2) competitors are overpaying. In response, the current economic environment has proven to not be a typical sine wave cycle, and if a period of acquisition occurs now, a time period for integration may still be available before a return to economic growth. Additionally, competitors may be overpaying based on IBM’s cost of capital model, but may not be overpaying based on the competitions’ model. IBM’s criticism assumes everyone’s R&D is equally as efficient as IBM’s, when in reality, the competition may have “overpaid” by attempting (and possibly failing) to internally develop what is now under the microscope for acquisition.
Salesforce.com (CRM) and the Wave of Collaboration
Salesforce.com used the opening keynote to demonstrate its new collaborative interface, “Chatter.” Built on the concept that Facebook has trained over one-half billion users how to instantly interact, share information, and disperse knowledge, Chatter is a real-time, interdepartmental collaboration platform that is operating-system and device agnostic. While the demonstration was seamless and inspiring, I have grown to equate CRM with “ground-breaking” innovation and market-leading evolution. I was thus surprised and disappointed by CRM’s presentation of a (1) product that most likely will not be a significant revenue driver and (2) a product that has been/is/will be introduced by almost every vendor in the business platform market. A platform for team collaboration, while market-meeting, is not market-leading.
Oracle (ORCL) Fusion Apps Is Anxiously Awaited at OpenWorld
Much of the less-than-surprised reaction to CRM’s Chatter release was due to the lack of understanding regarding Oracle’s release of Fusion Apps at this week’s OpenWorld. Every single enterprise software vendor was asked at least once: “What do you know about Fusion Apps?” All answers, however, were the same: “You will know the same day we know.”
Microsoft’s (MSFT) SharePoint Provides Fuel for More than One Vendor
In sharp contrast to the lack of Oracle Fusion Apps information, many vendors were openly verbal about their success through integration with Microsoft’s SharePoint enterprise collaboration tool. Open Text (OTEX), an award winning Microsoft partner, has built its product on top of the SharePoint code base to ensure seamless integration. Open Text has received considerable attention along the theme that over 60% of the company’s new business is compliance-driven in an ever-increasing regulatory environment. Open Text, however, has also received criticism for its lack of organic growth and a roll-up acquisition strategy that is quickly running out of potential future candidates. Open Text concluded a barrage of almost belligerent organic growth/acquisition strategy questions by stating (the only vendor that did state, in fact) that it had been given access to Oracle’s code base for Fusion Apps and would be integrating as seamlessly as its execution with SharePoint.
Chip Level Security Appliances with Fortinet (FTNT)
One of the most compelling participants was Fortinet. A developer of proprietary ASICs for chip-based, high-speed and deep-packet security screening, Fortinet’s technology and success make this organization a significant strategic acquisition target from a multitude of enterprise network, datacenter hardware, and telecommunication infrastructure angles. Unfortunately, in the current market volatility I mentioned earlier, Fortinet has already been identified as a premier technology leader, and the stock carries more than a small premium.
High-Speed Secure Wireless Networks with Aruba Networks (ARUN)
Speaking of compelling vendors with a major premium, during its general session, Aruba Networks attracted twice the number of analysts than there were seats. Touting its significant contracts with the U.S. Navy, U.S. Army, and several of the largest domestic college campuses, Aruba Networks continues to be the premier provider of large-scale, high-speed, and high-security wireless network infrastructure. As the CFO himself said, “I go to bed every night and wake up every morning thinking about Cisco,” but Aruba Networks seamlessly integrates and it continues to claim that over 85% of its customer base uses Cisco Solutions (CSCO) for the back-end networking but switches to Aruba Networks once the hard-line reaches a wireless need.
Thought-Provoking One-Off Commentary
I’d like to conclude by posting a few comments by various conference participants that left me thinking, and in some cases, prepping for a new post.
Dell (DELL): The reduced energy footprint of new desktops allows enterprises to save more in energy costs (as compared to existing infrastructure) than the actual cost of purchasing the desktop.
Dell: Desktop prices have fallen to a point where the ROI for a thin-client is no longer compelling. Enterprises are now deciding: for the same price, should the investment be made at the desktop level or at the datacenter level (with a thin client).
Motorola (MOT) & Dell: Android provides healthy competition and forces Microsoft to innovate at a faster pace. It is neither company’s intention, however, to take Android to the high-end smartphone market (i.e., Android phones should not be considered “iPhone killers”).
Motorola: Android, in its current state, is not supposed to be a tablet OS; next-generation development is required. Additionally, Android optimization at the chip-level will be required before Android can even be considered an iOS competitor (Apple is already vertically integrated).
A123 Systems (AONE): (In response to an analyst question) Used Lithium Ion automotive battery packs are being considered for energy grid load shedding, i.e., after approximately 10 years, the 80% recharge capability is no longer useful for automotive applications, but the battery is still functional for energy grid requirements. A123 Systems cautioned analysts to be skeptical of these proposals because most proposals require a forward-purchase of the packs by the utility when 10 years of development is a significant period of time during which battery cells will evolve and could decrease in price significantly.
Qualcomm (QCOM): Emerging Markets (EM) do not have an “iPad experience” expectation, and in many cases, a tablet or smartphone is the EM consumer’s first online experience. As such, significant markets exist for computing products despite the emphasis on an Apple experience in domestic markets.
American Superconductor (AMSC): In the interim, there is a serious need for wind turbine blade development. Blade technology has not kept pace with turbine development, and in many cases, blades are such a great length that they cannot be delivered along the narrow and twisting roads of the rural areas where many wind farm developments are planned. American Superconductor has taken a meaningful stake in Blade Dynamics, but will remain a wind turbine part manufacturer without the intention of becoming a turbine manufacturer.
As I mentioned in my opening, I had an opportunity to interact with many more vendors than the few I have discussed above. I always encourage feedback on my notes and I will be sure to respond to any posted questions. Conference participants with whom I interacted: ADSK, AMSC, AONE, ARUN, ATVI, CRM, CSCO, DELL, DLB, ELON, EMC, FFIV, FTNT, IBM, MOT, MOTR, NUAN, OTEX, QCOM, SAP, SFSF, SNIC, TRMB, and ULTI