SAIC reduced real estate holdings to cut costs and prepare for the impending split

In May SAIC announced that it would sell its Tyson’s Corner headquarters in McLean, Va., to a real estate investment company in a transaction worth between $120 million and $140 million. TBR believes SAIC is taking this action as a part of its restructuring plan to save a total of $70 million by reducing its facility footprint by 30%. We believe SAIC will continue to reduce its facility footprint nationally by consolidating operations and terminating unneeded leases. We believe that SAIC is ramping up its efforts to locate resources at its client’s sites to form stronger client relationships and deliver better results that often come from closer collaboration.

TBR believes SAIC’s reduced real estate holdings will give the company more financial capacity to invest in its operations, as it can allocate the funds that were used to maintain facilities to critical growth initiatives. We believe SAIC is taking these actions to monetize assets before the spin-off to strengthen its balance sheet by increasing cash holdings and reducing debt.

SAIC bolstered its cyber solutions brand

In May SAIC was named a commercial service provider for the Department of Homeland Security’s Enhanced Cybersecurity Services (ECS) program. ECS is a voluntary information-sharing program that helps protect critical infrastructure by pooling together cybersecurity provider, and DHS analyzes that data and provides indicators to the commercial service providers to help them better protect their networks.

TBR believes that SAIC’s selection as a commercial service provider enhances SAIC’s cybersecurity brand and will allow it access to classified cybersecurity information that can help it offer better protection to its clients, which in turn has the potential to increase sales. We believe that SAIC will take actions in 2013 to broaden its network of alliances to strengthen its cybersecurity services portfolio, to compete with well-established cyber solutions competitors such as Lockheed Martin IS&GS and Northrop Grumman IT.

SAIC targeted the airport segment for revenue growth

SAIC was awarded a $4.5 million contract to design and implement an Integrated Airport Management System (IAMS) for Denver International Airport. The system will provide better data collection, organizational connectivity, and situational awareness and management for the airports operations.

TBR believes that SAIC will seek to expand sales of its IAMS solutions to airports around the world as airports increasingly seek data collection and management solutions that can help them drive cost-saving operational improvements. We believe that SAIC will seek to cross-sell its Critical Insight Solutions big data platform as a complement to its IAMS system development and implementation offerings to drive more value for customers by helping them process data in more efficient and effective ways. Venturing deeper into the airport management solution market will provide an expanding global market for SAIC in 2013, especially with emerging economies such as Brazil and China actively building out there regional airport networks.

Please feel free to use this content or call/email Joseph Walent (603-929-1166) for additional commentary.

Salesforce.com has rapidly gained a leadership position in the CRM space and is simultaneously gaining traction in additional functional areas

Salesforce.com is successfully diversifying revenue and sustaining high growth by addressing more functional areas outside sales and will continue to cross-sell and win new deals in coming years. Salesforce.com’s consistently high growth rates, at 28% in the quarter to $893 million, are evidence of the stability of the company’s subscription model as well as its ability to expand outside CRM. Although we believe Sales Cloud (CRM) contributes to the majority of revenue, Force.com and Service Cloud will become the company’s next billion dollar businesses, followed by Marketing Cloud and Data.com, which are expected to generate over $100 million each in FY14. In the quarter, Salesforce.com migrated the highest number of customers ever in a single quarter from SAP to Salesforce.com Sales Cloud, and in turn surpassed both SAP and Oracle to gain the top CRM spot in terms of market share (regardless of deployment method). Operating margin was negative in the quarter and will remain so through at least CY15 as the company invests for growth. Unlike competitors with historically high operating margins (SAP, Oracle and Microsoft), Salesforce.com’s shareholders are used to and more comfortable with lower margins and trust that growth will outweigh short-term losses. We believe this model will continue for Salesforce.com over at least the next few years as it invests to pull farther away from competitors, moves to a leadership position in more functional areas and increases vertical customization.

The launch of Social.com and Communities will drive revenue for Salesforce.com as the market increasingly demands social capabilities

Salesforce.com continues marketing its “customer company” mantra by launching more social-related products through Marketing Cloud and Chatter and will continue to execute on its new vision. The addition of Social.com will allow businesses to increasingly connect social into their marketing campaigns as well as directly to CRM. After the full release of Social.com in summer 2013, Marketing Cloud users will be able to connect social advertisements with the Salesforce.com CRM to publish targeted advertisements to the right people in real-time while using the monitoring and analyzing capabilities of Radian6 as well as the publishing and ad-placing capabilities of Buddy Media.

Additionally, Salesforce.com has developed Communities, an app that leverages the Chatter platform, allowing businesses to connect to and collect data from customers and employees and incorporate this data across processes such as sales, marketing, content sharing and R&D. TBR believes Communities will provide crucial data to the Marketing Cloud, creating a competitive advantage over competitors such as SAP, Microsoft and Oracle. We also believe that Salesforce.com may make more acquisitions in the marketing space, and long-time, fully integrated partner Marketo is at the top of the list.

Admittedly late to the government sector, Salesforce.com will make up ground through the launch of mobile solutions for the vertical

Government-specific product launches and partnership expansions are evidence that Salesforce.com is beginning to shift its focus from a “one size fits all” approach to a more vertically specific strategy. We believe this change is spawned from the U.S.’ (and as of May, the U.K.’s) Cloud First policy in regards to IT purchasing. Salesforce.com, among other prominent cloud vendors including Amazon Web Services (which recently won FedRAMP certification) and ServiceNow (which we believe will win FedRAMP certification) are investing in the vertical. During the FY1Q14 earnings call, CEO Marc Benioff stated that Salesforce.com is lagging in the space, and is increasing investment to improve adoption among government agencies. TBR believes that Salesforce.com has, until now, chosen to sustain growth through expansion into business functions as opposed to vertical customization, and that government-specific investments mark a change in this strategy that the company will similarly target more verticals in coming years.

Salesforce.com launched four new products in its Salesforce Mobile Solutions for Government debut to improve communication and visibility between agencies, partners and people. The mobile app development tool allows businesses to create apps that better connect people, partners and the government by offering an improved experience through the incorporation of real-time user-specific data and a user-friendly UI. Products include Rapid Response 311, Mobile Communities for Government, Government Social Command Center and Platform Mobile Solutions for Government. These products will allow the government to connect in the mobile and social ways the majority of its citizens have already adopted.

Salesforce.com is also leveraging its alliance with Deloitte to show its commitment to government mobility by offering new capabilities for Deloitte’s Federal Innovation Center. TBR believes that leveraging this partnership, paired with Mobile Solutions for Government, will enable Salesforce.com to increase its presence (to date, the company has an estimated 500 government customers) in the space.

Please feel free to use this content or call/email Jillian Mirandi (603-929-1166) for additional commentary.

Lenovo is effectively navigating a difficult PC environment by focusing on profit expansion

As global PC demand continued to dwindle in response to elongated refresh cycles and cannibalization from mobile devices, Lenovo’s PC revenues declined by 1.6% year-to-year, but still outpaced the industry average, as major PC vendors like HP posted double-digit declines. Lenovo exploited a wide range of new touch-based Windows 8 notebooks such as the IdeaPad Yoga series to help drive a more premium sales mix in the global consumer and SMB market segments. TBR believes a stronger premium consumer PC portfolio combined with a strengthened presence in North America contributed to a 160 basis point increase year-to-year in corporate gross margin to 12.3% in 1Q13.

Lenovo’s focus in PCs will be to drive further margin gains without sacrificing its market position as it fuels growth in other product categories, such as smartphones, tablets and server products. TBR believes that by shifting PCs into the protect status of Lenovo’s corporate protect-and-attack growth strategy, the company is well positioned to achieve margin gains in PCs as it allocates resources to new growth opportunities. Mobile device expansion will help counter slowing PC sales and support corporate growth

TBR expects Lenovo will continue to augment limited growth in PCs with global expansion of its mobile devices. In 1Q13 Lenovo achieved 4.5% revenue growth year-to-year, bolstered by the Mobile Internet and Digital Home (MIDH) segment, which grew nearly 75% year-to-year, accounting for more than 9% of revenue. Growth in mobile was highlighted by continued smartphone expansion in China as well as modest growth in other emerging markets such as India.

As the number two smartphone vendor in China, falling closely behind Samsung, Lenovo has established scale in the region and has set its sights on improving profitability after achieving a positive smartphone operating margin for the first time in calendar 4Q12. Following investments in expanding its smartphone portfolio in calendar 2012, Lenovo strengthened its sales mix of premium 5-inch and larger smartphone models, such as the K900. TBR believes an improved mix, coupled with scaling benefits helped strengthen Lenovo’s smartphone profitability in 1Q13 and will continue to improve throughout 2013 as the company builds its footprint in other emerging markets such as Russia.

Coinciding with the purchase of CCE in Brazil, Lenovo will realign its geographic units to cater more explicitly to LATAM customers

In 1Q13 Lenovo announced a reorganization of its geographic segments by breaking out LATAM from APAC and creating the Americas business unit. TBR believes the realignment will help Lenovo more effectively execute on its growth strategy in LATAM as it integrates with CCE by driving synergies with manufacturing and supply chain operations in the Americas. As a result, we expect Lenovo’s profitability in the Americas to improve throughout 2013.

Please feel free to use this content or call/email Beau Skonieczny (603-929-1166) for additional commentary.

If 4Q12 (HP’s fiscal 1Q13) heralded HP’s first steps toward developing, as CEO Meg Whitman stated during a March 2013 analyst summit, “solutions for the new style of IT,” then the actions taken by the company in 1Q13 (fiscal 2Q13) have widened paths into new areas of consumer and enterprise markets. By augmenting its consumer product lines to include devices built on Google’s Android operating system, unifying its sprawling enterprise product portfolio into integrated solutions that feature unique technology, the company continues to make strides toward Whitman’s goal of transforming the technology stalwart into a more agile and adaptable company.

However, while its expanded focus beyond Microsoft’s Windows and leading-edge technology such as its innovative Moonshot microservers illustrate HP’s awareness of the trends that will shape the IT marketplace, the moves fail to halt a two-year long streak of annual revenue declines from its hallmark PC and x86-based server product lines.

Chromebooks and Android-based tablets open new roads for HP into the mobile customer base but will not offset steep declines in sales of Windows PCs

TBR believes HP’s Chromebooks, Android notebooks and tablets, led by the Pavilion series Chromebooks, and recently released SlateBook x2 and Slate 7, will lead to a renewed interest in PC vendors’ computing devices. The devices are aimed at, in particular, countering the lengthening life cycles of reliable PCs that have deferred purchases or drastically slowed consumers from buying new devices and PCs and enterprises refreshing their fleet of client endpoints. As these new form factors mature, we anticipate HP will integrate other hardware, software and services from its other product families to differentiate Chromebook and Android offerings and establish them as bona fide computing devices.

However, substantial revenue gains for HP from sales of these devices will be limited through 2H13. Despite efforts by HP to promote the devices as an entry point into its overall PC portfolio, and augment the devices in 2H13 as Chromebooks and tablet PCs gain traction in the marketplace, TBR expects HP’s PC revenues and unit shipments to continue to decline. Mobile-centric vendors such as Samsung and Apple have gathered much of the market’s momentum as Windows-based PC users flock to Android or iOS ecosystems that fit better into consumers’ and enterprises’ changing computing habits.

The company’s Personal Systems Group (PSG), Imaging and Printing Group (IPG) and Enterprise Group (EG) segments continued to be caught in the wake of a declining global PC market. Overall revenue in 2Q13 declined on an annual basis for the seventh consecutive quarter, falling 10% year-to-year to $27.6 billion, weighed down by a dramatic annual revenue decline of 20% in PSG, 10% in EG and 1% in IPG.

Notebook PC shipments, which in 1Q13 comprised 49% of PSG’s revenue, were down 24% annually, in parallel with a 24% drop year-to-year in notebook revenues. Continued pressure from rivals such as Lenovo and Asus who are willing to tolerate lower PC margins, and rapid proliferation of Android and Apple tablets and smartphones into the consumer marketplace continue to erode HP’s PC market share. Consumer printing hardware shipments fell 13% from 1Q12, contributing to a 1% annual drop in IPG revenue as consumers abandon stand-alone digital printers in favor of sharing and storing photos and documents via a wide range of online storage readily available through social networking or an Internet service provider.

Revenue from HP’s industry-standard x86 servers and storage products declined 12% and 13%, respectively. Traditional tape and hard-disk-based storage dropped a marked 33% to $508 million as enterprises move away from hardware-heavy legacy data center solutions and towards software-defined server capabilities and storage capacities. As a result, HP’s converged storage revenues climbed 48% year-to-year.

HP’s Moonshot technology harkens back to its legacy as an innovator, but a fierce fray of competition will continue to challenge its leading x86 market share

While TBR believes that x86 server vendors face no short-term threat from up-and-coming server technologies such as ARM and Atom, TBR believes x86-centric vendors such as HP will be compelled to engineer innovative technology that addresses a critical problem facing their enterprise customer base: the volume of network-connected devices is overwhelming traditional data center infrastructure. With consumer and enterprise data requirements projected to increase exponentially, the space, cost and power demands of traditional x86 technology are placing today’s data centers at a breaking point.

HP’s Moonshot servers show microserver technology will soon illustrate the ability of servers that reduce costly energy consumption and shrinking space requirements match x86 performance for workloads such as social, cloud, big data and mobile. Although single microserver processor cores cannot match the performance of an x86 processor, they provide enterprises with greater flexibility to adapt to changing workload or hardware requirements.

TBR believes Moonshot places HP on the leading-edge of server technology, ahead of its rivals and better positioned to claim a larger share of enterprises integrating more complex and increasingly software-defined workloads into their data centers. However, HP’s lead over Dell, Oracle and Fujitsu continues to shrink as HP’s market share is eroded by the combination of lower-cost offerings from rivals in midrange storage used by larger SMBs and smaller enterprises — an important customer segment for HP — as well as greater use of equipment-reducing virtualization and consolidation technology by large enterprises.

Please feel free to use this content or call/email Jack Narcotta (603-929-1166) for additional commentary.

Workday’s unified portfolio strategy will accelerate human capital management (HCM) sales — and including financials will drive revenue growth into CY15

Workday is positioned for accelerating sales of its core HCM portfolio across 2013, courtesy of an established brand and high-profile customer success stories. Revenue performance in CY1Q13 reflects those accelerating sales, as total revenue grew 61% year-to-year to top $91 million while subscription revenue exceeded $68 million (rising 85% year to year). With the bulk of Workday’s subscription revenue base stemming from its HCM portfolio, we maintain that install base defense will be a critical 2013 market tactic as the company’s increased profile attracts attention from competitors. As demonstrated by the launch of Workday 19, Workday remains committed to product updates every three months. To maintain that timeline while expanding its portfolio will require Workday to escalate investments in personnel and development across CY13.

TBR projects that once Workday looks beyond install-base-led sales for growth in its financial management suite, the company will be challenged to expand its brand and go-to-market messaging accordingly without material investment in sales and marketing personnel and resources — extending the near-term window in which Workday will operate at a loss. However, we feel these investments in sales, marketing and R&D personnel are critical steps to protect the Workday install base from competitors such as Oracle and SAP. Workday’s consistent, constant approach to applications updates and refreshes has established the company as a credible technology leader, and monetizing new hires will accelerate the development and delivery of high-value features (including embedded analytics) to a growing install base also deepening client relationships. TBR sees this approach as critical to ensuring customers of Workday’s financial management suite develops the same level of long-term loyalty demonstrated by customers of Workday’s HCM suite (with average contract lengths of three years).

Workday will increase its investment in direct and indirect sales infrastructure, extending enterprise market conversations for CY13 revenue growth

Though we maintain much of Workday’s near-term investments will center on sustaining product development and road maps, we also project that Workday will scale out direct sales resources in the Americas and EMEA across CY13. TBR believes Workday will align go-to-market investments to increase the visibility of its portfolio strategy of “one code line, one version, one community” into the enterprise, driving Fortune 500 firm sales through an expanded sales infrastructure supporting sales of Workday 19. Like enterprise software competitors Oracle and SAP, Workday remains focused on ensuring professional services revenue opportunities for its partners. We believe Workday will continue to escalate channel investment across CY13, ensuring ongoing engagement with its ecosystem of systems integrator partners and resulting in sustained customer satisfaction with Workday deployments and products.

Please feel free to use this content or call/email Elizabeth Hedstrom Henlin (603-929-1166) for additional commentary.

HP Software is expanding its portfolio and channel presence to reignite growth for 2014

TBR believes HP and HP Software in particular are correctly prioritizing long-term growth goals, staying the course with the overall business plan laid out in October 2012 despite HP Software’s third consecutive quarter of year-to-year decline (with revenue dropping 3% to $941 million) amid HP’s overall corporate declines of 10% year-to-year. We concur with HP CEO Meg Whitman’s opinion that HP customers and partners are “feeling the turnaround,” and expect a growth recovery for HP in 2014, fueled by channel and portfolio investments that will position HP to address market trends including SaaS, mobile, security and analytics.

Though license sales continue to be a lagging performer for HP Software, reflecting customer defections and concerns around sales execution, HP’s channel investments — especially around analytics products Autonomy and Vertica — will begin to have a positive impact on revenue and operating margin as an increasing number of partners are certified to sell the solutions. SaaS revenue, an initial headwind for the company, increased 18% year-to-year in 1Q13 based on product launches such as HP Anywhere and HP Agile Manager. We expect HP Software to continue launching SaaS products throughout 2013, and HP Software in convergence with other business units to expand its overall cloud portfolio with a focus to hybrid cloud capabilities.

HP Software will benefit from HP’s investment in channel programs, ensuring HP’s ecosystem will be a primary driver of HP’s CY14 recovery

With 200 partners selling software and more than 1,500 selling hardware, HP is positioning itself to realize a material opportunity for channel-led revenue growth in its software business. HP is investing to raise awareness and engagement around its ability to be a solutions provider to midmarket customers — launching new channel programs supporting security products, with the potential to expand that template across its portfolio in the long term. HP is simplifying the pricing and shortening the sales cycles to ease the channel’s sales process and ease of business with HP.

Systemic investment in and structuring of HP’s Managed Security Services partner program will not only accelerate sales of HP Software’s security portfolio but expand channel partner engagement, creating revenue growth opportunities for HP. To date, HP realizes more than 66% of overall revenue from channel sales. TBR maintains that for HP to sustain and expand on that revenue base, the company will increase partner program investment to ensure engagement with the full extent of HP’s enterprise portfolio, particularly with respect to HP’s software offerings.

HP remains committed to its Autonomy- and Vertica-fueled big data vision, and will sustain investment into CY14

HP’s CY4Q12 portfolio realignment placed Vertica (“big data analytics”) and Autonomy (“meaning-based computing”) at the heart of HP’s overall strategy for CY13 revenue growth and corporate renewal. HP Software EVP and GM George Kadifa highlighted Vertica at HP’s recent Partner Conference as having the potential to become HP’s next $1 billion business. Despite recent engineer defections, TBR sees the Vertica portfolio as ready to sell. TBR maintains that new channel programs (launching across CY13) will be the driver through which Vertica becomes a leading revenue growth driver for HP Software across CY14. Sustained product team hiring for HP’s Autonomy division and the ongoing profile given to new division Chief Robert Youngjohns emphasizes HP’s focus on the portfolio it acquired as the value driver for this division. Moreover, Kadifa’s recent discussions of Autonomy’s channel potential signals additional near-term investment and long-term growth potential for HP Software.

Increasing alignment between HP Software and the rest of HP’s businesses will drive solutions sales growth

The recent launch of HP’s Converged Systems Division (building appliances designed for cloud, big data, mobile and social solutions with HP applications atop HP hardware) as well as new SaaS additions to HP’s application performance management portfolio demonstrate the growth potential HP Software represents for HP overall and will unite diverse product offerings into solutions for customers’ business problems.

Please feel free to use this content or call/email Jillian Mirandi (603-929-1166) for additional commentary.

HP Services’ financial performance will continue to weaken through 2H13 during HP’s year of rebuilding, positioning for long-term growth in 2014 and onward

HP reported $8.27 billion in services revenue in 1Q13 (fiscal 2Q13), down 6.3% from the year-ago quarter and up 1.3% sequentially. Technology Services revenue declined 2.7% from 1Q12 to $2.27 billion, which TBR attributes to weakened unit shipments within HP’s product businesses. Technology Services revenue, however, improved sequentially by 1.3%, which we believe is a benefit of bringing Technology Services into the Enterprise Group and closer to HP hardware to better bundle service and support with technology. IT Outsourcing revenue declined 5.9% year-to-year to $3.72 billion during the quarter as customer transitions to cloud environments pilfer away at traditional ITO revenues and HP actively runs off its lower margin outsourcing contracts.

Applications and Business Services revenue was hardest hit in 1Q13, declining 120 basis points as a percentage of revenue to 27.5% and declining 10.1% from 1Q12 to $2.28 billion, which TBR believes was driven by the running off of less-profitable contracts. We anticipate the projected divestiture from MphasiS, HP Enterprise Services’ BPO-focused services subsidiary, is a result of continued declines in MphasiS-driven BPO revenues, which is in part due to declining demand from HP for MphasiS’ services as HP currently contributes to approximately 50% of MphasiS’ revenue, compared to 70% in 2010. The divestiture will negatively impact BPO revenue, but will allow HP additional financial resources to invest in emerging technologies should the company choose to divest.

Though HP reported Enterprise Services operating margin of 2.6% in 1Q13, TBR estimates operating margin for the entirety of HP Services, including Technology Services, was 9% during the quarter, down from 11.3% in the year-ago quarter. HP anticipates continued revenue and profitability headwinds in fiscal 2H13 and 2014 as many account runoffs expected for this quarter have been delayed and will be carried out later in the year. HP Services is gaining ground in the transportation vertical, in particular with increased sales in APAC

HP is gaining traction in the transportation space due to rising demand for IT transformation and optimization services from clients based in the emerging markets, particularly the APAC region. As emerging economies continue to grow, governments and private sector companies have responded by investing in more transportation infrastructure such as air travel, railroads and highways. To support the growth in transportation infrastructures, demand for technology modernization and optimization solutions has risen. In 1Q13 China’s TravelSky Group signed a deal with HP Enterprise Services to develop a next-generation Passenger Services System. HP Services also signed transportation deals with All Nippon Airways and Moscow Railways.

TBR believes HP Services will focus on increasing its transportation sales in APAC due to its relatively more robust growth prospect, particularly in China, where transportation and travel spend are significantly on the rise. We believe the company will increase transportation revenues by building up sales and delivery resources and forming alliances in the region. TBR believes that HP will encounter stiff competition in APAC transportation markets from local competitors that are often favored by governments as well as Unisys who has considerable and growing market share in the APAC transportation space. We believe HP Services will compete with Unisys by offering a more in-depth, end-to-end solution that contains software, hardware, networking, security and mobility features, which we believe Unisys cannot match as its portfolio breadth and depth is not as complete as HP’s.

First cloud, now converged systems — HP is creating virtual practice areas to improve messaging

In April HP announced the formation of its Converged Systems Group that focuses on developing converged infrastructures by incorporating expertise and capabilities from HP’s business units. HP’s converged systems combine technology infrastructure with applications and productivity tools into single systems that focus on social, cloud, mobile and big data solutions. TBR believes HP is leveraging its technology convergence strategy, as seen most recently and predominantly when it formed the Converged Cloud group, to build a better structure and foster internal collaboration around the key emerging technology areas. We believe HP will continue to further the capabilities of its Converged Systems group by adding new offerings in 2013 through internal development and alliances. The new group, while providing more cohesive and strategic messaging around converged systems, will be faced with organizational challenges as it pulls resources from each of the business units and horizontal functions.

Please feel free to use this content or call/email Cassandra Mooshian (603-929-1166) for additional commentary.

International investment and an expanded federal civilian footprint will not be enough to mitigate revenue contraction in FY14

Booz Allen Hamilton (BAH) joined the small group of federal IT contractors (along with Lockheed Martin IS&GS and General Dynamics IS&T) to report revenue growth during its fiscal 4Q13 (CY1Q13), with revenues of $1.55 billion representing a 0.3% expansion over the year-ago period. Despite this, BAH’s revenue contracted on a fiscal-year basis, with FY13 revenues of $5.76 billion representing a 1.7% contraction compared to FY12 ($5.86 billion).

BAH continues to see growth in its core investment areas of cybersecurity, cloud and engineering, as well as within its base of federal civilian clients, however positive momentum in these areas will not be enough to offset declines in defense and intelligence spending, driving single digit revenue contractions through the firm’s FY14.

Saudi Arabia represents BAH’s most attractive international opportunity

In the past 18 months, BAH has rapidly expanded its footprint in the Middle East, specifically with Gulf Cooperation Council (GCC) states, to expand its international presence; the firm opened regional headquarters in the UAE and has registered with multiple GCC states, including Kuwait, Oman and Qatar.

In February the firm announced that it had registered with the Kingdom of Saudi Arabia’s Ministry of Commerce and Industry, clearing the way for the firm to provide services to prospective public sector and commercial clients. Much like the firm’s forays in the aforementioned countries, BAH will pursue a wide variety of opportunities related to financial services, healthcare, critical infrastructure, defense and transportation.

While the UAE, Kuwait, Oman and Qatar contain substantial opportunities for new business development, Saudi Arabia represents the white whale among the GCC countries, accounting for approximately 47% of GCC GDP during 2012 and traditionally spending one third of its GDP on defense. TBR believes Saudi Arabia is crucial to BAH’s regional growth goals; without operations in the country, pursuing the Middle Eastern market would be moot.

BAH will increase its leverage of thought leadership as a key differentiator to prospective clients

In the last six months, firms have experienced success penetrating international markets by leveraging competencies established through prior successful engagements with clients in their core U.S. markets: Raytheon with C4ISR systems related to its missile defense products (Saudi Arabia), Lockheed Martin with its cloud and applications portfolio (United Kingdom) and Northrop Grumman with cybersecurity and biometrics services (Australia).

BAH is leveraging its consulting heritage to establish itself as a thought leader to clients in GCC states. In the last six months, the firm has released region-centric white papers or commissioned studies related to healthcare expenditures, cyber espionage, financial services security, critical infrastructure and synergies between the public sector and commercial markets.

TBR believes BAH is aware of the importance of establishing relationships with the GCC as a whole, as well as within the individual countries that comprise the GCC, many of whom BAH has recently opened operations. By establishing the firm’s position as a thought leader in high-priority verticals such as healthcare, financial services and the public sector, the firm will position itself as a vendor of choice for future infrastructure and services engagements within the region.

Please feel free to use this content or call/email Sebastian Lagana (603-929-1166) for additional commentary.

NetApp will protect its revenue and operating profit in 2H13 while ensuring long-term success in key technology areas by restructuring its workforce

NetApp maintained an approximately flat revenue base on a year-to-year basis in 1Q13, with declines to product revenue offsetting gains to the software entitlements and maintenance and services revenue bases of 7% and 8% year-to-year, respectively. The company continues to successfully drive its OnTap-led value proposition in an industry steadily moving toward commoditized hardware and software-defined IT environments, as evidenced by software-related revenue outpacing corporate revenue in growth during the quarter. However, professional services revenue fell 12% year-to-year during 1Q13, indicating that NetApp remains a product-centric company and is heavily reliant on its channel partners to deliver consulting and other services that are critical to customers as they navigate key industry disruptors, including rapid big data growth and adoption of new cloud-based IT models, on which NetApp is seeking to capitalize.

TBR believes NetApp’s decision to eliminate approximately 7% of its employee base, or 900 employees, indicates that the company is working with great urgency to correct its slipping operating margin, which occurred despite slow revenue growth and a 170 basis point year-to-year gross margin improvement in 1Q13. NetApp is targeting improved operating margin performance to reassure Wall Street and better hone its investment in important technology areas such as flash storage and clustered Data OnTap, as well as long-term growth initiatives. However, we anticipate reduced software, engineering and sales staff will limit NetApp’s near-term ability to drive innovation, and execute on cloud- and big data-related sales opportunities in a climate of tight IT budgets and increasing competitive pressures in its core midmarket customer base—thus mitigating the intended effects during 2013.

Clustering and OpenStack support will enable NetApp to position its OnTap value proposition against competitors’ investment in software management

NetApp will successfully focus investment during 2013 on evolving its core OnTap value proposition to better support virtualized and cloud-based environments, as a means to protect against the efforts of competitors ranging from EMC to Dell to monetize on demand for single-pane-of-glass management platforms. Efficient and user-friendly management is becoming increasingly important as a differentiator across the IT stack, as it is critical to driving the workload-specific efficiencies that customers are requiring despite growing IT complexity within the market. NetApp is responding by leveraging its Data Ontap clustering capabilities to promote a message of performance and availability in virtualized environments, while tapping rising demand for flexible and cost-effective custom-designed infrastructure by working with the OpenStack community to offer cloud-based file share capabilities.

NetApp will expand in small and midsized enterprise accounts by monetizing on rapid big data growth and adoption of mobile computing

As competitors including EMC, HP and IBM invest to capitalize on storage opportunities in the midmarket—NetApp’s core customer base—NetApp is investing in big data and mobile computing-related solutions and touting its core value proposition of scalability and cost-effectiveness to expand in small and midsized enterprise (SME) accounts by positioning at the heart of customers’ productivity, efficiency and security concerns. NetApp is aligning its E5500 Storage System, rolled out in March, with enterprise big data and high performance computing (HPC) storage requirements by cultivating a message of continuous uptime achieved through automation, simplified administration, and proactive diagnostic capabilities, alongside a competitive price-performance proposition. NetApp is also addressing SME mobile computing requirements with offerings such as its NetApp Connect application, which provides simplified authentication and setup for ease-of-use, but still enables customers to be reassured of the security of their data, as data is still stored on an on premises OnTap-based storage array.

Please feel free to use this content, or contact Krista Macomber at (603) 929-1166 or krista.macomber@tbri.com for additional commentary.

ServiceNow’s unwavering commitment to GTM and evolving technology will help it continue to beat both large and small competitors

ServiceNow wins deals because of its unwavering focus, fully integrated tools, flexible and simple customization and because its releases are free and occur often — not simply because it is deployed over the cloud. Essentially, ServiceNow is beating the competition because it consolidates, consumerizes and automates the management of IT assets. ServiceNow continues to widen the gap with traditional IT Service Management (ITSM) market leaders BMC, HP and CA Technologies, and we believe these vendors are not agile enough to catch up. Competitors have not kept abreast of new technological developments and subsequently have lost market share. ServiceNow plans to expand its focus to include the SMB market through both an app store (not yet launched) and its partner channel. ServiceNow will continue to have more impact on large enterprises but will secure a presence in the SMB space to stamp out “me too” vendors and potential early disruptors.  

A single system of record, a simple but powerful app development platform and high levels of automation and orchestration position ServiceNow to sustain high levels of customer and revenue growth over the next five years. The company is still in the early stages of adoption — with 13% penetration in the large enterprise space — giving it room to go wide and deep across this market.  ServiceNow keeps a constant go-to-market strategy by selling an ITSM suite into the IT departments of large enterprise businesses. By focusing on IT purchasers, ServiceNow has successfully solidified messaging and taken advantage of companies with strategies in flux such as HP, CA, BMC and Dell (Quest).

Transform IT from a reactive help desk to a proactive services organization helping to improve business processes

Increased levels of automation and orchestration, and seamless integration of the ServiceNow suite on a single platform will enable the company to help IT departments move from a static, red-taped, reactive “help desk” mentality to a dynamic, proactive and business-focused organization serving other functions across the company. IT has become a central function in business, with demands on IT departments skyrocketing, and those who cannot or choose not to keep up with today’s technology will risk corporate irrelevance. Finance, marketing, HR, sales, R&D and the C-suite rely on processes and data analysis driven from IT — all of which ServiceNow addresses after initial ITSM adoption.

ServiceNow will set its foundation in IT and then expand across other functional areas as users discover they are able to manage and improve more workflows through app creation. The land-and-expand strategy works for ServiceNow, as evidenced by 66% of users utilizing the technology for processes outside of IT (up from 50% last year).

Customization and app development are key differentiators for ServiceNow that will help the company sustain long-term growth

App building and workflow management is intuitive for IT, and with the release of ServiceNow App Creator, non-IT people (citizen developers) will (eventually) create apps as well. The notion of the citizen developer is key to ServiceNow’s long-term growth, but App Creator will take a few more product releases to get to this point (we estimate six to 18 months). The company has laid out a road map to reach the citizen developer phase, and third-party developers and an App Store are also part of the end game.

As discussed, many customers are enjoying custom apps on ServiceNow, and this is exactly what ServiceNow intended them to discover as they worked on the ITSM platform. With its footprint in many large enterprises including Coca Cola, NYSE, Target, Netflix and Home Depot, there have been a large number of apps created, and ServiceNow is in the process of creating an app exchange program that would allow these vendors to share apps free of cost. IT departments generally have the same types of issues across verticals and geos, such as fragmentation, BYOD and onboarding employees, increasing the value of sharing apps.

While it is not customary for businesses to want to share internally developed apps, the customers at Knowledge13 spoke highly of this practice and encouraged others to adopt it as a best practice. ServiceNow is also entering the mix by creating apps itself, starting with CMBD and Asset Manager (both of which were announced at Knowledge13).

ServiceNow-created apps, for the most part, are incorporated into general releases at no additional cost. After ServiceNow app additions and an app exchange program, ServiceNow will open its platform to approved third-party developers. These platform programs will likely be completed in release “F” (“D” or Dublin is the current release). Release “F” is also when we believe the citizen developer will come into play.

ServiceNow is similar to CRM disruptor Salesforce.com and will continue on a high-growth trajectory through portfolio and people investments

To continue replacing HP, BMC and CA Technologies, ServiceNow will invest in applications and mobile capabilities. The company is a force in the ITSM space, but similar to Salesforce.com (a force in the CRM space), ServiceNow will expand into more functional areas through apps to keep up with mobile trends and grow its teams. We expect to see similar revenue and operating margin trajectory for Salesforce.com as well, with sustained high growth through equal distributions of new customers, cross-selling and renewals, and a negative operating margin for years to come as ServiceNow invests in growth through portfolio and people.