0101 1010 0101 1010 0101 1010 Software 0101 1010 Sector outlook 0101 1010 0101 1010 0101 1010 0101 Ed Maguire AWS’s quiet arsenal 1010 [email protected] Amazon software reshapes industry landscape 0101 +1 212 549 8200 Amazon Web Services (AWS) is arguably the most consequential force in 1010 0101 Reagan Tangney enterprise IT today, with its US$12bn-plus Infrastructure-as-a-Service 1010 +1 212 549 5028 (IaaS) business dominating the public cloud IaaS segment and disrupting 0101 the incumbent compute and storage industry. Building on its dominant 1010 position, AWS is expanding into higher-value software services as its 0101 1010 RedShift and Aurora offerings marginalize legacy on-premise vendors, 0101 such as Underperform-rated Oracle and Teradata. 1010 0101 AWS opportunity moves “up the stack” 1010 26 September 2016 Amazon dominates IaaS, which IDC forecasts to reach US$43.6bn in 2020, 0101 1010 with over 50% share. The market for Software as a Service (SaaS) and cloud 0101 USA software (eg, Software Apps as a Service, System Infrastructure Software as 1010 Technology a Service, Platform as a Service [PaaS]) is projected to be US$152bn in 2020. 0101 With less than 2% share to date here, AWS has plenty of room to expand. 1010 0101 Data(base) is the key to expansion 1010 0101 Data stored in AWS provides a vector to drive adoption of higher-value 1010 Akamai BUY software services, database in particular. AWS’s Aurora and RedShift are its 0101 Target US$65 fastest-growing services, emerging as formidable competition. We expect AWS 1010 to focus aggressively on growing share in the US$34bn-plus database market 0101 Amazon¹ O-PF 1010 Target US$890 directly against incumbents Oracle, Teradata, IBM and Microsoft. 0101 1010 Citrix O-PF Making platforms count 0101 Target US$99 AWS’s growing portfolio addresses adjacent markets including Internet of 1010 Things (IoT) platforms, content delivery networks (CDN) and application 0101 Microsoft O-PF delivery controllers (ADCs). Its IoT suite is positioned to drive incremental 1010 Target US$60 demand for infrastructure services; CloudFront CDN targets mid-market AWS 0101 1010 Oracle U-PF customers; and application load balancing indirectly targets the ADC market. 0101 Target US$42 1010 Above the PaaS layer - towards user apps 0101 1010 PTC O-PF AWS is making an aggressive push into business intelligence (BI) with its 0101 Target US$45 QuickSight offering. With a formal launch later this year, we expect this 1010 product to have significant impact on vendors in the traditional BI market. The 0101 Red Hat BUY company’s forays into virtual desktops (WorkSpaces), mail (WorkMail) and Target US$94 1010 collaboration (WorkDocs) appear to be meeting less success. 0101 1010 Salesforce BUY 0101 Target US$101 Amazon Web Services - Growth at scale 1010 25,000 (US$m) Revenue (LHS) Revenue growth (%) 80 0101 ServiceSource U-PF 1010 Target US$5 70 0101 1010 20,000 Splunk BUY 60 0101 Target US$86 1010 0101 15,000 50 Teradata U-PF 1010 0101 Target US$30 40 1010 10,000 0101 Trend Micro O-PF 30 1010 Target ¥4,400 0101 20 5,000 1010 ¹ covered by CLSA analyst James Lee 0101 10 1010 0101 0 0 1010 2014 2015 16CL 17CL 18CL 0101 www.clsa.com Source: CLSA, company 1010 0101 1010 Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com 0101 Produced by CLSA Americas LLC. For important disclosures please refer to page 72. 1010 0101 Software Contents AWS’s quiet arsenal .......................................................................... 3 AWS opportunity moves “up the stack” ............................................. 5 Data(base) is the key to expansion ..................................................16 Making platforms count ...................................................................34 See also 2020 in sight for our work on innovation and key themes Above the PaaS layer - towards user apps .........................................48 All prices quoted herein are as at close of business 21 September 2016, unless otherwise stated Insights into disruptive trends 2 [email protected] 26 September 2016 Investment thesis Software AWS’s quiet arsenal Amazon (O-PF by CLSA analyst James Lee) has arguably emerged as the Reshaping the industry landscape most consequential force in enterprise technology, a pioneer and the dominant leader in the market for public cloud Infrastructure as a Service. IDC expects this market to reach US$43.6bn by 2020, and Amazon Web Services holds dominant share for compute and storage as a service. The market for SaaS and cloud software is much larger, likely to reach US$152bn by 2020, and AWS has barely any presence so far. AWS opportunity moves “up the stack” Building on its dominance in infrastructure and the strategic advantages that Expanding offerings into higher-value come from storing mission critical data, Amazon is “moving up the stack”, software categories expanding its offerings increasingly into higher-value software categories - notably database. We’ve already seen the negative impact that AWS has (indirectly had) on server and storage vendors, including Oracle and Teradata, both of which we rate Underperform. It’s our view that database vendors are already feeling the impact of Amazon’s growing market presence. We summarize AWS’s offerings, key competitors on premise and in the cloud and the estimated competitive impact. Competitive matrix Category Services On-premise Cloud Competitive Comments vendors vendors impact Compute EC2, EC2 Container Registry, Elastic HP, IBM, MSFT, GOOG, High AWS dominates compute Beanstalk, Lambda, Auto Scaling and ORCL, Dell IBM, RAX, ATT, as a service with scale, Load Balancing VZ, others pricing and breadth Storage & S3, CloudFront, Amazon EBS, Elastic File NTAP, IBM, GOOG, MSFT, High AWS dominates storage content Storage, Glacier, Import/Export Snowball ORCL, HPE, Dell/ IBM, AKAM as a service with scale, delivery and AWS Storage Gateway EMC, Veritas pricing and breadth Networking Virtual Private Cloud, Direct Connections, CSCO, JNPR, VRSN, NSR, Low to AWS's direct impact has Elastic Load Balancing, Application Load HPE, FFIV, CSCO, CTXS medium been minimal, but product Balancing and Domain Name System CTXS, RADW roadmap increasingly targets (Route 53) the application delivery services market Management CloudWatch, CloudFormation, CloudTrail, CA, IBM, VMW, VMW, MSFT, Low AWS management tools tools Config, OpsWorks, Trusted Advisor MSFT, RHT, HPE, ORCL, IBM, targeted to AWS workloads CSCO, SPLK NOW, NEWR, RHT, SPLK Security & Identity and Access Management, EMC/RSA, CA, AKAM, IMPV, Low AWS security and identity tools identity Certificate Manager, CloudHSM, Key IBM, CYBR VRSN, QLYS, address AWS user needs Management Service, Directory Service, GDDY Inspector and Web Application Firewall Database RDS (Aurora, MySQL, PostgreSQL, Oracle, ORCL, IBM, MSFT, GOOG, Medium AWS's Database-as-a-Service SQL Server, MariaDB), Database Migration MSFT, SAP, ORCL to high offerings are aggressively Service, DynamoDB, ElastiCache, RedShift TDC, HDP capturing incumbent share Analytics QuickSight, RedShift, Machine Learning, DATA, TDC, MSFT, GOOG, Medium Data Warehouse as a Service Kinesis, Elasticsearch, Elastic MapReduce IBM, SAP, CRM is having significant market and Data Pipelines ORCL, MSFT impact, but business intelligence has not entered the market Enterprise WorkSpaces, WorkMail, WorkDocs CTXS, MSFT, MSFT, GOOG, Low AWS footprint is limited, cloud applications OTEX CTXS, BOX competition well established Internet of AWS IoT, Device SDK, Registry, Device MSFT MSFT, GE, Low to Market is nascent but AWS Things Shadows and Rules Engine GOOG, CRM medium offerings are highly competitive Source: CLSA, Amazon 26 September 2016 [email protected] 3 Investment thesis Software Data(base) is the key to expansion Data stored in AWS’s S3 service provides a vector to drive adoption of higher- value software services, database in particular. AWS’s Aurora and RedShift are its fastest-growing services, emerging as formidable competition in the relational database, data warehouse and Hadoop-as-a-Service markets. Amazon has differentiated itself in the US$34bn-plus database market and Most successful - and aggressive - targeting the data warehouse market. IDC estimates Amazon’s total revenue from the database market the database market was about US$580m in 2015, while management has disclosed >US$1bn annual run rate from database revenue including relational database services (RDS). Amazon’s database services grew 167% YoY in a market that saw only 1% growth. By 2019 we see the market expanding to US$45bn with AWS’s share growing to 8.6% with US$3.96bn in revenue. We expect AWS to focus aggressively on gaining share in the database market directly against incumbents Oracle, Teradata and IBM, in particular. Making platforms count AWS’s growing portfolio addresses adjacent markets including Internet of IoT, CDN and ADC are smaller opportunities, Things platforms, content delivery networks and application delivery with less risk to controllers. Its scale, breadth and market reach position it to be a leading IoT incumbents for now platform, accelerating adoption of IoT solutions and spurring incremental demand across the portfolio of cloud infrastructure services. We estimate AWS IoT could generate US$200m with an additional US$1.0-1.6bn in related cloud services by 2020, with major competition from Microsoft and Google. CloudFront CDN, by our estimates, is the second-largest CDN after Akamai, but the service predominantly targets mid-market AWS customers. Application load balancing is a new market that AWS addresses indirectly. IDC estimates about US$500m revenue addressing ADC-type use cases. We see potential impact to F5 Networks and Citrix as a medium-term risk. Above the PaaS layer - towards user applications AWS is making an aggressive push into business intelligence with its Aggressive push into business intelligence QuickSight offering. With the formal launch later this year, we expect the as- a-service model to exert pricing pressure on traditional BI offerings from other vendors including SAP, Oracle and IBM.