The CSP ecosystem is at the early stages of a major edge build-out

Spend on edge infrastructure will ramp up significantly in 2021

Drivers of this ramp up will include data traffic optimization, new use cases of the network, IoT proliferation, and data privacy and data sovereignty requirements, among others.

For additional information, read our recent special report TBR projects CSP spend on edge compute infrastructure will exceed $82B by 2025 and contact an account executive about TBR’s Edge Compute portfolio.

Quick Quantum Quips: Demonstrating quantum’s value to customers is top of mind early in 2020

Welcome to TBR’s monthly newsletter on the quantum computing market: Quick Quantum Quips (Q3). This market changes rapidly, and the hype can often distract from the realities of the actual technological developments. This newsletter will keep the community up to date on recent announcements, while stripping away the hype around developments.

For more details, reach out to Stephanie Long or Geoff Woollacott to set up a time to chat.

February 2020 Developments

In February, developments in the quantum computing market centered on customer proof points. Quantum computing development is happening swiftly, and demonstrating value to customers is an essential way in which quantum vendors can begin the monetization process. However, TBR notes that, often, the commercialized use cases vendors tout remain stuck in the developmental phase.

  1. Cambridge Quantum Computing added IBM as its newest investor in February. IBM and Cambridge Quantum Computing have a long history in partnership, as Cambridge Quantum Computing was one of the first quantum vendors to join IBM’s Q Network back in 2018. Quantum software and quantum machine learning are two of the highlights of Cambridge Quantum Computing’s portfolio, which pair well with IBM’s superconducting hardware capabilities and stand to diversify IBM’s capabilities and therefore accelerate monetization.
  2. D-Wave partnered with Dubai Electricity and Water Authority (DEWA) to promote training and awareness around quantum computing. Leadership and relevant personnel at DEWA attended a three-day training on quantum capabilities offered by D-Wave and also worked with D-Wave to identify some vertical-specific challenges they foresee with quantum computing rollout. TBR believes the adoption of quantum computing will likely be vertical specific, and power resources are a likely second-tier vertical. Initial vertical adoption is most likely to be seen in government and financial services.
  3. Scotiabank, in partnership with Xanadu, is investing in the development of its quantum computing capabilities. Scotiabank leverages a quantum algorithm developed by Xanadu called Monte Carlo in conjunction with its software suite to simulate trading scenarios the bank often encounters, and Scotiabank reports a 1,000-fold increase in calculation speed coupled with increased accuracy of outcomes. Xanadu and Scotiabank are both Canada-based firms.
  4. Xanadu received $3.3 million in funding from the Sustainable Development Technology Canada (SDTC) foundation. The funding will be used to take Xanadu’s photonics-based quantum computing systems from development to general availability in the cloud. Due to this investment, Xanadu expects to demonstrate the commercial usefulness of quantum computing by 2022.
  5. Intel continues its work on a cryogenic quantum computing control chip, which it calls Horse Ridge. Similar to Intel’s goal in the classical computing world, innovation on Horse Ridge is geared toward eliminating some of the complexities of computing with proprietary chips in the quantum computing world, and scalability of qubits is a key focus of these developments as a result. TBR notes that while Intel has made the development of Horse Ridge public knowledge and continues to report on its progress, these quantum control chips remain in the developmental phase. Part of the significance of Horse Ridge is that Intel simplified the control electronics necessary within a quantum system. In doing so, Intel effectively replaced the bulky instruments of a quantum system that are relatively impractical at scale with an integrated system-on-chip, which is expected to speed up the setup time as well as simplify scalability. To do this, Intel effectively has moved the controls closer to the qubits themselves. By moving the controls closer to the qubit, Intel has significantly reduced the number of wires into and out of the cryogenic refrigerator, and this is a key to the milestone Intel is working to reach.

If you would like more detailed information around the quantum computing market, please inquire about TBR’s Quantum Computing Market Landscape, a semiannual deep dive into the quantum computing market. Our latest version published in December.

The emerging and evolving landscape of enterprise edge computing

TBR launches its inaugural Enterprise Edge Compute Market Landscape this week. The report profiles key vendors playing in the enterprise edge compute market as well as trends in alliance and acquisition activity, emerging market opportunities, and use cases and business cases for edge. As a complement to TBR’s Telecom Edge Compute Market Landscape, this new reportalso details high-level market forecast estimates for the significant enterprise edge compute opportunity.

On Wednesday Senior Analysts Stephanie Long and Nicole Catchpole will host an exclusive preview of TBR’s findings in its Enterprise Edge Computing Market Landscape. In this webinar, the pair will analyze the enterprise edge market, which is providing an emerging and rapidly evolving opportunity for existing data center and cloud players as well as entrants across a broad spectrum of industries. Register today for “The emerging and evolving landscape of enterprise edge computing,” and visit our Webinar Portal to view all of TBR’s previously aired webinars.

Additional assessments publishing this week from our analyst teams

“Further developing NTT DATA’s emerging technology portfolio improves the company’s market position and enables it to seek cross-selling opportunities to broaden engagements and deepen client relationships, as it leverages previous acquisitions and ongoing internal investments to support efforts to expand client wallet share.” Senior Analyst Kevin Collupy

“DXC Technology is utilizing both organic and inorganic investments to expand its next-generation IT services capabilities, aligning its portfolio with client demand while incrementally strengthening its market perception.” Collupy

Cognizant’s focus on evolving from its traditional roots to a digital transformation leader resulted in multiple acquisitions and a flurry of restructuring efforts in 2019, led by the company’s Digital Transformation Office (DTO) that was formed in 2Q19. Recently, the DTO announced a restructured sales and commercial model as part of Cognizant’s 2020 Fit For Growth Plan, including new incentive plans for sales members to prioritize key solutions and services as well as the formation of new customer segments .TBR believes Cognizant’s success during 2020 will be tied directly to the efforts of its DTO, and TBR will be monitoring further initiatives being set forth by the group.” Analyst Kelly Lesiczka

T-Mobile ended 2019 on a high note, surpassing postpaid net addition, adjusted EBITDA and free cash flow expectations. This momentum will continue in 2020 as T-Mobile attracts customers via new Un-carrier initiatives, while improved network coverage realized by 600MHz spectrum deployment will help retain customers. The widespread 5G coverage provided by 600MHz spectrum will also help T-Mobile gain a time-to-market advantage during the 5G era’s infancy.” Analyst Steve Vachon

Forecast: 5G to be widely deployed by end of 2022 + Check out market overview infographic

“TBR expects most Tier 1 and some Tier 2 and Tier 3 wireless operators will have begun deployment of 5G by the end of 2022. This will be driven by the need to add capacity to support growing data traffic and to tap into new revenue opportunities brought on by emerging use cases for the network that materialize in the 5G era. TBR expects new, economically supported use cases for the network will arise around 2022, which will drive the next wave of 5G investment.” — WRAL TechWire

The federal IT services market remains highly favorable in growth for technology contractors in 2020

Defense, intelligence and civilian agencies are accelerating modernization efforts in 2020. M&A activity in the market will also remain at a brisk pace.

“Leidos released its 4Q19 and 2019 fiscal results on Feb. 18, posting 4Q19 revenue growth of 11.6% year-to-year to $2.95 billion on the back of strong bookings and backlog growth throughout 2019 as well as several recent large-scale contract wins and successful award rebids that are converting to revenue at a vigorous pace,” said Senior Analyst John Caucis. “Growth with classified customers in the Intelligence Community (IC) also remains strong. Leidos surpassed its guidance for 2019 revenue of between $10.9 billion and $11 billion, with full-year sales of $11.1 billion, an increase of 8.8% over 2018. Leidos’ guidance for 2020 calls for full-year sales between $12.6 billion and $13 billion, implying growth over 2019 of 13.6% to 17.2%, largely driven by recent strategic acquisitions. For example, Leidos spent over $2.5 billion to acquire Dynetics in December and L3Harris Technologies’ Security Detection and Automation division in February, expanding its footprint in defense technologies, airport and critical infrastructure screening products, automated tray return systems, and industrial automation systems.”

According to Research Analyst Brian Baker, “ManTech’s revenue rose 21.6% year-to-year to $604.4 million in 4Q19. Growth was augmented by acquisitions of Kforce Government Solutions, which closed in April, and H2M Group, which closed in August, as both contributed inorganic revenue to ManTech’s top line in 4Q19. Classified customers continue to accelerate spend with ManTech, while spending on behalf of ManTech’s principal Department of Defense and IC clients continues trending upward, in addition to significant wins with federal civilian and health agencies, leading to impressive 15% organic growth in 4Q19 and 9% organic growth for 2019. Robust revenue expansion, strong cash generation and stable margin performance enable ManTech to continue with its aggressive M&A strategy to enhance access to high-growth and high-value markets, similar to tactics of peers CACI, Leidos and SAIC.”

Additional assessments publishing this week from our analyst teams

Forging partnerships with larger-scale technology vendors enables vendors to more quickly enhance portfolios and incorporate emerging technologies while also strengthening scale to pursue opportunities outside their existing markets.

”Quantum computing, the edge, AI and cybersecurity are some of the latest investment areas in which Atos is developing pointed solutions to differentiate between a typical blue-sky consultancy approach and its approach of a technology-enabled organization. Enhancing its cloud capabilities, such as around Google Cloud solutions through the launch of Workplace as a Service Google Edition and the acquisition of Maven Wave, and the launch of the Digital Hybrid Cloud offering jointly with VMware, creates cloud professional services opportunities that will sustain Atos’ cloud revenue growth in the coming quarters.” Senior Analyst Elitsa Bakalova

CGI is pursuing a strategic growth objective to double its revenue base over the next several years with accelerated investments in M&A and homegrown IP. However, the company must continue to execute on its expense management strategy as margins face pressure in the near term with the ramped-up acquisition pace and ongoing organizational restructuring.” Research Analyst John Croll

“Refreshing its business image to position as a digital transformation company and better align with client demand for emerging technologies, such as security, IoT and AI capabilities, will provide growth opportunities for Fujitsu’s services business if the company is able to successfully build out its global presence and talent bench to support new portfolio areas. While the company has expanded its global network, adding new delivery and innovation centers that increase client awareness of the brand and offerings, the company is unable to generate sustainable and consistent growth outside Japan. Bolstering portfolio innovation efforts through solution codevelopment partnerships will help Fujitsu scale its new portfolio and generate new opportunities, but the company needs to maintain differentiation within its portfolio to successfully capitalize on potential opportunities around emerging technologies.”Analyst Kelly Lesiczka

“Amazon Web Services (AWS) continues growing its sales team in an effort to outcompete IaaS and PaaS rivals such as Microsoft and as coopetitive partners such as SAP take AWS head-on. The recent general availability of AWS Outposts increases AWS’ hybrid value proposition and will help the vendor maintain its leadership in the consolidating IaaS market.” Analyst Jack McElwee

While upselling Zoho One and maintaining focus on SMBs, Zoho taps into enterprises as its portfolio matures

Zoho integrates enterprise capabilities into Zoho One and pushes upmarket

While new enterprise customers are more likely to utilize apps from multiple vendors, Zoho has been successfully upselling Zoho One to customers, such as IIFL, that start with smaller product suites like CRM Plus. Zoho One includes Zoho’s bundled offerings for CRM, finance, human resources, collaboration and commerce, and is more cost-effective than buying the offerings individually. Enterprises that purchase Zoho One subscriptions for a select number of employees pay $75 per user, per month. However, enterprises that go all-in on Zoho One pay $30 per user, per month.

Despite the lower revenue per user, the enterprise pricing model requires a subscription for all employees within the customer’s organization, likely increasing the number of user subscriptions. TBR expects that Zoho will leverage this strategy to drive upmarket, using CRM Plus as a common inroad to enterprise customers, then using the CRM Plus pre-integrations with the vendor’s broader portfolio as a selling point for Zoho One.

Zoho’s journey upmarket is impressive as the company thus far has managed to penetrate an increasing number of enterprise accounts while holding true to its vision. One has to wonder, however, what is next and how Zoho will adapt to its own growth if the journey upmarket continues. Will Zoho continue to grow by word of mouth and fly under the radar with a portfolio of almost altruistically priced applications? Or is there an identity crisis looming on the horizon whereby philosophy, market dynamics and ambition may come to a crossroads? TBR will continue to monitor Zoho’s growth, customer acquisition and geographic expansion as a potential market gamechanger who flies under the radar – and is happy to do so.

Proprietary IT stack enables Zoho to quickly develop new apps alongside new AI, analytics and developer tools

Zoho is able to maintain lower-cost products by utilizing its own data centers, rather than hosting on external infrastructures such as those provided by Amazon Web Services (AWS). In addition to avoiding high storage and compute costs from a third-party vendor, owning and developing the entire technology stack also simplifies the app development process. Part of the reason for this is that the infrastructure layer, platform layer and database models are uniform throughout Zoho’s technology stack, rather than cobbled together through acquisitions. This decreases the development life cycle, enabling Zoho developers to quickly move from product idea to product release, while ensuring a more seamless integration across the portfolio.

At ZohoDay 2020, about 60 analysts attended a series of interactive presentations in a relatively intimate forum that highlighted Zoho’s unique journey and industry-divergent principles. Zoho senior executives interacted with analysts one-on-one, and clients spoke about their “voice of the customer” experiences.

Becoming the bridge: EY and its 2020 Global Information Security Survey

TBR perspective

EY’s latest Global Information Security Survey illuminates critical aspects of how EY sees itself positioned in the cybersecurity services market, even as it informs on the trends and troubling developments across the information security space. Reviewing a preview of the results, TBR was struck by three elements: First, EY clearly sees itself as the bridge between security professionals and their internal colleagues, a role that requires technical expertise and, more importantly, trust from all sides. Second, understanding the toughest challenges facing chief information security officers (CISOs) does not require EY staff to be security experts as much as it requires navigating clients’ organizations and budgets and metrics. Third, evaluating security concerns (or lack thereof) across an entire client’s organization becomes even more challenging for EY when the threats change dramatically, as this year’s survey shows.

The bridge between security and … everyone else

When previewing the survey results with TBR, EY security leaders repeatedly described the firm’s role within a client’s organization as the bridge: between security professionals and business leaders, between security professionals and board members, and between security professionals and industry leaders (both internal and external). According to EY, the firm revamped the survey for 2020 with a fresh approach to reflect clients’ emerging appreciation for the role bridging often difficult and strained relationships between security professionals and their own colleagues. One of the starkest findings, in TBR’s view, showed respondents’ ratings of the relationships between the security teams and other groups within their organizations, ranging from Neutral, Distrust or Non-Existent to High Trust and Consultation. Not surprisingly, IT departments had the most trust in security teams while more than 70% of the respondents indicated the relationship between marketing and security teams rated neutral or worse. While understandable that marketing teams would chafe at restrictions placed on them by security concerns, EY’s critical insight revolved around “New Initiative Owners,” which includes marketing. If new investments and reallocated budget dollars (as well as C-Suite and board interest) flow toward lines of business, R&D and marketing, but security teams have poor relationships with those groups at more than 55% of enterprises, EY’s role as a bridge becomes even more critical. Security teams cannot get sustained support and new funding if their colleagues driving new business do not see them as teammates or even positive actors within the organization.

TBR believes that EY’s efforts to position as a bridge conforms with the firm’s overall approach to consulting and plays to EY’s strengths around risk and compliance. In addition, playing that role demands a high level of trust among all the groups within a client; EY has invested heavily in building that level of trust and continues to benefit from it. Immediate technology-centric opportunities in connection with migration and management of SAP S/4HANA workloads can serve as a use case and strengthen EY’s trust with the IT buyer, a persona the firm looks to strengthen its relationship with, especially when it comes to application and data security management. Challenging for EY, however, is the fact that most organizations continue to make reactionary decisions around security and frequently bring security concerns and requirements into a business initiative well after the first few developmental stages. These variables create opportunities for EY as a security services consultancy and potentially enhance the firm’s role within clients.

In a discussion with TBR prior to the release of the 2020 Global Information Security Survey, EY previewed the survey’s findings and how the firm sees a changing role for itself in the security services market. In TBR’s view, the survey’s most notable findings underscore strategic moves by EY to evolve its security services practice, including a focus on bridging organizational gaps between security teams and business leaders within EY’s clients.

Why the Sprint/T-Mobile merger could actually help the spread of 5G

“‘This merger is very beneficial for T-Mobile, but it’s also beneficial for the U.S., and where we currently are in the global race to 5G,’ said Steve Vachon, an analyst at Technology Business Research. ‘Now, the 5G plan is much more likely to go forward.'” — Digital Trends

TBR projects CSP spend on edge compute infrastructure will exceed $82B by 2025

TBR estimates over 1.2 million network sites and cell sites will become mini data center (edge) locations globally by 2025, up from nearly 9,000 sites globally at the end of 2019. The primary driver of edge build-outs during the forecast period is CSPs’ network transformations, which entail migrating to a cloudified and virtualized network, and webscales’ edge initiatives to support their cloud businesses and digital lifestyle endeavors. In this new architecture, network functions will be virtualized and housed in NFVI, which is essentially a data center. Network sites, such as central offices, have been the primary edge compute location to date, with cell site builds expected to ramp up significantly in 2021 and become the primary location for the CSP edge by 2025.

Webscales and disruptive startups are positioning early to capture new value created by edge computing, threatening to limit telco and cableco opportunity

In 2H19 several of the largest telcos in the world, namely AT&T, Verizon, Vodafone, SK Telecom, KDDI and Telecom Italia, established strategic partnerships with key webscales pertaining to edge computing. In each of these situations, the webscale provides the extension of its public cloud via a physical compute stack, which is being housed in the telco’s site at an edge location and integrated with the telco’s network. TBR views these partnerships as necessary for both parties but is wary that telcos will be largely confined to providing connectivity while webscales get point position at the edge to accrue most of the new value created from new use cases of the cloudified network.

Telcos and cablecos could generate significant edge-related revenue by opening their network sites to colocation opportunities. Existing network sites could be repurposed to house a telco’s or cableco’s equipment and the edge stacks of other companies, which would pay rent to the site owner. CenturyLink and Frontier are both all-in on colocating their existing sites, and TBR expects more telcos and cablecos to follow in their footsteps over time.

TBR’s Telecom Edge Compute Market Landscape, which is global in scope, deep dives into the edge compute-related initiatives of stakeholders in the telecom market including telecom operators, cable operators, and vendors that supply the telecom market. The report also covers leading webscales’ edge computing-related initiatives. The research includes key findings, market size, regional summary, technology trends, use cases, business models, operator and vendor positioning and strategies, and acquisitions and alliances.

SAIC and Unisys Federal: Penetration, growth and confidence, with questions around IP and integration

Consolidation continues

SAIC’s agreement to purchase Unisys’ federal business for $1.2 billion (which includes present value tax assets of approximately $175 million) is just the latest example of the continued consolidation of the public sector IT services market, which has been ongoing for the past four years. For example, Leidos (NYSE: LDOS) purchased Lockheed Martin’s (NYSE: LMT) IT services business; General Dynamics Information Technology (GDIT; NYSE: GD) purchased CSRA; DXC Technology’s (NYSE: DXC) U.S. Public Sector business combined with Vencore and KeyPoint Government Solutions to form Perspecta (NYSE: PRSP), which subsequently purchased Knight Point Systems in 2019. The same year, SAIC purchased Engility, CACI (NYSE: CACI) made six acquisitions and Raytheon (NYSE: RTN) announced a “merger of equals” with United Technologies (NYSE: UTX), to be finalized in 2020. Additionally, Leidos recently finalized its purchase of Dynetics and announced the purchase of BAE’s airport security business only days before SAIC announced its plans to acquire Unisys Federal. Along with these marquee deals, the market saw a smattering of smaller and/or less strategic deals over the past four years. Much of this M&A activity has in some way emphasized scaling to compete for mega-deals such as Next Generation Enterprise Networks Re-compete (NGEN-R) or Defense Enterprise Office Solution (DEOS) contracts. Based on recent market activity and the federal government’s increasing emphasis on digital transformation and next-generation technologies, it seems unlikely the need for scale will diminish for federal market players anytime soon. For SAIC to acquire another company of this size so quickly after the purchase of Engility only underscores the importance the company’s leadership places on scale. In fact, this purchase would theoretically boost SAIC to fourth place in TBR’s Public Sector IT Services Benchmark (behind only Leidos, GDIT and Booz Allen Hamilton [NYSE: BAH]) based on the most recent trailing 12-month federal revenues of the companies we track.

Unisys Federal impact and opportunities

Aside from the additional scale in both employees and revenue, Unisys Federal will provide SAIC with deeper access to the Department of Homeland Security and Treasury Department through U.S. Customs and Border Protection (CBP) and the IRS, respectively. For calendar year 2019, Unisys Federal had approximately $179 million in obligations to CBP and $84 million in obligations to the IRS. Both agencies are relatively underpenetrated by legacy SAIC and should provide more opportunity for growth with other civilian agencies. Unisys Federal realized a CAGR of 10% over the last two years, far outstripping the average of 4.6% for the 15 companies tracked in TBR’s Public Sector IT Services Benchmark, supported by a $1.8 billion backlog (2.6 backlog-to-revenue ratio), which TBR believes should provide ample opportunity for the new SAIC to continue Unisys Federal’s strong growth, especially in cloud adoption and other modernization services. Most of this backlog consists of slightly higher-margin projects than legacy SAIC engagements. TBR expects this deal will improve margins for SAIC by somewhere between 20 to 40 basis points by the two-year mark. In addition to the scale, agency access and large backlog, SAIC now has the right to sell CloudForte, a key platform for Unisys Federal’s business in the public sector that typically forms the backbone for the cloud services the company has delivered and likely will continue to offer as part of SAIC.

TBR believes SAIC’s (NYSE: SAIC) purchase of Unisys Federal, announced on Feb. 6, 2020, will provide the combined company with broader agency access and a strong potential for growth while signaling the extreme confidence of SAIC’s leadership. We also believe the lack of IP included in the deal and the challenges associated with SAIC’s previous and upcoming integrations mean this deal likely carries more risk than reward. This acquisition comes almost exactly one year after SAIC’s purchase of Engility for $2.5 billion, which has yet to produce organic growth for SAIC, though SAIC claims cost synergies have been fully realized. The inorganic boost of Unisys Federal (which achieved approximately $689 million in revenue for the trailing 12-month period ending Sept. 30, 2019, with an impressive 10% two-year compound annual growth rate) will bring the combined organization’s annual federal revenue for the same 12-month period to approximately $6.6 billion on a pro forma basis.