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Zoom videoconferencing booms amid COVID-19, but Microsoft and Google will win with broader SaaS

Zoom’s rapid adoption highlights security concerns; Microsoft and Google are better positioned

Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOGL) were relatively well prepared for the unexpected demand for videoconferencing, with global data centers and strong security measures in place, while Zoom’s security was not ready for the same scaling. There have been numerous reports of “Zoombombing,” which is when hackers join a Zoom meeting and disrupt the workflow, particularly in online classrooms. While some educators did not use password protection to make their online classrooms private, TBR believes this security lapse also occurred because Zoom lacks end-to-end encryption. Microsoft and Google Cloud have experienced difficulty with outages but have performed well in terms of security with end-to-end encryption in Teams and Meet. The regularity of these hacks has led to a recent investigation by the FBI and caused some government agencies, companies and educational institutions to ban the use of Zoom. In TBR’s special report Security measures taken to combat impacts of COVID-19 on businesses will have long-term implications, Senior Analyst Nicole Catchpole discusses the security concerns with Zoom and other cybersecurity threats that have risen amid the COVID-19 pandemic.

Zoom, Microsoft and Google remove pay barriers, increasing usage and setting the foundation for a much larger base of paying customers post-COVID-19

Use of videoconferencing solutions is skyrocketing, but modernization of these platforms will be a long-term strategy

Zoom, Microsoft and Google are offering their video-collaboration tools for free to support the unexpected global shift to remote work and learning environments. For six months, Microsoft is removing paywalls for Government Cloud and certain Office 365 subscriptions — including Office 365 E1 for businesses and Office 365 A1 for educational institutions, both of which include Microsoft Teams. Google Cloud is also offering Meet for free until Sept. 30, but only to existing customers, which makes it slightly more restrictive than Microsoft’s offer. Finally, Zoom has also removed the 40-minute time limit on its free basic subscription tier for K-12 schools in numerous countries, including the U.S., where the company boasts roughly 60,000 customers as of mid-March. Within the “freemium” tiers that are available, Zoom customers can have up to 100 participants in a virtual meeting, whereas Teams and Meet can support up to 250 people in a meeting. Given that each of these vendors has reduced cost-related barriers to adoption, customers can select the vendor that best fits their broader IT environment.

The global shift to a virtual work-from-home and learn-from-home environment has drastically increased demand for SaaS solutions that support collaboration and remote workflows, particularly videoconferencing as companies and educational institutions try to maintain as much face-to-face communication as possible. Among the numerous SaaS offerings available, some of the most popular are Zoom, Microsoft Teams and Google Meet. Zoom quickly rose in popularity and became a household name, growing from 10 million users in December 2019 to 200 million users in March 2020. While Zoom’s (Nasdaq: ZM) number includes individual nonpaying consumers, the vendor has also signed paying business and organizational customers including IAC Group, Rubrik and Texas A&M. Microsoft Teams and Google Meet experienced growth spikes as well. The number of users on Teams more than doubled, from 20 million daily active users in November 2019 to 44 million in March 2020, including enterprises such as EY, SAP (NYSE: SAP), Continental AG and Accenture (NYSE: ACN). Google Meet grew by more than 25 times from January to the end of March and is adding 2 million new users per day, with customers such as Korean Air, Shopify (NYSE: SHOP) and TELUS (NYSE: TU). While Zoom’s total user growth is strong and its offerings are widely used, TBR expects Microsoft and Google Cloud will start to poach Zoom customers due to their value-add hardware and SaaS offerings Office 365 (200-plus million users) and G Suite (6-plus million users).

Investments in acquisitions and startups enrich Capgemini’s next-generation solutions portfolio and improve its competitive position

Capgemini has taken multiple steps to enhance its portfolio to drive transformations through next-generation technologies and create business value for clients. The acquisition of Altran to deliver digital transformation in the industrial sector, enhanced relationships with Microsoft around Microsoft Azure solutions and with SAP around certification of industry innovation accelerators in manufacturing and retail, and investment in startups and joint commercial activities exemplify Capgemini’s recent activities to advance its competitive position,” said Senior Analyst Elitsa Bakalova. “Offering deep industry expertise improves Capgemini’s ability to address clients’ business-specific challenges. The company will continue to experience momentum in cloud services, with cloud revenue driven by offerings in the Capgemini Cloud Platform portfolio that support clients when building, migrating and managing applications and infrastructures in cloud environments. Offering each client its entire portfolio of solutions enables Capgemini to provide holistic transformational solutions and effectively compete with peers. The expanded partnership with Microsoft around Microsoft Azure solutions will enable Capgemini to increase cloud professional services activities, especially around cloud application development and maintenance.”

Additional assessments publishing this week from our analyst teams

Apple continues to pursue both service and hardware initiatives to maintain growth. The company is leveraging services and its wide install base to grow continuous revenue streams as device refresh activity wanes amid lengthening device life cycles and slowing hardware advances. While services are growing as a cornerstone strategy for Apple, the company also remains focused on maintaining its market perception as the most advanced smartphone producer. TBR expects the iPhone 11, which is slated to be released later in 2019, to have steady sales, but Apple will likely not see breakout sales like that of the iPhone X until the release of the 2020 model, which will deliver larger hardware upgrades such as 5G enablement. — Dan Callahan, Analyst

Google doubled its revenue over the past six quarters, surpassing $2 billion in 2Q19 as the vendor migrates customers to Google Cloud Platform (GCP) and attains particularly strong revenue growth from selling analytics. Google’s PaaS business will continue to drive revenue growth as enterprises integrate their hybrid environment with Anthos and leverage Google’s analytics, AI and machine learning offerings. In addition, Google supplements growth with G Suite as the company’s growing sales base brings industry-specific versions of the collaboration suite to market and cross-sells G Suite into GCP-oriented customer engagements. — Jack McElwee, Research Analyst

Cognizant has reworked its corporate strategy to emphasize the criticality of digital technologies to its growth plans. Pursuing acquisitions, such as that of Meritsoft, enables Cognizant to diversify its revenue mix, fostering new sources of digital revenues within key verticals. We expect Cognizant will maintain steady revenue growth year-to-year, largely led by demand around its digital operations capabilities.    — Kelly Lesiczka, Analyst

An integrated sales structure, paired with investments in price-competitive AI solutions and on-site presence, will help Infosys transform its brand identity. At the same time as Infosys builds a healthy pipeline, the company may need to calibrate stakeholders’ expectations around margins to sustain trust. — Boz Hristov, Senior Analyst

Reinforcing Verizon’s reputation as a premium wireless service provider will be essential for the operator to sustain revenue growth in the 5G era, as competitive pressures from T-Mobile will intensify, especially given the pending Sprint merger. Though Verizon will continue to trail T-Mobile in postpaid phone net additions over the next several years, Verizon will be able to sustain revenue growth by attracting customers willing to pay a higher price for the operator’s network coverage and premium unlimited data plans. Steve Vachon, Analyst

Sprint continues to undercut its rivals as the operator remains reliant on competitive pricing to attract subscribers given its subpar network coverage, though the company is moving away from more aggressive promotions, such as its previous Cut Your Bill in Half offer, to improve average revenue per user (ARPU). Sprint will continue to struggle to balance ARPU and subscriber growth, however, as many customers are unwilling to pay higher prices for the company’s network quality and Sprint is experiencing high churn rates from customers rolling off promotional pricing offers. — Steve Vachon

Public sector IT services spotlight: The U.S. federal earnings season continues the week of July 29 with three services-led defense contractors — Booz Allen Hamilton (BAH), Leidos and ManTech — releasing their fiscal results for the second calendar quarter of 2019.

As reported on Monday, July 29, Booz Allen Hamilton delivered 10.8% year-to-year growth during 2Q19, the first quarter of its fiscal 2020, and 100% of BAH’s growth was organic as the company continues to eschew acquisitions. BAH’s strong performance in 2Q19 reflects how ideally positioned the company is to serve its federal clientele, as well as a growing number of commercial entities, with a high-value, differentiated solutions suite spanning the strategy, mission and critical IT needs of public and private sector clients alike. As a result of its strong 2Q19 year-to-year growth, BAH is also likely to be the top-performing organic growth vendor in TBR’s upcoming 2Q19 Public Sector IT Services Benchmark (publishing in early October). BAH’s growth and margin performance (operating margin of 9.8%) in 2Q19 mostly outstripped that of the trio of federal competitors that released 2Q19 earnings and fiscal performance last week: Raytheon (YTY growth of 5.3%; operating margin of 9.1%); General Dynamics Information Technology (YTY contraction of 11.6%; operating margin of 7.1%); and Northrop Grumman Technology Services (YTY contraction of 0.4%; operating margin of 10.8%). We believe BAH’s performance relates directly to its solution set, which sits at the juncture of federal agency IT and mission objectives with a differentiating blend of consulting, technology and emerging solutions.           John Caucis, Senior Analyst  

Leidos will release its earnings on Tuesday, July 30, and is expected to post top-line, year-to-year growth of between 5% and 7% to reach about $2.7 billion in 2Q19 revenue. Growth will derive from Leidos’ continued strong pace of new awards, net increases in volume across several high-profile programs, and improving win rates, which are accelerating the conversion of pipeline opportunities into bookings and revenue. Leidos should also be able to offset the wind-down of existing programs and some limited currency headwinds from unfavorable swings in the U.S. dollar. The company has guided for 2019 revenue of between $10.5 billion and $10.9 billion, implying a median 5% growth rate, and record backlog levels achieved in prior quarters positions Leidos well to achieve its projections. — John Caucis  

Finally, ManTech will release its 2Q19 fiscal performance and earnings after business hours on Wednesday, July 31. ManTech’s latest strategic acquisition (Kforce Government Solutions, or KGS) will add roughly $100 million in new revenue and expand ManTech’s opportunity set in the federal civilian segment, augmenting robust Department of Defense (DOD) and intelligence growth while inorganically boosting ManTech’s top-line growth (projected to be between 6% and 8% in 2Q19). ManTech’s top-line growth in 2Q19 should be significantly augmented by the KGS acquisition, as the purchase closed in April and immediately began to contribute inorganic revenue to ManTech’s top line. On an organic basis, classified customers continue to accelerate spend with ManTech, while spending on behalf of ManTech’s principal DOD and Intelligence Community clients continues trending upward. Prior to the KGS acquisition, ManTech tendered a 2019 outlook for full-year 2019 revenue of between $2.05 billion and $2.15 billion, implying growth of between 4.7% and 9.8% over FY18 revenue of $1.96 billion. KGS is expected to contribute between $60 million and $80 million in inorganic revenue during the latter nine months of FY19; this compelled ManTech to elevate its prior guidance for FY19 revenue to instead reach between $2.13 billion and $2.21 billion, implying growth of between 8.8% and 12.8% over FY18. — John Caucis  

Informatica touts AI benefits with a caveat: Data cleanliness and management are critical

To be widely effective, AI needs clean data and cloud scale

Informatica World 2019’s focus was on customers of all backgrounds and sizes leveraging AI to accelerate digital transformation. While AI is not a new or novel discipline, cloud computing has supported its growing accessibility by enabling scalable, cost-effective data processing. In that spirit, Informatica has forged partnerships with the three most prominent public cloud brands, Amazon Web Services (AWS; Nasdaq: AMZN), Microsoft (Nasdaq: MSFT) and Google Cloud (Nasdaq: GOOGL), and put these three Platinum partners on stage throughout the event’s keynotes and breakout sessions.

Google Cloud

Google Cloud was represented on the keynote stage by new CEO Thomas Kurian, who harped on both data processing at scale and the idea of ensuring you’re informing AI and analytics with clean and comprehensive data sets. Informatica and Google jointly announced that as of the conference, Informatica’s Intelligent Cloud Services (IICS) and Master Data Management (MDM) solution were available on Google Cloud, better enabling customers to move their data warehouses to Google Cloud Platform, leverage Informatica’s products in the environment, and run analytics through BigQuery and Google’s AI capabilities.

AWS

Ariel Kelman, VP of Worldwide Marketing at AWS, joined Informatica CEO Anil Chakravarthy on stage to describe how AWS is innovating and enabling customers with AI, but more importantly to explain the relationship between Informatica and AWS in supporting their joint customers. Kelman admitted that “a lot of [AWS’] services need data and a lot of that data is still on premises.” Though AWS is bringing its services into customers’ environments through AWS Outposts, customers also want help bringing their data to the cloud. In addition to supporting integration between Informatica products such as Power Center and IICS with Amazon Redshift, the partners announced a joint offering with Cognizant (Nasdaq: CTSH) that enables customers to complete a free, self-service data migration assessment. The assessment service leverages Informatica Enterprise Data Catalog on AWS and Cognizant’s data-to-cloud migration assessment and strategy services to help customers begin planning and mapping their data migrations to cloud. The service is intended to accelerate customers’ data migrations to AWS infrastructure while ensuring enlistment of Informatica data management products and Cognizant consulting and systems integration services in the process.

Microsoft

While Microsoft and Informatica did not make a formal announcement on stage, Microsoft had a large presence in the final keynote of Informatica World and in breakout sessions, highlighting how Microsoft approaches AI innovation and use cases across various industries and customer roles. At the outset of the event, Informatica announced its support of the Microsoft Common Data Model (CDM), data frameworks meant to ultimately reduce data silos across workloads and applications through data model standardization on Microsoft Azure. Informatica’s support of the Microsoft CDM, which is a key aspect of the widely discussed Open Data Initiative between Microsoft, Adobe (Nasdaq: ADBE) and SAP (NYSE: SAP), enables customers to utilize Informatica’s portfolio of products and solutions to manage data across applications and enable analytics and business intelligence efforts across the data landscape. TBR believes there’s a clear opportunity for Informatica to similarly extend its Customer 360 and Customer 360 Intelligence solutions into the Open Data Initiative alliance, particularly to bring greater light to the capabilities brought with Informatica’s recent acquisition of AllSight, a storyline that was overshadowed at the event despite its deliberate inclusion in the narrative.

Three years after launching Google One, Google Cloud nears enterprise readiness with Anthos

Google Cloud’s enterprise journey started with Diane Greene and the ‘One Google’ strategy

When Google entered the public cloud market it leveraged the company’s positive reputation among developers as well as technological expertise around machine learning and data analytics from its Search business. However, as a cloud vendor, the company had yet to establish a reputation or a business model that appealed to enterprises. Customer engagements were largely disjointed as G Suite and Google Cloud Platform were sold by different sales teams, making it cumbersome for enterprises to adopt multiple offerings within Google Cloud’s portfolio. To attract and win enterprise customers, Google Cloud hired Diane Greene as CEO in 2015 and created its “One Google” enterprise strategy in which Google Cloud planned to unify its SaaS and PaaS offerings in sales and engineering. Greene’s experience as the co-founder of VMware made her particularly qualified to lead the new strategy, but she was unable to establish the business messaging that large enterprises seek. However, Google Cloud’s value proposition to enterprises has improved over the past three years under Greene’s leadership with a degree of portfolio integration and technology advancement in areas such as machine learning, analytics and Kubernetes.

Incremental improvements are the backbone of Google Cloud’s enterprise-grade platform, Anthos

Over the past year Google Cloud’s momentum has continued to accelerate: Thomas Kurian was appointed CEO, the company partnered with large vendors such as Atos and introduced Google Cloud Services platform, which included hybrid capabilities with Google Cloud’s GKE and its new managed on-premise private cloud, GKE On-Prem. While many of these developments were noteworthy on their own, Google Cloud’s Anthos Platform, announced at Google Next in April, brings together the vendor’s technological advancements and partnerships, as well as new capabilities and infrastructure agnosticism that truly appeals to enterprises.

At its core, Anthos is a rebrand of Google Cloud Services Platform, a multicloud management toolset first announced in July 2018. In addition to GKE On-Prem’s general availability through Anthos, Google Cloud also launched Anthos Migrate, which enables customers to manage workloads running on Amazon Web Services (AWS) and Microsoft Azure. Anthos Migrate automates the migration of virtual machines from on-premises or cloud environments into containers in GKE, which helps simplify migration to Anthos.

The ability to migrate from — or run workloads on — AWS and Microsoft IaaS in addition to Google Cloud Platform (GCP) is vital to Google Cloud’s enterprise strategy, as 30% of enterprises plan to increase the number of IaaS providers in their hybrid environments over the next two years, according to TBR’s 2H18 Cloud Infrastructure & Platforms Customer Research. Further, enabling these organizations to containerize legacy applications on premises in Anthos helps alleviate virtual machine maintenance and OS patching pain points for enterprise IT departments. Migrating to Anthos also enables customers to leverage offerings such as Google Cloud AI in GCP while keeping certain workloads on premises, which is particularly beneficial for organizations facing corporate, government or industry regulations.

Google Cloud’s partner ecosystem will support, sell and augment Anthos to drive customer adoption

Because Anthos is a completely software suite, customers can deploy it on their existing hardware rather than replacing on-premises assets with new infrastructure. For customers that have existing hardware or plan to buy additional infrastructure, Google Cloud hardware partners such as Cisco, and hyperconverged infrastructure partners including Dell EMC, Hewlett Packard Enterprise, Intel and Lenovo are making their offerings compatible with Anthos, enabling customers to configure or purchase the underlying hardware based on their storage, memory and performance requirements.

System integrators including Accenture, Atos, Cognizant, Deloitte, HCL Technologies, NTT DATA, Tata Consultancy Services and Wipro are also developing services and solutions to provide managed services for Anthos, helping Google Cloud customers integrate Anthos into their hybrid environments. TBR expects these partners will drive adoption of Anthos, as they bring Anthos to market and sell the suite to their customer bases, helping expand Google Cloud’s addressable market.

IBM’s Kubernetes-based IBM Cloud Private offers a similar value proposition, but Google Cloud’s expertise in Kubernetes may help fend off competition from IBM, as well as Microsoft and AWS

Google Cloud’s most formidable competitor regarding Anthos is IBM and its Kubernetes-based PaaS offering IBM Cloud Private, which is gaining traction in the market as evidenced by the vendor’s 200 customer signings in 4Q18. Additionally, IBM’s tenure as a trusted enterprise provider makes the vendor a favorable choice for many organizations. However, IBM is also seen by many enterprises as a legacy on-premises provider, whereas Google Cloud is a born-in-the-cloud business with a strictly cloud-oriented business model. In the public cloud market, Google Cloud is growing at a faster rate than IBM, showcasing Google Cloud’s superior perception in the market. In addition to its improving perception among large enterprises, Google Cloud can leverage its reputation among developers to outcompete IBM in the small- to medium-enterprise space.

AWS’ Amazon Elastic Container Service for Kubernetes and Microsoft’s Azure Kubernetes Service are Kubernetes-based PaaS offerings similar to GKE, but the on-premises capabilities for each offering lag behind those of Anthos. Azure AKS will become available on Azure Stack, but the plans to create Azure AKS on Azure Stack were just announced in February. Amazon EKS can connect to Kubernetes apps running on premises, but the capabilities are more limited than those of Anthos as AWS has not yet developed an Amazon EKS on AWS Outposts. TBR expects Google Cloud will be able to fend off competition from IBM, AWS and Microsoft, as Google Cloud — as the inventor of the technology and with a network of more than 20 ISV partners with Kubernetes apps in the GCP Marketplace — has a prowess that may help swing customers in its favor.

Kurian brings enterprise smarts to Google Cloud

During his tenure at Oracle, Thomas Kurian proved himself as a balance of technical savvy and business strategist at a company that serves the largest enterprises in the world. He reportedly left Oracle because he believed more fully in a strategy to coexist with the cemented leaders in the public cloud IaaS market. Both of these points fit Google Cloud’s aspirations well.

Creating its Google Cloud division and appointing Diane Greene as its CEO in November 2015 was the first step Google, Inc. made to tell a cohesive story around its managed cloud services and more effectively vie for share of the enterprise cloud market in competition with Amazon Web Services and Microsoft Azure, among others. Greene’s enterprise experience from co-founding VMware qualified her to start this transition, but potential Google customers have indicated to TBR that Greene’s empathy had not effectively trickled down the organization to complete the business messaging enterprises are looking for. TBR believes Kurian is a perfect fit to complete what was started by Greene, and he will be able to wrap Google’s technical abilities in a more clear and compelling enterprise story.

What Diane Greene’s Departure Means for Google Cloud

“While the AI-centric strategy played to Google’s strengths, it didn’t help much with more boring workloads such as storage and website hosting that drive Amazon’s dominance and are the bulk of the cloud market. ‘They’ve been making the right moves and saying the right things, but it just hasn’t shown through in performance financially,’ says Meaghan McGrath, who tracks Google and other cloud providers at Technology Business Research. She says Google is still hamstrung by a perception that it doesn’t really know how to work with corporate IT departments—an area where Microsoft has a long track record.”

Earnings recap: Amazon, Microsoft and Google grow fast and keep hold on the market — for now

Although the market is consolidating around AWS, Microsoft Azure and GCP, the trailing vendors are unable to match AWS’ quarterly revenue gains

Consolidation is occurring across cloud segments, with the most notable convergence occurring around the five leading PaaS and IaaS players, blending the lines between PaaS and IaaS. Customers and applications vendors are flocking to the leading players Amazon Web Services (AWS), Microsoft Azure and Google Cloud Platform (GCP). This is evidenced by these three vendors collectively growing 58% year-to-year in 2Q18, while the total PaaS and IaaS market is expected to grow only 16% year-to-year in 2018. This consolidation is helping the largest players continually capture greater market share and, as a result, largely dictate the growth of the PaaS and IaaS markets.

With the leading vendors’ CY2Q18 earnings results now public, it is clear that AWS continues to rule the PaaS and IaaS spaces, sitting at almost three times the size of second-place Microsoft Azure and sustaining greater quarterly revenue additions. Google sits in third place in mindshare for many customers, but trails AWS and Microsoft Azure in revenue by a large margin. These three vendors face increasing competition from Alibaba, which continues to expand its global reach, and IBM, which has seen more success in private cloud and hybrid IT.

AWS maintains its public cloud lead through continuous innovation, but faces growing opposition as new and existing competition strengthens

AWS accelerated revenue growth for the third consecutive quarter in 2Q18, up 48.9% year-to-year to $6.1 billion, further extending its lead in PaaS and IaaS. AWS’ position as the far-and-away market leader causes the competition to fiercely innovate and expand to challenge the vendor. However, AWS’ mindshare has been secured, and paired with its portfolio breadth, innovation pace and global availability, inserts the vendor into the bulk of customer and partner evaluations. AWS’ determination to innovate with and ahead of customer needs continues to drive service and feature releases, aimed at winning new workloads without compromising profits. Halfway through 2018, AWS has released 800 new services and features, an accelerated pace of service innovation from 2017’s record level.

Microsoft Azure continues its fast-paced growth, but will remain behind AWS in revenue for the foreseeable future

Microsoft’s Commercial Cloud revenue, which includes public cloud and private cloud versions of Office 365 commercial, Dynamics 365 and Azure, approached $6.9 billion as Microsoft nearly doubled the number of Azure agreements worth $10 million or more over the last year. Azure revenue grew 89% year-to-year to $2.2 billion in 2Q18.

Microsoft’s combination of traditional software, public cloud and on-premises private cloud positions the company to be the backbone of customers’ hybrid environments — a label few competitors, especially AWS and Google, can claim. As such, Microsoft is uniquely positioned to help customers extract the value from their integrated data and has put itself at the forefront of innovation and commercialization of emerging technologies such as artificial intelligence (AI) and Internet of Things (IoT) to capitalize on this leading position.

Google will be unable to retain its third-place position as it fights to shift market perception and fend off strengthening competition

Relative to AWS and Microsoft Azure, GCP is far behind in the PaaS and IaaS space but is trying to prove to customers that it is as enterprise-ready as its main competitors. As Google solidifies its cloud portfolio and builds out key offerings, the company has also prioritized improving its large enterprise go-to-market efforts under its One Google strategy. Google Cloud, which consists of G Suite and GCP, increased revenue by an estimated 56% year-to-year, nearly reaching $1.42 billion. TBR expects Google Cloud revenue will increase to $1.6 billion in 3Q18 as the vendor continues to execute its One Google strategy.

While Google is investing in its go-to-market activities and shows progress through growth, its overall reputation in the market has been slow to adapt from consumer-grade to enterprise-ready. To combat that market perception, Google Cloud focuses its innovation on mastering four areas of expertise: machine learning and analytics, security, application developer tools, and connected business platforms. Recent investments in hybrid enablement and improved rendering capabilities demonstrate Google’s ongoing commitment to becoming a leading cloud vendor in differentiated areas of high-growth opportunity. While Google will succeed in these discrete areas, TBR expects Alibaba to emerge as the third-place general-purpose PaaS and IaaS provider.