Why Cloud Migration is Just Getting Started

Hey everyone, Mauser’s post about constantly hearing management say we’re in the early stages of the cloud inspired this post.

Quick note… I still plan to post my Feb results, I was up 28.77% at the end of Feb (I’m now up around 20%). I didn’t post yet because I’ve been making a lot of adjustments to my portfolio and we can’t mention companies for at least 2 days after our trades on the boards.

Anyways, on to the cloud. For the last year, I’ve worked at a consulting firm and our biggest partners are Google Cloud, AWS, Microsoft, Salesforce, and Tableau. So most of what we do is related to the cloud.

Every cloud-related project I’ve ever worked on or heard people talking about has really only been a transition for small chunks of the client’s overall infrastructure. In my experience, they don’t overhaul the entire business at once (especially Fortune 500 companies). So in every case I’ve seen, there has been departments/services transitioned to the cloud and some staying on-prem.

This happens for a few reasons…perceived risk or inexperience with the cloud, transition cost (even though it’s cheaper generally once someone is up and running in the cloud, the initial migration is very costly. Companies have to hire consultants, re-allocate current employees who may already be fully loaded with other tasks or not trained on these cloud technologies, hire new employees (developers) with new skills.

But probably the single biggest barrier to these migrations is just the MASSIVE amounts of data and programs that are running on infrastructure that is in some cases 20+ years old. In every case, there’s a long discovery/analysis to even figure out what employees own what applications, what the data dependencies are, what the second and third order effects will be due to the transition, etc.

In many cases, businesses have no idea which programs are still active and which aren’t, or if they know they are still active, many application owners don’t understand the processes or infrastructure their applications are built on, they took ownership of them during a 4 hour transition period from the old app owner who had all the institutional knowledge from the last 20 years, then left the company with a 2-week or one day notice. Yes, this happens ALL THE TIME.

So basically, there is really really really old and out-dated infrastructure, there’s SO MUCH DATA that companies don’t know where to start, these migrations happen in phases and take a long time, a lot of institutional knowledge has left companies over the last 20 years which leaves a gap in understanding of their old infrastructure which makes cloud migrations expensive and time-consuming up front.

BUT, these companies know it’s just a matter of time until their old infrastructure completely breaks, they know security is a concern on these systems (we see the breaches all the time), and they know that over the long-term, it’s cheaper to move to the cloud (or at least have an updated hybrid strategy), and once they do transition, the can innovate SO MUCH FASTER because they don’t have to maintain their own infrastructure.

It’s just a matter of prioritizing the expenses to please shareholders, manage risk, and allow for R&D to continue.

None of this is new information. Most companies talk about this stuff in their earnings releases. I just wanted to share my own perspective on it.

For me personally, the big investing takeaway is to find the most innovative companies with best-in-class products that have a very easy to understand sales pitch and serve a critical component of a business. I really think things like P/S and P/E are almost irrelevant (clearly with the exception of bubbles) because the best software products tend to grow like weeds once a company is exposed to them.

I think many of the companies we talk about on this board do exactly that. Some critical components, in my opinion, are security, communications, data & analytics, HR, Marketing and Agile Project Management (how software is developed).

This is why dollar-based net expansion rate has probably become the most important metric for SaaS companies in my opinion. That number alone tells us everything about the quality of their products, ability to innovate, sales effectiveness, and quality of customers.

  • Austin

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** That comment about seeing security breeches all the time was in regard to breeches that are public information. I did not mean, nor do I know of any breeches that are not public information. I just forgot to add “in the news” after that.

  • Austin

Shopify (SHOP) Ticker Guide

For information on all of my current holdings view my profile here: http://my.fool.com/profile/CMFAleeb/info.aspx

On the flip side, think of the massive applications in COBOL that still exist … those are not going to be easy to move to the cloud and the reason they are still running in COBOL is because they aren’t easy to migrate.

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thanks Austin,

I’m a newbie to this board ( but have read everything from post 1) and a retired IT person. I agree 100% with what you have said above. In most companies there is massive resistance to change anything from the status quo. Things that help companies decide to make those changes are significant disruptions of service that are caused by unknown/undocumented problems that arise during production running of in-house developed software. That’s why some programmers and almost all system managers have to wear pagers 24/7. Most companies don’t understand what the cloud can offer them but it is getting better. I expect all our SaaS companies to grow (some much better than others, it’s our job to sort those growers out).

I’ve learned a lot from this board and Saul, you are a man amongst men. Thank you all for the help.

Ron

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Hey Ron,

Thanks for the kind words. Really glad to have you in the community. I hope to see you post more as your experience is incredibly valuable.

Great post, thanks for sharing.

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Great post! Very informative and insightful. One question. What are the bubbles you mention? Thanks.

John

“This is why dollar-based net expansion rate has probably become the most important metric for SaaS companies in my opinion. That number alone tells us everything about the quality of their products, ability to innovate, sales effectiveness, and quality of customers.”

I don’t think we should look at the expension rate alone but also at the customer growth. We saw Pivotal with a 156% expansion rate but still went down because of customer growth.

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great post Austin… agree with most things said.

couple of points to consider / to add:

  1. In many cases, enterprises may not go fully on public cloud. The cost benefit of public cloud reduces for larger enterprises and for control and other reason, the end (steady state) outcome may be a hybrid cloud (part on public cloud, part on private cloud). This is abundantly clear even today as spending on private cloud is also growing.
  2. Because of hybrid cloud reality, companies like SAIL, Pivotal, PSTG, NTNX continue to have good future even if not as fast growing as some of the pure play names we follow here.
  3. ZS to me stands out - they offer brilliant solution to address both public and private cloud and just fantastic execution and strategy
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On the flip side, think of the massive applications in COBOL that still exist … those are not going to be easy to move to the cloud and the reason they are still running in COBOL is because they aren’t easy to migrate.

And why exactly would that be? Is a COBOL program not able to run in a VM? Of course it is.

Mark

Is a COBOL program not able to run in a VM? Of course it is.

Well, maybe … is there a COBOL compiler for the OS running in that VM? Is it a compiler which is really capable of production work? My impression is that the bulk of COBOL applications are running on hardware that is legacy as well.