A Wall Street Transcript Interview with Matt Hedberg, Equity Research Analyst with RBC Capital Markets: Large Paradigm Shifts in Software Within Cloud Computing and Data Centers

Wall Street Transcript

67 WALL STREET, New York - June 5, 2014 - The Wall Street Transcript has just published its Business and Application Software Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Cloud Computing Secular Trends - Application Software Consolidation Activity - Cloud Computing and SaaS Trends - Larger IT Systems Upgrades - B2B Recovery - Paradigm Shifts in Software - Software-Defined Data Centers - Business Services Capex Spending

Companies include: Salesforce.com (CRM), VMware, Inc. (VMW), Citrix Systems, Inc. (CTXS), International Business Machine (IBM), Microsoft Corporation (MSFT), Intel Corporation (INTC), Cisco Systems, Inc. (CSCO), Juniper Networks, Inc. (JNPR), EMC Corporation (EMC), NetApp, Inc. (NTAP), Red Hat Inc. (RHT), Oracle Corp. (ORCL), SAP AG (SAP), PAR Technology Corp. (PTC)

In the following excerpt from the Business and Application Software Report, an expert analyst discusses the outlook for the sector for investors:

TWST: What is your coverage in the software space?

Mr. Hedberg: I have fairly extensive coverage in the space. I cover about 26 names across security, applications and infrastructure.

TWST: There are a lot of different definitions for some of these terms. How do you define the application space?

Mr. Hedberg: In general, it refers to applications a business owner would interface with, like salesforce.com (CRM). There is a fine line, to be quite honest, but a lot of times application software focuses on the productivity side or the user-interface side. A company like VMware (VMW) provides infrastructure for data center and does not really provide applications in the traditional sense. Citrix (CTXS) has some applications, plus they also have infrastructure software. We generally think of application software having a user interface.

TWST: What are the overall trends we are seeing in the space right now?

Mr. Hedberg: There are some large paradigm shifts going on right now in software. If you think about historically, we came from a mainframe era that was defined by IBM (IBM) and others that was very much what we call the distributed architecture, or you had all the processing going on in central locations and the interfaces was through what we called dumb terminals. Then Microsoft (MSFT) and Intel (INTC) came around and introduced the personal computer or the PC, and then we went from a mainframe to more of a distributed computing environment called client/server. That moved a lot of the processing from a data center to a workstation. That was a huge paradigm shift.

Now with cloud computing, we are almost seeing a little bit of reversion to a mainframe-like environment, where you are seeing more processing in the cloud, for instance salesforce.com rather than our own desktop and users interface to the cloud through an Internet browser. The other big paradigm shift right now is what data centers look like. Historically a lot of the processing took place on hardware and software interfaced with the hardware. When VMware came around, they introduced the hypervisor, which allowed IT to streamline how they run their processing, which we call compute. You were able to get a lot more compute done on less hardware because you were virtualizing these operating systems, and you had much higher density, higher throughput, which was very, very cost effective. You could reduce your capex spending with similar or even more compute power.

When you think about a data center, there are three components: compute, which is the servers; and then you have networking gear from vendors such as Cisco (CSCO) and Juniper (JNPR); and then you've got storage, so EMC (EMC), NetApp (NTAP), things of that nature. Now we are seeing a paradigm shift called software-defined data centers, where people are taking similar principle that we apply to servers, i.e. VMware virtualization, and we are applying some of those same principles to storage and networking gear to try to put more of this logic in the software layer, effectively trying to do more with software and do less with hardware. That is called software-defined data centers. It's a huge paradigm shift that certainly plays a role in cloud computing as well, but this is a 10-year or more trend that we think is certainly very disruptive...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.