Research

SUMMARY

Cloud computing transition and big data platforms are poised to be the industry drivers of growth as it is expected an exponential increase in data volume and a growing need for companies to deal with all that information.

Private Cloud and Big Data require not only hardware and software but also a design of the deployment that ensures the usefulness and efficiency for the customers. Also these customers will need implementation and support services. This is why I believe Datalink is in a very good position to benefit from this opportunity. It relies in the best hardware and software suppliers in the industry and is investing ever more in top of class engineers and consultants, even engaging in acquisition strategy that enables them to gain exposure to the whole data center service.

With all this there are another couple of things to notice: Prices and Budget. Especially in the case of hardware, prices are always in a downtrend so providers need to keep investing on developing new products. This is always a big deal because of gross margins. As a reseller, DTLK is less exposed than OEM and is more able to overcome the situation as it also provides services with historically higher margins than products. Still, there’s one thing no company can escape: Economy. Macroeconomic conditions are forcing governments to cut spending, and US is no exception. This can limit the potential growth as US public sector is a major player in this field. 

RESEARCH

Datalink is a data center solution provider that has been widening the range of services in order to offer a more comprehensive set of solutions to its customers. Like it was mentioned in the business description, DTLK incorporates four business segments: Virtualization, Storage, Networks and Recovery Solutions.

An industry analysis should focus on the expectations of growth and profitability of each of these segments as well as the actual position of the company in the industry.

As a private investor, I don’t have access to industry research so this is a difficult work that involves reading a lot about the business, searching for key drivers to do some research on my own. On the other hand I have the means to see the actual position of the company in the industry.

After reading the company’s reports and some news about it I understood “Private Cloud”, “IT spending” and “Big Data” were major factors to this business. Cloud Computing is the hottest theme for a while and it will be the driver of growth for IT companies in hardware, software and services businesses. Also growth is limited by the amount customers are willing to spend on IT. “Big data is a collection of data sets so large and complex that it becomes difficult to process using on-hand database management tools. The challenges include capture, storage, search, sharing, analysis and visualization.” (Source: Wikipedia). Rapid growth in big data should materially expand the market for storage over the next few years.

Exceptionally, I was able to access a Bloomberg terminal and retrieve some information about these key factors.

Private Cloud

IDC estimates a CAGR (2010-2015) of 12% revenue growth in virtualized storage systems and an increasing weight of these in the total external network storage industry. Also there seems to be evidence that companies are increasingly adopting virtualized environments. IDC forecast small double-digit growth in cloud spending and that this will cause a market share gain in EMC and NetApp (both DTLK suppliers). NetApp and EMC are more likely to benefit the most from transition into cloud computing because of their lead in unified storage technology.

(Source: Bloomberg and IDC)

By now, I realized Public Cloud can actually compete with Private Cloud for the same budget. Facebook, Google and Amazon are examples of companies which opted for a public cloud model. Spending on private clouds surpasses that for public clouds because public cloud adopters are able to acquire large storage and computing capacity at much lower costs. With that in mind, it’s also true that most large corporations want to retain control of intellectual property and minimize security risks. Private clouds offer the agility of clouds by deploying the infrastructure within a firewall, minimizing risks.

(Source: Bloomberg and IDC)

I think this is enough to conclude that in regards to virtualization, business is poised for growth as companies’ storage systems transition to cloud computing that consequently need maintenance, assistance and upgrades as business needs keep evolving.

IT Spending

As we can see, IT spending is going to increase at a bigger pace in all segments through 2012, except for servers and software, according to IDC. Software should be the segment with the highest percentage of spending growth for the next few years. It is also expected that as exponential data growth drives demand for storage management and security software, high margin software vendors would benefit their overall margins with increasing software revenue mix.

(Source: Bloomberg and IDC)

To what regards storage spending there are some mixed opinions as I found out. There are no doubts that spending will increase driven by virtualization and cloud computing solutions, but there are arguments in favor of a slower growth. These arguments are related to the economic weakness in general, and in US in particular. Some say that economic conditions are forcing US government to cut IT budget. They support this view with evidence that NetApp’s revenue from US public sector (which holds leading market share in this sector) decreased 6% yoy in 4Q 2012. On the other hand, U.S. corporate spending is closely aligned with earnings and the current macroeconomic situation can hurt corporate earnings as well.

(Source: Bloomberg)

Big Data