Some takeaways from Morgan Stanley's Q4 CIO survey
- Software has the highest growth expectations in IT
- Strong demand in software persisting (not simply pull forward in 2021)
- Cloud computing remains CIO's top priorities
- Security software most defensible
More graphs below
"Survey data suggests 25% of application workloads are running in the public cloud today, up from 23%... in 2Q21. The multi-year trend in the migration of applications to the cloud remains intact, with CIOs expecting 44% of workloads to reside in public cloud by 2024"
Similar data but presented differently. We're in the early innings of the cloud
Cloud computing, security software, and digital transformation are the top 3 priorities
Security software remains the most defensible category
"As workloads continue to shift from on-premise to the cloud, Microsoft and Amazon remain the largest beneficiaries , both in 2021, as well as over the next three years"
"Snowflake screens as the vendor with the highest weighted average growth expectations in 2022 at +7.1%...30% of CIOs surveyed expecting spend to increase in 2022, vs. 0% of CIOs expecting spend to decrease."
Microsoft has the highest up-to-down ratio of 70%
Maybe most importantly:
"Expectations for software spending growth in 2022 remain ahead of historical levels, refuting the notion of a pull forward in demand in CY21"
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After Q3 '22 Snowflake guided to 47% growth in 2023. Yesterday they dropped that guide to 40%. What was the cause? 3 things primarily (in ascending order of impact)
1. Change in existing customer purchasing behavior 2. Weaker new logo bookings 3. Slower ramp from newer customers
1. Change in existing customer purchasing behavior
Snowflake sells annual / multi year deals that come with minimum consumption spend. Once customers reach those committed spend levels, they have the choice to re-up with another multi-year commitment. Usually, they do...
...however, this quarter Snowflake saw more of these customers buy just enough capacity to get them through the next few months, nothing more.
Important to remember - the bigger impact of this is on bookings (more on this later), not revenue. Customers are still consuming...
Positives
- Strongest new logo quarter
- Gross churn very low
- Healthy pipeline generation
Negatives
- More optimizations in Q4 than Q2 / Q3
- Things got worse in December
- Weak 2023 guide
$DDOG
The best summary quote from the earnings call was "Overall, we observed slower usage growth with existing customers while continuing to scale our new logo acquisition and new product cross-sells."
The tricky balance is the commentary around the record new logo quarter + strong pipeline generation with weaker near term optimization headwinds
Some quotes:
"we had our strongest new logo quarter to date, with a record level of new logo ARR bookings"
Investing in infrastructure businesses, particularly data infrastructure, has been incredibly exciting over the last few years (and will continue to be!). A couple data infra stacks Im excited about
1) Analytics stack 2) Real time stack 3) Data Lake stack 4) AI stack
More below
1. The Analytics Stack (or Modern Data Stack). Typically consists of: 1) Data Source (transactional database, SaaS app, etc) 2) ELT tool (Fivetran, Airbyte, etc) 3) Data Warehouse (Snowflake, Redshift, etc) 4) Data Transformation tool (dbt) 5) BI (Looker, Sigma, etc)
We hear a lot about this stack. Budgets are massive for it, and many companies have hit escape velocity building different layers of the stack. How each vendor evolves will be interesting to watch. There are also newer parts of this stack emerging (Reverse ETL, Data quality, etc
Consumption models under fire this year given easier to optimize (reduce) spend quickly. This pain happens quick.
However, everything I'm hearing pointing to new customer signups posing the biggest challenges currently, and expansion / churn seeing relatively less pressure...
...Models more reliant on new customer signups for growth feeling more pain now, vs consumption models felt it earlier in the year.
What do I think of this? 2023 might be the year consumption models actually show more resiliency (less growth decay)...
...If more of your growth is coming from scaling existing customers vs signing up new ones, it'll be easier next year when the burden of getting through procurement / legal for a new customer signup gets tougher.
Of course, it's never purely a business model question...
Lots of interesting announcements from AWS at re:Invent today. Some new products, and some product enhancements. Data and Security are clearly top of mind for them. Some of my favorites below:
AWS Security Lake: A central data lake purpose built to store and analyze security data (primarily log data)