Editor's note: This story has been updated to reflect news from yesterday's fiscal first quarter earnings report, released yesterday.
Cloud technology led to a number of dramatic changes in speed, security, and access when it comes to data storage and retrieval. It turns out those leaps only set the stage for significant disruption in a variety of industries -- the real benefits come in the “unlocking” of services and processes that were previously trapped in centralized solutions. The Cloud allowed smaller organizations to rent powerful capabilities to meet specific needs, instead of investing significant capital to purchase massive software or hardware.
That means the one-solution-fits-all approach championed by industry giants is well on its way out the door. Closed systems from Oracle
(NYSE:HPQ), SAP AG
(NYSE:SAP), and others are giving way to customized, open source solutions that can be more easily designed to serve customer needs. This will provide small to mid-sized businesses with greater access to services on an as-needed basis, enabling leaner infrastructure and faster growth. Development and operations will come together in a more advanced, easier-to-implement setting, with seemingly endless tailored solutions that are seamlessly integrated into evolving operating environments. This dynamism is a heady shift away from the static nature of large legacy enterprise solutions that are built to serve a wide range of clients.
Another major factor in enterprise disruption is the advance of Application Programming Interfaces (APIs). APIs are powerful translators that allow users to extract data from existing platforms or ecosystems in usable formats. Information can be more easily manipulated and used in an open environment, presenting users with more options and loosening the grip that legacy software companies have had for decades.
This massive disruption is bringing immediate, meaningful change to the face of enterprise infrastructure. While companies like Google
(NASDAQ:GOOG) and Amazon
(NASDAQ:AMZN) are grabbing headlines in the space, several companies that have been working quietly behind the scenes of API development and tailored SaaS offerings are worth watching.
F5 Networks (NASDAQ:FFIV) has expanded from a traditionally hardware-based set of solutions to accommodate virtualization, to an application delivery networking (ADN) technology that optimizes delivery of information across servers and data-storage devices. When data travels to servers, it comes across an Application Delivery Controller (ADC), which examines the transmission and decides if there are security threats, decrypts data, prioritizes different data streams, compresses incoming and outgoing data to reduce bandwidth by up to 80%, and distributes traffic to underutilized servers.
F5 is primed to bring a strong offering of virtual services based on its experience with traditional servers, and the company should benefit as digital traffic continues to explode. F5 is likely to become an important supplier of virtual firewalls, ADCs, policy enforcement, and other virtual network services in emerging overlay environments.
Update following Q1 earnings report: F5 Networks has refreshed their products in 2013 to reignite their growth. The Street expected immediate results and punished the stock in 2013 as growth slowed. As longer-term investors, we were excited by F5’s focus on network security and on software virtualization products. F5 Networks has advanced its leadership in the ADC market with the acquisition of LineRate Systems in 2013. All of these efforts effort are now bearing fruit in both top and bottom line results as we head into 2014 – and it looks as though there is more opportunity ahead. Importantly, F5 has maintained its extraordinarily high margins which bodes well for future earnings. With the U.S. leading economic indicators up or improved in 2013, we expect to see an advance in capital expenditures in 2014 – and believe F5 Networks could find gathering wind at its back.
Citrix Systems (NASDAQ:CTXS) has grown into a leader by helping to define the market for virtual desktop infrastructure. IT departments can easily manage their Microsoft (NASDAQ:MSFT) products through remote desktop software. This ability opens the door for new tools and services that support a wider range of application and devices.
The advances are sending ripples through the industry. It is hard to tell at this early point which might hold winning hands, but it is becoming clear that antiquated, hardware-based enterprise leaders of the past will be losers at the table unless they pivot immediately. The cloud has changed the game, and the market is calling for a user-empowered environment.
To read more about our thoughts pertaining to opportunities in the cloud, please download our discussion paper titled, "Upside in the Cloud: Investing in the Cloud’s Impact On Information Technology."
No positions in stocks mentioned.
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