Friday, December 03, 2010

Energy Savings in the Cloud

Cloud computing saves energy!

How do we know this? A study completed by Greenspace (private ), a green building supplier based in Illinois, completed a study of enterprises using NetSuite’s (N: NYSE) ERP and CRM applications (Enterprise Resource Planning and Customer Relationship Management). NetSuite delivered these popular enterprise applications through a Software-as-a-Service (SaaS) platform wherein the software stays on NetSuite’s servers and enterprise customers access the applications via a network connection - i.e. cloud computing.

Customers in the Greenspace study were able to reduce overall server room electric consumption by more than 99%, representing a decrease in cost of more than $10,300 per customer per year. Since server rooms and data centers account for as much as a third of an organization’s information technology budget, the size of the savings has enterprise and even government agencies taking notice. The cost of the servers is shifted to the SaaS provider, which at least in the cast of NetSuite has proven capable of managing a more energy efficient data center.

SaaS had been an increasingly popular option as large organizations grappled with the high cost of original software licenses and updates. Yet the energy savings potential has business and government agencies fine tuning their calculations on the SaaS or cloud computing option versus outright software licenses to get the applications that will make their operations hum.

Earlier this week the U.S. General Services Administration (GSA) tapped Google, Inc. (GOOG: Nasdaq) to provide e-mail services for the entire agency through its Goggle Apps services. (Just as an aside it should not be a surprise that the day before the announcement of this major contract, Google jettisoned the controversial WikiLeaks web site from its server platform after WikiLeaks made available a large volume of very embarrassing documents pilfered from the U.S. State Department.)

The GSA estimates that moving its IBM Lotus Notes to Google Apps could save the agency as much as 50% on its e-mail bill over the next five years. Unisys (UIS: NYSE) was tapped to handle the infrastructure component that is apparently fulfills the government “belt and suspenders” approach to message security.

The arrangement leaves out Microsoft (MSFT: Nasdaq) and IBM (IBM: NYSE) both of which have been trying to build cloud computing solutions. Microsoft’s Windows Azure has attracted a few enterprise customers such as 3M (MMM: NYSE) and General Mills, Inc. (GIS: NYSE). IBM roared onto the cloud computing racetrack with a series of acquisitions, beginning with Cognos, which IBM bought at the market peak in 2007 for $5 billion. More recently IBM bought Sterling Commerce from AT&T for $1.4 billion and Cast Iron Systems for an undisclosed amount.

Most likely IBM and Microsoft need not worry. The competition is just beginning. The GSA news provides evidence that the cloud computing market place has moved past the early adopter stage as late adopters like the federal government are beginning to get involved. Indeed, we expect even more competitors to launch cloud computing offerings.

Principal on the list of likely new entrants are the telecom services providers, which are always hungry to find new product offerings for their customer base. This premise is one of the legs in the Crystal Equity Research investment case for Verecloud, Inc. (VCLD: OTC/BB), an emerging player in the cloud computing space. Verecloud’s NIMBUS Xchange is a turnkey ecosystem for enterprise cloud computing that can be used by a telecom as an alternative to costly and time-consuming internal development. The software architecture is designed to fit neatly into the back office, complementing the existing customer, service and resource management layers.

Nimbus development is complete and Verecloud is trolling for its first customers. Verecloud is entering the cloud computing space with impeccable timing and a highly differentiated product. Competition might come from systems integrators such as Accenture and IBM that are attempting to patch-in solutions for the largest, Tier One telecoms. At the other end of the spectrum are smaller players with cloud computing offerings for telecoms such as Savvis, Inc. (SVVS: Nasdaq) and Jamcracker (private). Savvis has been working with Verizon for a few years on a SaaS offering and is reportedly working on computing-as-a-service. Established hosting providers such as Rackspace, Inc. (RAX: NYSE) have also hung out their cloud computing shingle with hosted applications for small and medium size business, presenting potential competition for Verecloud’s telecom partners.

For the investor looking for a pure-play position that will yield a return on the shift to cloud computing, the choices are mixed among the companies high-lighted here.

Verecloud is a micro-cap that has not earned its first dollar of revenue from its NIMBUS platform. The company is newly public through a reverse merge and its stock has yet to trade with regularity. A VCLD position is a bet on management’s ability to use their telecom connections to penetrate that target market.

Savvis shares are more seasoned, but carry a beta over 2.00 as a risk measure. Savvis has revenue - $900 million in the last twelve months ending September 2010 - but has reported only a single penny of positive earnings in the last three years. The questions of critical mass and breakeven revenue level must be answered before taking a position in SVVS.

Rackspace’s legacy hosting business drives its earnings and its forward price/earnings ratio of 55.7 times the consensus estimate suggests confidence in future growth. A long position in RAX is more a bet on whether the hosting business remains viable.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has issued a report on VCLD with no rating.


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