December 6, 2017
5 Takeaways from AWS re:Invent
Last week Clearsight was in Las Vegas for Amazon’s annual cloud computing conference, AWS re:Invent. Although to call this simply a conference would be an understatement – with 40,000+ attendees across four venues, the strip was overrun by AWS devotees energized by the tech giant’s latest round of breathtaking releases for the platform. This event was truly a celebration of cloud computing as a platform and a showcase for possibilities in innovation.
The conference was abuzz with chatter for every crowd, and by week’s end we noticed a handful of re-occurring topics. (And no, I’m not even thinking about the amount of times we heard Shawn Mendes’ “There’s Nothing Holdin’ Me Back” while camped out around the casino.) As dealmakers our attention was directed toward the M&A and capital raising landscape, which was simply electric when compared to this time one year ago. Our takeaways from this year’s AWS showcase conference:
- Precarious position for technology partners. AWS technology innovation continues at a breakneck pace. Journalists could barely keep up reporting announcement in artificial intelligence, machine learning, IoT, container orchestration, and many others. For technology partners, Amazon is a boulder rolling down a hill – those who have built technology in its path face almost certain disintermediation by the platform on which they’ve built. We sense that consulting and managed service partners enjoy a better competitive position and long-term opportunity.
- Private equity has arrived. Institutional investors have come in droves as private equity seeks an avenue for investments tied to growth in the public cloud. Virtually everyone we met with has seen a material increase in inbound interest from expected and unexpected sources. It’s clear that investors have a thesis in service providers for the public cloud, with enough conviction that finding an actionable entry point is the highest priority. A sign of euphoria, yes, but not unreasonable that a rising tide lifts all boats in this high growth market.
- Scaled assets are scarce. Despite Amazon’s $5bn quarterly run rate in cloud computing revenue, consulting and managed services in this market remains an immature but burgeoning field. Pure play firms in this space are growing quickly, but few have surpassed the $30-50mm revenue range. For many targets in the $5-$25mm range, it can be challenging to put meaningful capital to work even with high revenue multiples (more on that later), leading to creative deal structures predicated on further growth (for instance, see our thoughts on the Reliam deal here).
- Sellers are anchored at the top of the market. Everyone at the conference pointed to the same handful of deals when talking valuation: HPE’s acquisition of Cloud Technology Partners, Pamplona’s investment in Logicworks, and Blackstone’s investment in Cloudreach. In a market lacking depth of precedents, the deals which have been completed point to sky high multiples of revenue. We debate internally as to what extent the data points have been pushed up by some combination of asset quality, scale, strategic value, and/or scarcity. For their part, sellers continue to anchor around these announced and rumored valuations, a level that thus far seems to have deterred some would-be investors and acquirers.
- Activity likely to accelerate in 2018. Turning the corner on the calendar year, we expect the velocity of dealmaking to accelerate into 2018 and 2019. A number of contributing factors: a) continued growth fuels scale which will make deals more compelling from a total dollars perspective (for both sellers looking to monetize equity and buyers eyeing a minimum check size); b) sheer volume of surplus capital will unlock acquirers willing to meet sellers’ value expectations; c) strategic deal making will encourage others to move off the sideline (this may already be happening following the Cloud Technology Partners deal); and d) natural consolidation in a rapidly evolving ecosystem.
Our perspective is that the market robustness will accelerate and peak between six and 24 months from today (roughly 2H 2018 through 1H 2020). There remains runway to continue to grow, but the acquisition environment is forming and should be well developed by next year’s showcase event in re:Invent 2018.
Are you an operator or investor in managed cloud or cloud consulting? If so, we would love to speak to you and discuss our perspective with more depth. Please reach out to Greg Treger (firstname.lastname@example.org) or Alex Johnston (email@example.com) to continue the conversation.