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>> From the SiliconANGLE Media Office
in Boston, Massachusetts, it's theCUBE.
Now here's your host, Dave Vellante.
>> Hello everyone, and welcome to this week's episode
of Wikibon's CUBE Insights, powered by ETR.
In this breaking analysis, we take a deeper dive
into the world of Robotic Process Automation,
otherwise known as RPA.
It's one of the hottest sectors in software today.
In fact, Gartner says it's the fastest growing
software sector that they follow.
In this session, I want to break down three questions.
One, is the RPA market overvalued?
Two, how large is the total available market for RPA?
And three, who are the winners and losers in this space?
Now, before we address the first question
here's what you need to know about RPA.
The market today is small but it's growing fast.
The software-only revenue for the space
was about $1 billion in 2019,
and it's growing at between 80% to 100% annually.
RPA has been very popular in larger organizations,
especially in back office functions.
Really in regulated industries like financial services
and healthcare.
RPA has been successful at automating
the mundane, repeatable, deterministic tasks,
and most automations today are unattended.
The industry is very well funded,
with the top two firms raising nearly $1 billion
in the past couple of years.
They have a combined market value of nearly $14 billion.
Now some people in the ARP community have said
that RPA is hyped and looks like
the classic pump and dump situation.
We're going to look into that
and really try to explore the valuation and customer data
and really try to come to some conclusions there.
We see big software companies
like Microsoft and SAP entering the scene,
and we want to comment on that a little later in this segment.
Now, RPA players have really cleverly succeeded
in selling to the business lines,
and often have bypassed IT.
Now, sometimes that creates tension in organizations.
As I said, customers are typically very large organizations
who can shell out the $100000 plus entry point
to get into the RPA game.
The TAM is expanding beyond back office
into a broader automation agenda.
Hyperautomation is the buzzword of the day,
and there are varying definitions.
Gartner looks at hyperautomation as the incorporation of RPA
along with Intelligent Business Process Management, IBPM,
and IPAS, or Intelligent Platform as a Service.
Gartner's definition takes a holistic view
of the enterprise,
incorporating legacy on prem apps
as well as emerging systems.
Now, this is good, but I question whether the hyper term
applies here.
As we see hyperautomation as the extension of RPA
to include process mining
to discover new automation opportunities
and the use of machine intelligence, ML and AI
applied to process data,
where that combination drives intelligence analytics
that further drives digital business process transformation
across the enterprise.
So the point is that we envision
a more agile framework and definition for hyperautomation.
We see legacy BPM systems informing the transformation
but not necessarily adjudicating the path forward.
We liken this to the early days of big data
where legacy data warehouse and ETL processes
provided useful context.
But organizations had to develop a new tech stack
that broke the stranglehold of technical debt.
We're seeing this emerge in the form of new workloads
powered by emerging analytic databases
like Redshift and Snowflake
with ML tools applied
and cloud driving agile insights
in that so-called big data space.
So we think a similar Renaissance is happening here
with automation,
really driven by the mandate
for digital business transformation
along with machine intelligence.
And that tooling applied for really driving automation
across the enterprise in a form of augmentation
with attended bots at scale
becoming much, much more important over time.
Okay, now let's shift gears a little bit.
Question, is the RPA market overhyped and overvalued?
Now, to answer this
let's go through a bit of a thought exercise
that we've put together.
Look at some data.
What this chart shows is some critical data points
that'll begin to help answer the question that we've posed.
In the top part of the chart we show the company,
the VC funding, projected valuations, and revenue estimates
for 2019 into 2020.
And as you can see, UiPath and Automation Anywhere
are the hot companies right now.
They're private, so much of this data is estimated,
but we know how much money they've raised
and we know the valuations that have been reported.
So the RPA software market is around $1 billion today,
and we have it almost doubling in 2020.
Now, the bottom part of this chart
shows the projected market revenue growth
and the implied valuations for the market as a whole.
So you can see today, we show a market
that is trading at about 15 to 17 times revenue,
which seems like a very high multiple.
But over time, we show that multiple shrinking
and settling in mid-decade at just over 5X,
which for software is pretty conservative,
especially for high growth software.
Now what we've done in this next chart
is we've brought down that market growth
and the implied valuation data
and highlighted 2025 at $75 billion.
The market growth will have slowed by then to 20%
in this model, in this thought exercise,
with a revenue multiple of 5.4X for the overall market.
Now, eventually as growth slows
RPA software will start to throw off profits.
At least, it better.
So what we show here is a sensitivity analysis
assuming a 20%, 25%, 30%, and 35% EBIT
off of the market as a whole.
We're using that as a proxy.
And we show a 20X EBIT multiple,
which for a software market growing this fast
you would think is pretty reasonable.
Consider that tech overall typically is going to have
an EBIT multiple of 10 to 15X.
It really should be EV or Enterprise Value over EBIT.
It's really a more accurate measure.
But this is back of the napkin.
I don't have the balance sheet data,
I don't have the forecasts at all,
but we're trying to just sort of get to the question,
is this market overvalued?
As you can see in the far column,
given these assumptions we're in the range
of that $75 billion market valuation with that delta.
Now, reality you're going to have some companies growing faster
than the market overall,
and we'll see a lot of consolidation in this space.
But at the macro level, it would seem
that the company which can lead and win the spoils
is going to really benefit.
Okay, so these figures actually suggest in my view
that the market could be undervalued.
That sounds crazy, right?
But look at companies like ServiceNow and Workday,
and look at Snowflake's recent valuation at $12 billion.
So are the valuations
for UiPath and Automation Anywhere justified?
Well in part it depends on the size of the market, the TAM,
Total Available Market,
and their ability to break out of back office niches
and deliver these types of revenue figures and growths.
Maybe my forecasts are a little too aggressive
in the early days, but in my experience
the traditional forecasts that we see in the marketplace
tend to underestimate transformative technologies.
You tend to have these sort of ogives
where it takes off and really steepens
and has a sharp curve and then tapers off.
So we'll see.
But let's take a closer look at the TAM.
But first, I want to introduce a customer viewpoint.
Here's Eric Lex, who's an RPA pro at GE
talking about his company's RPA journey.
Play the clip.
>> I would say in terms of our journey,
2017 was kind of our year to prove the technology.
We wanted to see if this stuff could really work long term
and operate at scale.
Given that I'm still here, obviously we've proved (laughs)
that was correct.
And then 2018 was kind of the year of scaling
and operationalizing kind of a sustainable model
to support our business units across the board
from an RPA standpoint,
so really building out a proper structure,
building out the governance that goes along
with building robots,
and building kind of a resource team
to continue to support the bots that,
we were at scale at that point,
so maintaining those bots is critically important.
That's the direction we're moving in 2019.
We've kind of perfected the concept of the back office robot
and the development of those and running those at scale,
and now we're moving towards a whole new market share
when it comes to
attended automation and citizen development.
>> So this is a story we've heard from many customers,
and we've tried to reflect it in this graphic
that we're showing here.
Start small, get some wins, prove out the tech
really in the back office
and then drive customer-facing activities.
We see this as the starting point
for more SME-driven digital transformations
where business line pros are rethinking processes
and developing new automations.
You know, either in low code scenarios
or with centers of excellence.
Now this vision of hyperautomation
we think comes from the ability to do process mining
and identify automation opportunities
and then bring RPA to the table
using machine learning and AI
to understand text, voice, visual context,
and ultimately use that process data
to transform the business.
This is an outcome-driven model
where organizations are optimizing on business KPIs
and incentives are aligned accordingly.
So we see this vision as potentially unlocking
a very large TAM
that perhaps exceeds $30 billion globally.
Now let's bring in some of the spending data
and take a look at what the ETR dataset tells us
about the RPA market.
Now the first thing that jumps out at you
is RPA is one of the fastest growing segments
in the dataset.
You can see that green box and that blue dot at around 20%.
That's the change in spending velocity in the 2020 survey
versus last year.
Now the once caveat is
I'm isolating on Global 2000 companies in this dataset,
and you can see in that red bar up in the left.
Now remember, RPA today is really hot in large companies
but not nearly as fast-growing
when you analyze the overall respondent base,
which includes smaller organizations.
Nonetheless, this chart shows net scores
and market shares for RPA
across all respondents.
Remember, net score is a measure of spending velocity
and market share is a measure
of pervasiveness in the survey.
And what you see here is that
RPA net scores are holding steadily a nice rate,
and market shares are creeping up
relative to other segments in the dataset.
Now remember, this is across all companies.
But we want to use the ETR data to understand
who is winning in this space.
Now what this chart shows is net score or spending velocity
on the vertical axis
and market share or pervasiveness on the horizontal axis
for each individual player.
And as we run through this sequence
from January '18 survey through today
across the nine surveys,
look at UiPath and Automation Anywhere.
But look at UiPath in particular.
They really appear to be breaking away from the pack.
Now here's another look at the data.
It shows net scores or spending velocity
for UiPath, Automation Anywhere, Blue Prism,
Pegasystems and WorkFusion.
Now these are all very strong net scores,
which are essentially calculated by subtracting
the percent of customers spending less
from those spending more.
The two leaders here,
UiPath and Automation Anywhere are strongest
but the rest are actually quite good, they're in the green.
But look at this, look what happens when you isolate
on the 349 Global 2000 respondents in this survey.
UiPath jumps into the 80% net score territory.
Again, spending velocity.
Automation Anywhere dips a little bit.
Pegasystems, interestingly jumps up nicely.
But look at Blue Prism.
They fall back in the larger Global 2000 accounts,
which is a bit of a concern.
Now the other key point on this chart
is that 85% of Ui customers
and 70% of Automation Anywhere customers
plan to spend more this year than they spent last year.
That is pretty impressive.
In other words, you can see here in this chart
the Global 2000 have been pretty consistent spenders on RPA
for the past three survey snapshots,
UiPath again showing net scores or spending intensity
solidly in the 80% plus range.
And even though it's a smaller end,
you can see Pega with a nice uptick in the last two surveys
within these larger accounts.
Now finally, let's look at what ETR calls market share,
which is a measure of pervasiveness in the survey.
This chart shows data from all 1000 plus respondents.
And as you can see,
UiPath appears to be breaking out from the pack.
Automation Anywhere and Pega are showing an uptick
in the January survey,
and Blue Prism is trending down a little bit,
which is something to watch.
But you can see in the upper right
all four companies are in the green
with regard to net score or, again, spending velocity.
So let's summarize and wrap up.
Is this market overhyped?
Well, it probably is overhyped.
But is it overvalued?
I don't think so.
The customer feedback that we have in the community
and the proof points are really starting to stack up.
So with continued revenue growth and eventually profits,
you can make the case that whoever comes out on top
will really do well and see huge returns
in this market space.
Let's come back to that in a moment.
How large is this market?
I think this market can be very large.
A TAM of $30 billion plus is not out of the question,
in my view.
Now that realization will be a function
of RPA's ability to break into more use cases
with deeper business integration.
RPA has an opportunity, in our view,
to cross the chasm and deliver lower code solutions
to subject matter experts and business lines
that are in a stronger position to drive change.
Now, a lot of people pooh-pooh this notion and this concept,
but I think it's something that is a real possibility.
This idea of hyperautomation is buzzword-y,
but it has meaning.
Companies that bring RPA together with process mining
and machine intelligence that drives process analytics
has great potential
if organizational stovepipes can be broken down.
In other words, put process data and analytics at the core
to drive decision making and change.
Now who wins?
Let me say this.
The company that breaks out and hits escape velocity
is going to make a lot of money here.
Now unlike what I said in last week's
breaking analysis on cloud computing,
this is more of a winner-take-all market.
It's not a $1 trillion TAM like cloud,
it's ten of billions and maybe north of $30 billion,
but is somewhat of a zero-sum game in my opinion.
The number one player is going to make a lot of dough.
Number two will do okay,
and in my view everyone else is going to struggle for profits.
Now the big wildcard is the degree to which
the big software players like Microsoft and SAP
poison the RPA well.
Now here's what I think.
I think these big software players are taking
an incremental view of the market
and are bundling in RPA as a checkoff item.
They will not be the ones
to drive radical process transformation.
Rather, they will siphon off some demand,
but organizations that really want to benefit
from so-called hyperautomation
will be leaning heavily on software from specialists
who have the vision, the resources,
the culture, and the focus
to drive digital process transformation.
All right, that's a wrap.
As always, I really appreciate the comments
that I get on my LinkedIn posts and on Twitter.
I'm @dvellante.
So thanks for that, and thanks for watching everyone.
This is Dave Vellante for theCUBE Insights,
powered by ETR, and we'll see you next time.
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