Virtual offices need services and security. Stephanie Price and Scott Fletcher, CIBC World Markets analysts in Toronto, name the stocks positioned to win in this transformation.
We believe that the COVID-19 pandemic has accelerated the technology cycle, with companies that were further along the digitization process better positioned to respond to the move to remote work. With recent surveys suggesting that remote workers would like to continue to work from home (WFH) post pandemic (and some companies closing physical offices), we expect increased spending in a number of areas, including cloud, cybersecurity, human resources (HR) and e-learning and collaboration.
Software companies with solutions geared towards improving remote work productivity have done well year to date and we continue to like these names over the longer term given the pervasiveness of the trend to work remotely. Our top picks are Kinaxis Inc. (TSX—KXS), Docebo Inc. (TSX—DCBO), and Enghouse Systems Ltd. (TSX—ENGH).
While corporate disaster recovery plans detail contingency measures in the event of natural disasters, many did not account for a full-scale move to remote work, with stay-at-home orders catching 72 per cent of information technology (IT) decision makers under-prepared, according to a Xerox survey of 600 IT executives. Survey results suggest that the pandemic has accelerated spending intentions in a number of areas, including cybersecurity, cloud, automation and analytics.
Cybersecurity will get biggest spending increase
A Statista poll of representatives from major enterprises shows that cybersecurity is the area of their IT budgets that will see the biggest increase in spending following the onset of COVID-19, with about 80 per cent of respondents looking to increase cybersecurity spending. Hybrid or multi-cloud spending is also expected to increase at roughly 70 per cent of enterprises surveyed. We see many of the companies under our coverage benefiting from increased technology spending related to remote work, broadly in the areas of HR and e-learning, digital transformations and collaboration.
We expect cloud to be one of the biggest areas of accelerated spending, with many employees unable to access corporate systems remotely. IT research firm Gartner expects public cloud services to grow at 19 per cent year-over-year in 2020, with much of the spending that Gartner had forecast for 2023 and 2024 now expected as early as 2022. We see this spending occurring throughout the enterprise, from HR to supply chain to finance. Within our coverage universe, we regard Docebo and Kinaxis as best positioned to benefit. However, Gartner’s most recent IT spending forecast suggests that while overall IT spending is expected to decline eight per cent in 2020, spending on public cloud services is one of the rare areas of growth (19 per cent in 2020).
A survey of 10,000 VMware Inc. customers from January to May 2020 noted that the average of enterprise cloud spending was up 21 per cent year-over-year. By contrast small-to-medium enterprises and mid-market customers decreased their cloud spending, by eight per cent and 23 per cent respectively. Intuitively, we assume these clients had less budget flexibility and were impacted to a greater extent by government-mandated shutdowns.
Open Text, CGI benefit from cybersecurity spending
The move to remote work presents new security threats, including those related to the use of personal devices, insecure Wi-Fi, and sensitive data leakage. A PricewaterhouseCoopers survey taken in June showed that 19 per cent of chief financial officers (CFOs) list cybersecurity as one of their top three concerns, a percentage that has more than tripled from responses to the same question in April. Of the companies we cover, we consider Open Text Corp. (TSX—OTEX, NASDAQ—OTEX) and CGI Inc. (TSX—GIB.A, NYSE—GIB) as best positioned to benefit from increased security spending.
The same survey showed that only five per cent of CFOs would be willing to defer investments in cybersecurity, with that number shrinking to zero per cent among CFOs of technology, media and telecommunications companies. As the impact of the pandemic continues to extend, the importance of cybersecurity has only been elevated.
Forbes Magazine estimates the global cybersecurity market to be worth US$173 billion in 2020 and projects it to grow to US$270 billion by 2026. Spending on external cybersecurity products is expected to grow 8.4 per cent annually to 2026, with externally managed security services accounting for 77 per cent of cybersecurity spending by 2026.
Video conferencing seen as a security risk
Remote collaboration is another area where we foresee increased spending, with video collaboration surging during the pandemic and the majority of remote workers participating in one to five video conferences a week. In addition to video conferencing solutions, we believe automation and document management will drive technology spending as corporations look to safely share documents in a virtual office environment. We highlight ENGH and OTEX as well positioned in these areas.
With the shift to remote work, security policies and procedures will also have to be modified. These changes have been a work in progress, with an IBM Security survey of 2,000 newly remote working Americans finding that more than 50 per cent of respondents did not know of any new company policies related to customer data or password management. The survey further found that the use of personal devices to connect to corporate networks remains prevalent, with over 50 per cent of respondents stating that they used personal devices to access corporate networks.
HR and education spending will rise
Human Capital Management (HCM) has been redefining itself over the past few years to focus more on online, self-service applications. We believe adopters are pulling forward demand for HCM technologies, including solutions for employee collaboration, communication, feedback, learning, payroll, and talent acquisition.
Despite the pandemic, HR technology venture capital investments increased 14 per cent sequentially in the second quarter, with HCM solutions attracting significantly more investment than talent acquisition solutions. E-learning and Education Technology (Ed Tech) has also attracted elevated venture capital funding, with total investments in Ed Tech up 58 per cent year-to-date. Workplace learning was one of the earliest- and hardest-hit business activities by the pandemic. McKinsey & Company noted that roughly half of in-person workplace learning programs had been cancelled through June 30, 2020, in North America, with the number rising to closer to 100 per cent in parts of Asia and Europe.
The days of “office centricity” are over
While most business continuity plans include contingencies for natural disasters, the early days of the pandemic made clear that few had accounted for a large-scale shift to remote work. During and post the pandemic, we expect enterprises to address this oversight by moving more solutions into the cloud, adding security features designed for a remote workforce, and improving corporate collaboration offerings. We believe that the extensive shift to remote work has accelerated technology adoption.
The pandemic has illustrated that with the right technology support most employees can maintain (or improve) productivity by working from home. A Pulse Secure survey of 400 IT professionals suggested that 84 per cent of companies anticipate broader and more permanent WFH adoption to extend beyond the pandemic and 82 per cent of US office workers stated that they would like to work from home at least one day a week post the pandemic.
Big tech has embraced the concept, with Twitter declaring that WFH was now a permanent option for all its employees, Open Text closing 50 per cent of its offices and moving 15 per cent of its workforce to remote work, and Shopify Inc. extending its remote working policy indefinitely with CEO Tobias Lütke saying that the days of “office centricity” are now over.
Stephanie Price and Scott Fletcher are CIBC World Markets analysts in Toronto.
This is an edited version of an article that was originally published for subscribers in the September 18, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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