It’s been a tough time for enterprise SaaS companies. These organizations raked in profits and growth during the pandemic when offices shuttered and employees moved en masse to work from home. But as the economy turned last year and more workers returned to the office, their numbers slipped.
At the same time, enterprise SaaS companies are dealing with several other major problems that have come together to knock them off their perches.
Over the last year, TechCrunch has worked to better understand the current climate for selling software. It’s the most common startup product, and SaaS is the most common business model. So we pay special attention to leading SaaS companies on the public markets, hunting for trends, data and other pieces of information that we can apply to the private markets.
A changing economy, shifting investor expectations and other bumps have made the picture of the present-day software market hard to clarify. However, new data is sharpening our perspective.
We parsed earnings reports this week from Zoom, Salesforce, Box, Snowflake and Okta. The results were mixed, with some doing better than others. How do enterprise SaaS companies fight the short-term economic turbulence and get to the other side (whenever that may be)? And what do one quarter’s numbers actually mean in the scheme of things? Let’s dig into the data.
Economic headwinds blowing hard
It’s not your imagination: Companies of all stripes have been facing a challenging backdrop in which to operate.
The macroeconomic environment started shifting last year. First came inflationary pressures, then came higher interest rates to combat inflation.
Suddenly, money wasn’t cheap anymore. For startups, that meant tighter capital and more stunted valuations after years of gaudy (and perhaps unrealistic) numbers. For other companies, as interest rates have risen, it has had a negative impact on borrowing and spending. This was true for everyone, not just enterprise SaaS companies, but they were adversely affected nonetheless.
But perhaps the biggest factor influencing the enterprise SaaS downturn has been a massive shift in investor expectations from growth to profitability. Companies with high marketing budgets, like Salesforce, have been under pressure to cut costs.
We have seen this manifest itself in a number of ways, the most notable being layoffs. Companies that hired in huge numbers during the pandemic to meet growing demand were suddenly letting people go. Salesforce, the biggest of the enterprise SaaS companies, laid off 10% of its workforce as part of its attempts to cut costs, but it certainly wasn’t alone.
As though all of that weren’t enough, there was the war in Ukraine, with Russia subsequently cutting off energy exports to Europe, all combining to put pressure on spending in the EU and generating a cascading impact across businesses.
Finally, a strong U.S. dollar has been trouble for companies selling outside of U.S. markets as it has bitten into foreign profits and dragged down revenue growth overall.
Ray Wang, founder and principal analyst at Constellation Research, said investors are now not looking at the same metrics in the same way, and the interest rates, in his view, are having the biggest impact.
“What’s interesting is that we are no longer focused on fundamentals like we used to, such as market share, earnings growth and profitability. The public markets are only focused on Fed rates,” Wang told TechCrunch. “Taking that aside, what we do see is that the SaaS vendors are doing a good job in retention, double-digit growth and managing expenses. But the macro story is still about interest rates.”
The bad news
Despite being a recent winner in the enterprise software space, Box did not have a good run this earnings cycle. It barely cracked street expectations for revenue growth and guided under street expectations for its current quarter (by up to $12 million) and current fiscal year (by $40 million to $50 million).
Box CEO Aaron Levie said that while his company sees the same economic pressures as everyone else, he’s still confident that his products can play in this environment. “You know, there are some macroeconomic pressures that we see that buyers are facing, but what we’re seeing from customers is that the platform remains very resilient in this environment,” he told TechCrunch.
If that sounds familiar, it should. In the more uncertain economic setting of the past few quarters, there have been ample concerns that overall IT spend would take a hit. And CIOs have been telling us that although they are still spending, they are scrutinizing every dollar spent right now.
Box is not alone in seeing less future business than investors expected. Snowflake, a quickly growing player in the enterprise software market, beat both its own guidance and street estimates in its most recent quarterly cycle. But like Box, it is guiding under expectations. Snowflake is a larger company and posted a larger full-year revenue differential when compared to expectations than Box.
Why is Snowflake’s guidance more conservative than expected? Per its earnings call, the company sees “a measure of bookings reticence with certain customer segments in Q4, reflecting a lack of visibility in the business and preferring a cautious short-term stance versus larger, longer-term contract expansions,” according to a Fool transcript. Again, that sounds familiar.
Both companies saw their share prices fall by double-digit percentages overnight in the wake of their earnings reports. But not every enterprise software company is losing value.
The good news
Salesforce managed to stymie some of its critics with a better-than-expected financial performance this week. The company also anticipates improving profitability in the year ahead, leading to investors bidding its shares higher.
The CRM giant was not the only SaaS player to report numbers that cheered investors. Zoom was another, with the online video chat company seeing its shares appreciate in the wake of its Monday report, though it did lose value as the week went along (but it has not been a positive week for stocks, generally).
But in the case of both Salesforce and Zoom, future growth remains limited. Salesforce’s fiscal 2022 growth was 26%. In its recently concluded fiscal 2023, it fell to 18%. The company expects just 10% growth in its new year. Zoom’s deceleration has been more dramatic, from pandemic-fueled triple-digit highs to single digits.
The good news, then, at least in terms of investor reaction to recent enterprise SaaS results, is nuanced; we are not seeing the sort of growth acceleration among companies that saw their shares rise after their reports. Instead, the bumps in the value of Salesforce and Zoom feel more like companies beating lowered expectations more than cleanly clearing high bars.
Taken as a whole, the four companies are forecasting either slower growth than anticipated or simply slow growth in the year ahead. How much of that is down to their own doing versus their markets and the economic backdrop we described, we leave to you.
There is a caveat to our gloomy viewpoint. Okta, which also reported this week, is up around 10% today as a result of its trailing performance and guidance. The identity company beat trailing expectations handily, guided above estimates for its current quarter, and predicted in-line full-year growth when compared to analyst forecasts. Okta is, therefore, evidence that while it appears that enterprise SaaS is facing enough economic headwinds to slow materially, not every company will see similar effects. Okta does expect growth to slow this year, but its deceleration is sufficiently muted when compared to investor anticipation that it appears to be in fine form.
That could be because Okta operates in the security category, and it’s unlikely any CIO wants to cut the security budget, especially in an area as crucial as identity. That means performance is always going to vary by company type, said Liz Herbert, a Forrester analyst who covers enterprise software.
“In terms of the overall SaaS market, we still see healthy growth — and especially in categories that have lagged in SaaS conversion such as ERP and supply chain,” she told TechCrunch. “The markets that are more saturated are generally showing slowing growth. Products like Zoom and Box are in a unique situation because their use is generally impacted by back-to-office trends more so than something like cloud financial apps that will be used similarly regardless of in-office or remote work.”
Although it’s worth noting that although Box has leaned heavily into security aspects of content management in recent years, its performance still lagged behind Otka’s. There is always going to be some level of variability regardless of the economic conditions.
For startups, the lessons here are pretty simple. The market for their goods could be getting tighter, and outlier companies, even among healthy public software concerns, are somewhat rare.
This means that the middling startups of the world are likely in for a tough year. But don’t worry: Investors love to say that the best startups can always raise capital, so at least some folks are going to cruise through 2023.