Can software companies continue to grow despite macroeconomic uncertainties?


There have been many discussions among market participants and business executives over the past few months about the uncertainties facing the US economy and how companies in various industries across the country will fare in an environment economic uncertain.

For companies that are focused on providing software and/or digital infrastructure, their business can continue to shine regardless of the macroeconomic uncertainties they face. I say this based on comments – see below – shared by the executives of these companies during their most recent earnings conference calls that have taken place over the past two months. There was no specific reason why these companies were chosen other than that I have a vested interest in them.

Adobe (June 17, 2022)

I think the other part of the conversation that you’re all having with corporate CEOs right now is that they’re all recognizing that these are uncertain times, and that’s the conversation we’re having. But despite this uncertain macroeconomic environment, what they all recognize is that digital is a priority. And they really want to continue having conversations with us about how they can do digital. I’ll ask Anil to maybe add a bit of what he sees in different verticals as well. But the importance of digital remains intact.

Amazon (April 29, 2022)

So yeah, I mean, we keep seeing what the backlog is, right? This is the AWS augmentation [Amazon Web Services] customers making long-term commitments to AWS. At the end of the March period, we had a balance of $88.9 billion for this. So that’s an increase of about 68% year over year. And the weighted average remaining life for these is 3.8 years.

Datadog (May 5, 2022)

We believe digital and cloud projects are always high priority and not deprioritized, we haven’t seen that. We think we are still at the beginning. So with the data we have so far, we think there will be solid and continued investment. There is always some volatility in our client base. Our clientele is very diverse in all sectors and we have benefited from this over time. So, while we are not macro forecasters and there may be some sensitivity, we believe that the long-term digital and cloud migration trends will also be very strong throughout this cycle.

Microsoft (April 27, 2022)

The second thing is in the conversations that we have with our customers, the interesting thing that I find maybe even in past challenges, whether macro or micro, is that I don’t hear about companies who view their IT budgets or digital transformation projects as the place for cuts. On the contrary, some of these projects are how they will accelerate their transformation or, for that matter, automation, for example. I haven’t seen this level of demand for automation technology to improve productivity because in an inflationary environment the only deflationary force is software. So it’s the second micro thing, the tone that’s different.

MongoDB (June 2, 2022)

That being said, we understand that the macroeconomic outlook is attracting heightened attention due to geopolitical tensions, inflationary pressures and risks of a slowing global economy. Since macroeconomic issues dominate investor conversations, it makes sense to share with you what we see as well as discuss our framework for how we plan to manage this macroeconomic uncertainty. Starting with what we see on the market. The first quarter was a strong quarter for new business. Driving innovation remains a top priority for our customers, and they invest in modern technologies to facilitate this. We had a strong engagement with the C suite and our transaction cycles followed normal patterns. The tone of our quarterly business review meetings at the start of the second quarter was one of confidence. Our sales force has indicated that our message is resonating in the market and remains optimistic about opportunities to win new business.

Salesforce (June 1, 2022)

And so far, we just don’t see any material impact from the larger economic world that you all find yourself in. Our demand environment where the demand is very high, and if you look over the past 23 years, Salesforce has proven to be incredibly resilient based on this incredible business model. We have an incredible technology model that we have, where we’ve been through all kinds of crashes and dot-com recessions and financial crises and global pandemics and you’ve all seen us weather all possible storms, but we continue to weather them storms thanks to the power and strength of our model.

Veeva Systems (June 2, 2022)

This is really a long-term thinking move by the customer. They’re thinking about that in the 10 and 20 year horizon, so they wouldn’t really be confused by the specifics of the macro environment. So it’s, yes, applications in the clinical area but also in the quality and regulatory area, not all of our Development Cloud but a lot of it. So when they do that, it’s a very top-down decision. It’s like building a huge factory. This is why it is not affected by the macro environment. And then if you get it, what they’re trying to do is lay the groundwork for efficiency, numerical efficiency, get drugs to market faster to help patients. So it’s a long-term game of the customer and a kind of management-level decision.

Twilio (May 5, 2022)

I think, of course, if the economy were to go into some kind of deep recession, we wouldn’t necessarily be immune to that. But what we’re seeing based on our internal studies, and we’ve alluded to the Customer Engagement Report as well as a number of external studies, is that digital transformation remains a top board priority. administration. This obviously benefits Twilio, as various companies look to invest in their engagement strategies going forward. And we’re not – it’s not like we don’t see the macro environment, be it economic or geopolitical, but we just think this company is extremely well positioned to capitalize on digital transformation efforts. ongoing business.

Zoom video communications (May 24, 2022)

[Question:] I wonder if you’ve seen a reduction or moderation in some clients’ investments in light of growing macro concerns? And if so, has it varied by geography or customer size?

[Answer:] I mean we really have it – especially in enterprise, we continued to see strength in renewals as well as additional new customers and expansion into additional products. So we really didn’t see that in terms of concern. I think other people have told us that what they’re really focusing on might be – if they’re limiting spending, they’re focusing more on potential hiring or travel. And of course, Zoom is a great alternative if they’re focused on limiting internal travel. And so we really haven’t seen that impact today.

Final Thoughts

An underlying theme among the comments seen above is that companies continue to invest in their digital transformations, and they are doing so despite the uncertainties that abound, such as the risk of a recession in the United States. This is a tailwind for companies providing the tools for organizations to embrace the digital world.

Economic news out of the United States has been bleak lately. Only time can tell if tech companies are able to grow their business even in the face of a weak economic environment. At the very least, their managers are confident.

It should also be noted that there is at least one precedent of a software company showing admirable growth rates even when the economy was weak. This happened during the Great Financial Crisis of 2008/09, when US real GDP fell 4.3% from a peak in the fourth quarter of 2007 to a trough in the second quarter of 2009. The unemployment rate also increased by 5% in December. 2007 to 10% in October 2009. As the US economy struggled, Salesforce revenue grew 51% in 2007, 44% in 2008, and 21% in 2009. Salesforce provides customer relationship management software on the cloud and was able to grow rapidly during the financial crisis because its software was better than the solutions in place.

If software and digital infrastructure companies today are able to provide better solutions to their customers than what they use today, they could continue to grow even if the economy deteriorates from here, just like what happened to Salesforce a dozen years ago. But even if they struggle to grow in the short term, the long-term picture still looks healthy. According to Microsoft CEO Satya Nadella, approximately 5% of global GDP is currently spent on technology. I find it hard to imagine this percentage dropping in the years to come – what do you think?

To note: An earlier version of this article appeared on The right investorsa personal blog maintained by our friends.

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Disclosure: Ser Jing owns shares of Adobe, Amazon, Datadog, Microsoft, MongoDB, Salesforce, Veeva Systems, Twilio and Zoom Video Communications.


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