Earlier this week, TechCrunch covered a grip of earnings reports showing that some companies helping other businesses move to modern software solutions are seeing accelerated growth. Inside the Software as a Service (SaaS) world, this is known as the digital transformation. Based on how many software companies are talking about it, the pace of change is only picking up.
But since we published that first entry, a number of SaaS companies that have posted financial results seemed to disappoint investors. Seeing some companies in the high-flying sector struggle made us sit back and think. What was going on?
Today we’re going to explore how the digital transformation’s acceleration seems real enough, but how it’s not landing equally. We’ll start by going over a short run of earnings results, talk to Yext CEO Howard Lerman about what his B2B SaaS company is seeing, and wrap with notes on what could be coming next from software shops.
A quick word on digital transformation
We all hear about digital transformation, but it’s hard to define. Generally, it’s a broad area that includes digitization of manual processes, modern software development practices like continuous delivery and containerization and a general way of moving faster via technology — especially in the cloud.
Speaking last month on Extra Crunch Live, Box CEO Aaron Levie defined the term as he sees it. “The way that we think about digital transformation is that much of the world has a whole bunch of processes and ways of working — ways of communicating and ways of collaborating where if those business processes or that way we worked were able to be done in digital forms or in the cloud, you’d actually be more productive, more secure and you’d be able to serve your customers better. You’d be able to automate more business processes.” he said.
What we’re seeing now is that the pandemic has accelerated the rate of change much faster than many had anticipated. Efforts to slow the spread of COVID-19 and its related workplace disruptions have accelerated what would have been a normal timetable. But on its own, that doesn’t mean the market is seeing equal results across every company and industry that might be part of that trend.
Earnings results
Lots of SaaS companies reported earnings this week, but two sets of returns stuck out as we reviewed the results, those from Slack and Smartsheet.
Smartsheet was the first SaaS company we noticed to struggle after it recently reported earnings. The company’s trailing results were good enough, with 52% growth and narrowing per-share losses. But as GeekWire noted, investors may have been “spooked by the company’s guidance for the current quarter and fiscal year, which came in below expectations.”
This goes against the narrative that SaaS companies would enjoy a COVID-19-led boom in software that helps individuals work wherever. Smartsheet ironically agreed with this, saying in its earnings that its service has “become an increasingly mission-critical platform for enterprises seeking to enable a dynamic workforce.”
But that economic benefit didn’t show up sufficiently in its earnings guidance, so, down went its shares.
Slack was in a similar boat: After its CEO told investors that it was seeing outsized new sign-ups for its service, the company posted results that greatly bested old analyst expectations. In fact, the company managed to accelerate its growth rate from the preceding quarter, from 49% year-over-year growth to 50%.
Investors were still not impressed with those figures, or its guidance it seems. The company’s stock is off between 11% and 12% as we went to press today, a strong day for equities overall.
What happened? Slack did see more usage and more paid sign-ups, but investors had bid its shares up so far that its results didn’t match their pricing, it appeared; down went Slack’s shares. In time the free accounts that Slack accrued may convert, and thus monetize, boosting the company’s growth. And, Slack did post faster revenue accretion than previously anticipated. But Slack still missed the expectations mark despite finding itself in the epicenter of a remote-work tooling boom.
Digital transformation?
Yext is another SaaS company that reported earnings this week. It’s also a company that brought up the digital transformation — and its acceleration -— in its earnings. But after it reported better-than-expected revenue and per-share profit, its shares initially dropped. Why? Its guidance for the next quarter was modest, coming in under where investors had anticipated it landing.
In its earnings call, Yext’s CEO Howard Lerman said “industries like healthcare and financial services performed strongly, showing signs of accelerated digital transformation where Yext plays a key role.” In other places, however, Yext also “saw challenged industries like retail and food services” struggle, Lerman said.
So, on one hand, faster digital transformation. On the other, some sectors are taking hits. This is the uneven customer reality of today’s digital makeover. Not all industries can afford it right now, whether they need the new tech or not.
The topic came up in an interview this morning between TechCrunch and the CEO. We were curious how long it would take for the digital transformation’s acceleration to show up more broadly in companies’ results, given that some key players in the movement were either reporting slower-than-expected recent results, or slimmer-than-anticipated forward projections. Lerman said, “it depends on the portfolio mix of the industries in which you operate,” given that your customer mix would determine how hard COVID-19 has impacted your sales base.
He went on to note that around a quarter of its customer base is in what the company calls “challenged industries,” which must provide some headwind for the company.
But don’t despair, that sort of drag might be fading. “In May,” Lerman told TechCrunch, “retention levels came back.” He went on to say that he doesn’t see the market getting worse, adding that, “in fact, we’ve seen it come back a little bit.”
Consider those words to be green shoots for SaaS.
What’s next
It makes sense that the digital transformation is not spread evenly despite growing corporate needs. The pandemic has pushed many industries ahead, but those struggling in the current economy could be slower to adopt as they slash workforces and try to find ways to ride out the economic malaise.
It seems that there are a number of factors in place, however, that bode well for SaaS companies in particular. For example, companies, regardless of industry or current conditions, need to conduct business online and understand their customers better. This is especially true when customers are impossible to reach in-person. Companies also need to find ways to communicate and work in a digital context with workers spread out, and they need to get more efficient in cutting costs. Finally, the same companies need to move away from slow legacy tooling as quickly as possible.
SaaS companies can help with all of these problems, for a price. Some of these companies like Zoom are benefiting from broad usage across the board. Others with customers in sectors in the doldrums like cars, travel and brick and mortar retail are growing more slowly.
But if companies in struggling industries are smart, they are laying the groundwork for when the business returns, and when that happens, they will need the kinds of digital tools in place to hit the ground running. SaaS companies should be waiting to help, and that bodes well for these companies moving forward.