The cloud and SaaS are struggling with the tech crisis right now

Hard times for tech companies. The Nasdaq has lost nearly a quarter of its value since January, Netflix saw a third of its stock market quote soar in one day and Facebook has split since last fall. In an email addressed to its founders at the end of May, Y Combinator, one of the major American accelerators of startups, invites “ prepare for the worst “, added that” no one knows how bad the economy is, but the outlook is not good. »

If the economic downturn is for no one, there is one sector that is temporarily more resistant than all the others: the professional software. Thus, IBM, which sells cloud software and services to companies, has seen its share appreciate by more than 4% since January, and Hewlett Packard Enterprise, a company that specializes in business software, has achieved 6.7 billion in sales in the first quarter, up 1.5% annually.

Salesforce revenue, one of the pioneers of SaaS (software as a service, or software as a service), also grew quarter-year-over-year in the first quarter. It could reach $ 30 billion for the first time this year.

The cloud resists

American cloud giants, for their part, are showing a disrespectful success in a drifting technological market. Google Cloud generated $ 5.8 billion in revenue in the first quarter, its revenue equivalent for the whole of 2018, and an increase of 44% compared to the first quarter of 2021. These results contributed to limit damage for the group. of Alphabet, slightly reduces YouTube’s slowing growth and the decline in advertising revenues in a difficult economic context, marked by the war in Ukraine, the return of inflation and the certainty of rising interest rates.

Same story with Amazon: while in the first quarter, the e-commerce giant experienced its first quarterly loss in seven years, Amazon Web Services posted a turnover of 18.4 billion dollars, up 37% annually . Meanwhile, Microsoft, the third American cloud giant, had a good first quarter, but the cloud division Azure was particularly notable: where the IT giant posted an 18% turnover increase from a year until next, it believes its share of 32%. ” For us, business is following its usual course, we have not yet noticed the slowdown in our activities. “, comments on the condition of anonymously an executive working within a large cloud provider.

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Business appetite for the cloud will not slow down anytime soon, despite poor economic conditions: Gartner estimates that global public spending on the cloud should reach nearly $ 500 billion this year, 20% more than 2021.

And while software startups are having a harder time raising funds than they did last month, they’re also doing better in this regard than their counterparts from other digital industries. Carta Data, a data processing platform for startups and investors, reports that SaaS platforms using its services earned $ 1.04 billion in Series A in the first quarter.

This is certainly 38% lower than the previous quarter (1.70 billion dollars raised), but the gap is larger in other sectors. Healthcare startups, for example, raised just $ 370 million compared to $ 1.03 billion in the previous quarter, a 64% decrease. For SaaS start-ups in the start-up stage, the decline was 18%: in a sector such as biotechs, it reached 72%.

The big shift

After the pandemic, the upcoming recession in turn benefits software and the cloud, by accelerating the virtualization of companies, thus aiming to rationalize their costs, according to Will Price, creator of the investment fund and Next Frontier Capital. History will serve as our guide. After 2002, IT divisions had to do more with less. Companies that were able to reduce costs and deliver good investment returns were rewarded, while those who relied on expensive proprietary solutions saw a rapid decline in their market share. “, he explains.

For example, free software and virtualization became major technology trends as Linux replaced Solaris, MySQL removed ORCL’s market share, and VMWare allowed IT divisions to improve their returns on investment in by virtualizing their hardware. and their supply fluctuates according to demand. Thus, the recession has served as a catalyst for the transition from proprietary software to free software, from perpetual license to SaaS, from proprietary infrastructures to high-income virtualization on assets. “, he reviews.

We can, according to him, expect a similar logic, which benefits cloud and software players.

During a downturn, change does not slow down, on the contrary: entrepreneurs find new ways to reduce costs, waste, redundancy and lack of automation. Therefore, there is now an opportunity for investors and startups to propose innovations that reduce operating and capital expenditure, and allow, as after 2002, IT divisions to do more with more. little. “.

Others, like Mark Stoeckle, an executive at investment fund Adams Funds, are more skeptical about the benefits the crisis will bring to professional software companies. “ For some time now, companies have been using technology to become more efficient, and therefore more profitable. This is one of the reasons why margins have reached record levels. »

In times of instability, the stability of the subscription model similar to that of many software companies is also something to reassure shareholders and investors.

Finally, some software branches are benefiting from favorable circumstances. In the case of cybersecurity, it is an increasingly stringent legislative framework on data management and ever -increasing cyberattacks. In this context, cybersecurity costs are not a cost item which companies can reduce lightly. ” Cyberattacks are on the rise, and the trend won’t stop, emphasizing the value of a company like ours said Dan Rogers, president of data security specialist Rubrik.

Clouds on the horizon

The latest sign of software appeal is US semiconductor giant Broadcom’s acquisition of virtualization champion VMWare for $ 61 billion. Virtualization, or the replacement of hardware through software functions, allows companies to deploy their applications without having to worry about the private or public cloud, as well as in their own data centers, and to facilitate the navigation of their data between these different environments. . In addition to allowing greater efficiency, and therefore lower costs, this approach is sometimes necessary to comply with a regulatory framework, for example laws that impose data sovereignty.

Somewhat preserved, software companies are not completely immune. That’s why Microsoft lowered its forecasts for sales and turnover for the current quarter, blaming the dollar’s ​​rise against other currencies. This makes the products and services of American companies less competitive. They also earn fewer dollars from their exports. Microsoft estimates that the rise in the greenback reduced its sales by $ 302 million in the first quarter. Salesforce also lowered its sales forecast, citing the same reason.

Warnings that should be put in perspective, according to Mark Stoeckle. ” These comments should be put in context. We’re talking about little change in the face of the 2.22 billion turnover Microsoft generated in the first quarter. In my opinion, there is little chance that this will cause real problems for Azure, which is launched on a dynamic trajectory. I also hope for Microsoft, whose revenues, margins and cash flow are more than other software companies. »

The prolongation of the war in Ukraine, the lack of chips or the difficulties in providing energy could exacerbate the economic crisis on a global scale, causing chaos that in turn will affect professional software companies.