Business_news Enterprise software makers have outperformed the market since the coronavirus crisis hit. Experts say investors are underestimating just how hard the downturn is going to hit them.


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  • Investors may be underestimating the degree to which the enterprise software sector could be affected by the coronavirus crisis, experts told business Insider.
  • Many software makers have outperformed the broader stock market during the crisis and some, including Microsoft, have seen their shares near their all-time highs.
  • But such companies aren’t immune to the downturn and some are already being affected by it, the experts said.
  • Companies are dropping certain applications, looking for price concessions, or reducing their spending because they no longer have as many workers, the experts said.
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If you focused only on the stock market or spoke to the companies’ boosters, you might think the enterprise software sector of the tech industry had little to fear from the coronavirus crisis.

It’s not just that companies that areobvious beneficiaries of the work-from-home trendhave seen their share prices soar, like video conferencing software maker Zoom or e-commerce services provider Shopify. Many enterprise software makers have outperformed the broader market over the last three months and some, including Microsoft, are near their all-time highs. What’s more,some analysts have argued that such companies, by their nature, are better protectedfrom — if not actually invulnerable to — economic downturns.

But other market and tech experts believe that that thinking is wrongheaded. Enterprise software companies are as vulnerable to a recession as any other type of firm, they argue. And the market may be underestimating the degree to which the enterprise will be harmed by the current calamity.

Even enterprise software firms “are bound to economic gravity,” said Jerry Braakman, the chief investment officer at First American Trust, which manages $1.8 billion in assets. He continued: “It’s not like technology [companies] can get through this unscathed.”

Many enterprise software firms in recent years have moved to subscription-based software-as-a-service models. They typically charge customers on a monthly, per-user basis, and host the software in the cloud, rather than allowing customers to install it on their computers.

That kind of model, proponents have argued, will help enterprise firms retain customers even during a downturn, since those clients have to keep paying for the software in order to continue to use it. It also helps that monthly fees are relatively low compared to the cost of buying software with the old licensing model, which typically involved big charges paid annually (or even less often).

But the current downturn is likely to expose the SaaS model’s shortcomings, Braakman and other experts say. Cash-strapped corporations are cutting their budgets. As part of that, many have already started reassessing their software needs, figuring out which services they can live without. The fact that many of the applications that companies use are billed on a monthly basis could actually hurt the makers of those applications, as it may make it an easier decision to drop them. 

Zoom has seen a surge in usage thanks to the crisis, as more people have worked from home. Other software makers are likely seeing reduced usage as companies lay off workers.

Kena Betancur/Getty Images

“Companies are trying to rationalize their spend and figure out what they must have,” said Menlo Ventures partner Matt Murphy, who focuses on enterprise software startups. “They will drop some software … and pause on other SaaS vendors until they figure out the new normal.”

There’s likely to be some delay on that process for longer-term software contracts, Braakman said. But customers are likely to reassess those, too, as they come up for renewal.

“That always has a lag,” he said. “Over the next three years, those will come due.”

Even if they decide to keep particular applications, many companies are likely to pressure software makers for price concessions, Murphy said.Dropbox, for example, has accommodated some struggling customersalready, business Insider previously reported. Some clients are looking to cancel their contracts or pause payments until the economy starts to recover, Murphy said.

Such pressure is likely to put many software makers in a bind: not wanting to lose customers but also not wanting to diminish the value of their products.

“Companies are trying to work with their customers on these things but ultimately you don’t want to give away something you were getting paid for,” Murphy said.

Perhaps the biggest under-appreciated factor likely to impact enterprise software makers in the downturn is the fact that because many of them bill on a per-user basis, they suffer when their clients suffer. Even if a company’s customers stick with it and aren’t haggling over the price they pay for its software, that fact alone could lead to a huge cut in sales thanks to the economic crisis, as companiesbig and small lay off workers left and right lately. Theunemployment rate skyrocketed to 14.7% in Apriland things have only gotten worse since. Some2.4 million people filed unemployment claimsfor the first time last week, bringing the total number over the last nine weeks to nearly 39 million.

Corporations that have laid off employees aren’t going to want or need to pay for as many users to have access to particular software services as they used to.

“If we have 15-to-20% less employees working, then there’s 15-to-20% less Salesforce or Microsoft Office licenses that are needed,” Braakman said.

Software makers’ corporate customers “are not churning away, but they are going in and reducing the spend with that company,” said Jai Das, president and managing director of Sapphire Ventures, which also focuses on enterprise software startups.

Those effects could be amplified at smaller, newer companies. Many such startups count other startups as their initial — and often core — customers. Large numbers of thoseventure-backed companies have been hard hit by the downturn. Many have been advised by their backers to slow their burn-rates to the point where the cash they have left can last them at least 18 months. Companies have responded by laying off employees and drastically cutting costs. Those moves are already starting to weigh on the enterprise software sector, Murphy said.

And the situation could deteriorate from here for many companies, especially if the downturn and the pandemic that triggered it persist, he said:

“The longer this goes on, the deeper the cuts will go.”

Got a tip about startups or the tech industry?Contact Troy Wolverton via email at, message him on Twitter@troywolv, or send him a secure message through Signal at 415.515.5594. You can alsocontact business Insider securely via SecureDrop.


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