Tech vendors have begun reporting Q1 2020 earnings. IBM, Manhattan Associates, and SAP reported last week, as did Infosys, Tata Consultancy Services (TCS), and Wipro. This week, we have earnings reports from Alphabet (Google Cloud), Amazon Web Services, Cerner, Citrix, Microsoft, PTC, Pegasystems, ServiceNow, and Unisys, among others. In most cases, nine or 10 of the 13 weeks in the quarter predate the onset of the COVID-19 pandemic and the containment measures, so the reported revenue growth rates still look positive, if not strong. But in those earnings releases are clues to the future. Here’s how we read these tea leaves:
- Software license revenues will be down sharply as companies scale back or delay new projects. SAP’s license revenues dropped 31% in Euros in Q1. Manhattan Associates reported a 21% decrease in its license revenues. Cerner’s license revenues rose by 2.3%, a slowdown from 8% growth in 2019. These vendors have been shifting toward a cloud subscription revenue model, so their license revenues have been on a downward growth path. But these declines or slowdowns are much sharper than those trends. Since most clients wait until the last weeks of a quarter to close licensed software deals (they have learned that that’s when vendors will offer the biggest discounts), these are good indicators of how clients in Q2 and Q3 are likely to behave.
- Services revenues are starting to slip, showing an early sign of slowing new-project activity. Infosys reported a 1.3% drop in its revenues from the quarter ending in December 2019. Wipro showed a 1% sequential drop over the same period. TCS had a 2.6% decline. IBM’s Global Business Services revenue was basically flat, at -0.5%. Unisys’ services revenues dropped by 10%, due to “decreased demand for field services and declines in volume-based contracts.”
- Vendors of on-premises software are starting to lower their 2020 revenue projections. Manhattan Associates forecasts that revenues will go down by 9% to 12% as its retail clients cut back. SAP predicted that its revenues would slow to a 1% to 3% rate, but that assumed economic growth would resume in Q3. Cerner’s revenue forecast was 0% to -2%. PTC projected revenue growth would be in the 11% to 14% range, down from its prior 2o% to 25% forecast.
- Cloud infrastructure is still strong. Google Cloud’s revenues for the quarter rose 52%. Microsoft Azure had 59% growth. Amazon Web Services experienced a 33% increase, reaching $10 billion in the quarter.
- Work-from-home demands are another driver of growth. Citrix saw its Q1 2020 revenues jump by 20% due to client interest in its solutions to support remote workers. Microsoft’s Office 365 commercial offering had a 25% increase in the quarter, with high adoption of Teams.
- SaaS vendors are overly optimistic in their revenue outlooks, we think. ServiceNow projected 27% subscription growth in 2020, citing its recurring revenue model. SAP argued that its cloud revenues will rise by 18% to 24%, also citing its recurring revenue. Other software-as-a-service (SaaS) vendors are clinging to the same expectation that their bookings of recurring revenue will stay intact. At the same time, though, SaaS vendors are also talking about being responsive to their clients and being willing to adjust payment structures to help clients in distress. The expectation that recurring revenue will continue to recur can coexist with the willingness to help struggling clients if those clients only represent 2% or 5% of revenues. But SaaS vendors may well find that clients in distress make up 20% or 30% of revenues, with clients that cancel contracts due to failure or bankruptcy another 5% or 10%. SaaS vendors are crossing their fingers that things will not get so bad.