There’s been plenty of discussion among market participants and business executives over the past few months on the uncertainties confronting the US economy, and how the businesses from various industries in the country will perform in an uncertain economic environment.
For companies that are focused on providing software and/or digital infrastructure, their businesses may continue to shine regardless of the macroeconomic uncertainties thrown their way. I say this based on comments – see below – shared by the leaders of these companies during their latest earnings conference calls that took place over the past two months. There was no specific reason why these companies were chosen, other than me having a vested interest in them.
Adobe (17 June 2022)
I think the other part of the conversation that you all have with enterprise CEOs right now is they all recognize it’s an uncertain time, and that’s the conversation that we have. But despite that uncertain macroeconomic environment, the thing that all of them recognize is that digital is a priority. And they really want to continue to have conversations with us as to how they can do digital. I’ll have Anil maybe add a little bit of what he’s seeing across different verticals as well. But the importance of digital remains undiminished.
Amazon (29 April 2022)
So yes, I mean, we’re continuing to see what the backlog is, right? It’s the increase of AWS [Amazon Web Services] customers making long-term commitments for AWS. At the March period ended, we had $88.9 billion balance for that. So that’s up about 68% year-over-year. And the weighted average remaining kind of life term for those is 3.8 years.
Datadog (5 May 2022)
We believe that digital and cloud projects are still very high priority and are not being de-prioritized, we haven’t seen that. We think we’re still early on. So, with the data we have so far, we think there will be continued strong investment. There is always some volatility across our customer base. Our customer base is very well diversified across industries and we benefited from that over time. So, whereas we’re not macro forecasters and there may well be some sensitivity, we believe the long-term trends in digital migration and cloud will also be very strong throughout that cycle.
Microsoft (27 April 2022)
The second thing is in the conversations we are having with our customers, the interesting thing I find from perhaps even past challenges, whether macro or micro, is I don’t hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts. If anything, some of these projects are the way they’re going to accelerate their transformation or, for that matter, automation, for example. I have not seen this level of demand for automation technology to improve productivity because in an inflationary environment, the only deflationary force is software. So that’s the second micro thing, the tone thing that’s different.
MongoDB (2 June 2022)
That being said, we understand that there is heightened focus on the macroeconomic outlook because of geopolitical tensions, inflationary pressures and the risks of a slowing global economy. Since macro-related questions are dominating investor conversations, it makes sense to share with you what we are seeing as well as to discuss our framework on how we plan to manage through this macro uncertainty. Starting with what we’re seeing in the market. First quarter was a robust quarter for new business. Driving innovation remains a top priority for our customers, and they’re investing in modern technologies to facilitate this. We had strong engagement with the C-suite, and our deal cycles were in line with normal patterns. The tone of our quarterly business review meetings at the start of the second quarter was that of confidence. Our sales force indicated that our message is resonating in the marketplace, and they remain bullish about the opportunities to win new business.
Salesforce (1 June 2022)
And so far, we’re just not seeing any material impact from the broader economic world that all of you are in. Our demand environment where demand is very strong, and if you look over the last 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 dot-com crashes and recessions and financial crises and global pandemics and all of you have watched us go through every possible storm, but we continue to weather these storms through the power and strength of our model.
Veeva Systems (2 June 2022)
This is really a long-term thinking move by the customer. They’re thinking of this in 10- and 20-year horizon, so they wouldn’t be really fazed by specifics of the macro environment. So this is about, yes, applications in the clinical area but also in the quality and the regulatory area, not all of our Development Cloud but a big portion of it. So when they’re doing that, it’s a very top-down decision. It’s like building a huge factory. That’s why it’s not affected by the macro environment. And then if you get it, what they’re trying to do, it’s laying the foundation for efficiency, digital efficiency, getting drugs to market faster to help patients. So it’s a long-term play by the customer and sort of executive-level decision.
Twilio (5 May 2022)
I think, obviously, if like the economy were to dip into like some sort of significant recession, we’re not necessarily immune from that. But what we see based on both our internal studies, and we alluded to the customer engagement report as well as a number of external studies, is that digital transformation remains a top boardroom priority. That obviously benefits Twilio as a variety of 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, whether it’s economic or geopolitical, but we just think this business is extremely well positioned to capitalize on ongoing companies’ digital transformation efforts.
Zoom Video Communications (24 May 2022)
[Question:] I’m wondering, have you seen any paring back or moderation of investment from some customers in light of growing macro concerns? And if so, has it varied by either geography or customer size?
[Answer:] I mean we really have it — especially in enterprise, we have continued to see strength in renewals as well as additional new customers and expansion into additional products. So we really haven’t seen that in terms of concern. I think we’ve heard from other people that what they’re really focused on might be — if they’re limiting spending, it’s focused more around potentially hiring or travel. And of course, Zoom is a great alternative if they’re focusing on limiting internal travel. And so we really haven’t seen that impact today.
Final thoughts
One 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 USA. This is a tailwind for businesses that are providing the tools for organisations to embrace the digital world.
The economic news coming out of the USA has been bleak of late. Only time can tell if technology companies are able to grow their businesses even in the face of a weak economic environment. At the very least, their managers are confident.
It’s worth noting too that there’s at least one precedent of a software company posting admirable growth rates even when the economy was weak. This happened during the Great Financial Crisis of 2008/09, when the USA’s real GDP fell by 4.3% from a peak in the fourth quarter of 2007 to a bottom in the second quarter of 2009. The unemployment rate also rose from 5% in December 2007 to 10% in October 2009. While the US economy was in trouble, Salesforce’s revenue grew by 51% in 2007, 44% in 2008, and 21% in 2009. Salesforce provides customer relationship management software over the cloud and it was able to grow rapidly during the financial crisis because its software was better than incumbent solutions.
If software and digital infrastructure companies today are able to provide better solutions for their customers than what they’re currently using, they could continue to grow even if the economy worsens from here, just like what happened to Salesforce a dozen years ago. But even if they struggle to grow in the near term, the long run picture still looks healthy. According to Microsoft’s CEO Satya Nadella, around 5% of global GDP is currently spent on technology. It’s hard for me to imagine this percentage going down in the years ahead – what do you think?
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Adobe, Amazon, Datadog, Microsoft, MongoDB, Salesforce, Veeva Systems, Twilio, and Zoom Video Communications. Holdings are subject to change at any time