As the close of 2019 approaches, with extreme stock market volatility and mixed economic signals, SaaS Finance execs building plans for 2020 and 2-5 years beyond don’t have an easy time. What assumptions should you use among conflicting signals about economic and market growth over the next few years?
Experts are fairly consistent that global and US economic growth will be modest. At the same time, continued high growth in the SaaS market is expected. Huge capital inflows to tech combined with extraordinarily low interest rates contribute to relatively easy growth capital access across the funding continuum from debt to equity investment.
And Microsoft, now the largest SaaS vendor in the world, just beat analysts’ expectations announcing $33B in revenue in the first quarter of 2020 – and new guidance signaling continued growth for the rest of the fiscal year.
Meanwhile, this week, the IMF cut its global growth forecast for 2019 to 3%, potentially the weakest in a decade. The 2020 projection is now 3.4%, compared with 3.6% previously, but even this recovery is deemed “precarious”. The IMF is also predicting that the projected global GDP lost to trade conflicts could amount to a cumulative $700 billion by 2020, approximately the size of the Swiss economy – or a little more than the combined GDP of Massachusetts, New Hampshire, Vermont, Maine and Rhode Island.
The OECD projected back in September that global economic growth will slow to 2.9% in 2019 and are only projecting 3% growth worldwide in 2020, with 2% growth in the US.
Meanwhile, the global public cloud software as a service (SaaS) market is hitting an annual run rate of $100B in 2019 and forecast to grow to US $157 billion in 2020, more than doubling the market size from 2014. Microsoft revenues represent 18% of the total market, followed by SalesForce at 11.5% and Adobe is in third place with 6.7% of the market, according to Synergy Research.
Microsoft’s recent deal with SAP to bring SAP cloud customers onto the Azure platform, together with similar deals with Oracle and VMWare, gives AWS a run for its money. Cloud services spending is also fueling the data center hardware and software market to grow to $150 billion.
The Cloud infrastructure landscape for all SaaS companies should become more competitive, contributing to better margins and continued growth. Cost of revenue is trending down for SaaS companies, leading to higher gross margins. Here’s an example of how Cost of Revenue numbers have changed over the last 10 years, looking at three SaaS public companies:
Source: OPEXEngine’s EdgarEngine
We are in a world of big transitions, leading to the different signals in the market. The move to the Cloud is well underway, but the impact of AI on new growth and productivity is not yet well understood. In addition, the power shift from a rising China coupled with a US in retreat internationally and the impact of the current trade wars is also not well understood. Low unemployment rates and access to skilled labor may also affect growth.
Cloud companies are getting better and better at managing resources for growth. We have seen greater efficiency and increased productivity in the use of capital and labor in our benchmarking over the past five years. We expect growth rates to continue to be strong for SaaS companies in 2020 despite modest economic growth projections.