Industry
In charts: SaaS industry might be on way to recovery
Summary
Demand is back in the global SaaS market. It should lift Indian boats also, but they still have to overcome the challenge of cracking foreign markets.
A year ago, US-based SaaS (software as a service) companies such as Salesforce, ServiceNow and Atlassian were concerned about the continuing impact of the global economic slowdown. Revenues dropped and the flow of deals slowed, as clients were reluctant to spend amid economic uncertainty. More than two-thirds of SaaS companies surveyed by Everstage, also a SaaS company, did not meet their targets in the first half of 2022. Many listed SaaS companies, including Salesforce, revised their guidance downwards a year ago.
The gloom was also evident among Indian SaaS companies, which compete in the same market. Most Indian SaaS companies are in a growth phase. They are dependent on venture capital firms, which, in turn, take cues from the performance of global firms. The recent quarter suggests the SaaS industry might be out of the woods, despite macroeconomic uncertainties and greater deal scrutiny by clients.
A recent ICICI Securities report pointed out that revenues of most SaaS companies topped guidance in the June quarter. Combined revenues of the top five global SaaS companies by revenues—Salesforce, Intuit, ServiceNow, Workday and Atlassian—grew 14% on a year-on-year basis.
Margins also improved. It’s an indication that there is an overall improvement in the demand for SaaS, even if it's tempered by client concerns about macroeconomic factors. Salesforce, for example, said the industry continues to face “elongated sales cycles and additional deal approval layers", even as it raised its revenue guidance by 1 percentage point to 11% for financial year 2024.
Stock Appreciation
In calendar 2023, the share prices of all top five global SaaS companies have outperformed the Nasdaq Composite index. While their valuations are still lower than their peaks in October 2021, the appreciation in the past year reflects the long-term demand for SaaS.
According to a forecast by market intelligence firm Gartner this April, end users are expected to spend $233 billion on SaaS by 2024—an increase of about 40% from the $167 billion in 2022. IDC, another data provider, pointed out in July that it would be wrong to conclude that CIOs (chief information officers) would stop spending on the cloud because of economic challenges. In fact, the long-term investment agenda is starting to be dominated by “the assessment and use of AI, triggered by generative AI", said IDC. SaaS companies have been responding to that either through acquisitions or by strengthening their AI talent.
VC Pullback
The Indian SaaS industry has been impacted by the venture capital (VC) winter. According to a report by VC firm Bessemer Venture Partners last month, Indian SaaS companies received only $300 million in VC funding in 2023, as of 30 June, against $6 billion in all of 2022. According to data provider Venture Intelligence, VC funding to Indian SaaS companies dropped by about 80% in the first half of 2023 over the first half of 2022.
As global SaaS companies report better-than-expected numbers, investor sentiment for Indian SaaS companies too should improve. Besides, according to Bessemer Venture, Indian SaaS companies are more efficient. “Across revenue ranges and levels of business scale, we observed that Indian SaaS companies have higher efficiency scores than their US counterparts," BVP wrote in its report. The underlying message is that while markets might pick up, and access to funding might improve, SaaS companies will still have to focus on profitability.
Domestic Growth
An upside is a pick-up in domestic demand for SaaS. Bessemer expects annual recurring revenue (ARR) to increase from $13 billion in 2022 to $50 billion by 2030. Some SaaS companies that started with domestic sales have expanded overseas, while others are doing more in India. Salesforce, which employs about 9,000 in India, has said its India business is growing in double digits. Similarly, Zoho, which started by selling globally, has been consistently growing in India.
Yet, for most Indian SaaS companies, growth is expected to be overseas led. “Global markets are a key step for Indian SaaS companies looking to achieve substantial scale (more than $100 million ARR)," Bain & Co wrote in its India SaaS report earlier this year, adding that the US SaaS market was highly competitive. Thus, while the recovery in the global SaaS market presents an opportunity for Indian SaaS companies, winning there could still be challenging.
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