Software companies: Managing through market disruption and beyond

COVID-19 has caused a rapid, unprecedented impact to the software industry driven by a dramatic shift in consumption. This has created business continuity uncertainty. As software companies look to stabilize and re-emerge, they should use a three-phased approach focused on: Resilience, Recovery and the New Reality.

1. Software and SaaS subsectors are among the better stock performers in the early disruption, having lost only ~6% on average from February to mid-May, but performance varies significantly across subsectors – from +22% gain to -25% loss
2. Software and SaaS company liquidity is relatively strong compared to the S&P 500 median, but many remain sensitive to rapid revenue disruption and have to react quickly to any significant drops in revenue or cash collection performance
3. Software market is expected to continue to grow, but more slowly, as in the three prior down-turns. SaaS has grown faster than other software, but SaaS companies saw growth rates drop by ~half for 2 years during the 2008 downturn
4. To compensate, SaaS companies may need to manage costs to maintain efficiency. From 2007-2010, SaaS companies reduced OpEx share of revenue by 5-6 percentage points – though absolute spend increased
5. Companies should maintain focus on M&A and innovation. From 2007-2009, M&A deal volumes were halved, but IRRs for software and services deals more than doubled and innovative companies continued to emerge
6. Leaders plan in parallel for both recovery and a new reality. History suggests that companies executing a balanced response, focusing both on cost and revenue, outperform competitors post-recession on sales and EBITDA growth