Internet Explorer is not supported by our website. For a more secure experience, please use Chrome, Safari, Firefox, or Edge.
Infrastructure Software
Dharmesh Thakker, Jason Mendel  |  August 29, 2022
What Recent Cloud-Company Earnings Reports Say About the Current Economic Environment (Hint: It’s Good for Private Cloud Companies, Too)

The economic news is mostly bad these days: The NASDAQ Composite Index is down roughly 19% year-over-year, according to CapIQ data, with markets buffeted by rising inflation, corporate layoffs, lingering supply-chain woes and other factors.

So why are public cloud companies like Snowflake, Elastic and others doing so well?

Indeed, last week, data-platform provider Snowflake handily beat analysts’ expectations by reporting 83% year-over-year revenue growth and a slew of other solid metrics. Similarly, Elastic—whose cloud software helps with tasks like search, security, observability and analytics–saw revenue soar 30% year-over-year, to $250 million, with cloud-specific revenue rising at an even faster rate. Both companies’ shares are up over the last week.

So, what gives? In our view, these companies are outperforming—despite the uncertain macro-economic environment—partly because of the much-needed efficiencies they offer their corporate customers. Simply put, the type of software many larger, publicly traded cloud companies offer, and which many other up-and-coming cloud startups sell as well, has a deflationary effect, allowing corporate customers to automate core processes and save money on labor costs, which are rising even more these days because of the current labor shortage. In that sense, many types of cloud companies are the perfect antidote to today’s inflationary trends.

The current labor conundrum

The labor market is certainly in a complicated place right now. According to the latest jobs data from the Bureau of Labor Statistics, the U.S. has 11.3M open jobs and only 5.9M unemployed individuals, indicating a significant labor shortage. As the demand for labor persists, hiring quality employees has become more challenging and forced many companies to increase salaries to attract talent. That, in turn, negatively impacts companies’ bottom line and can lead them, along with other reasons, to raise prices, contributing to inflationary pressures.

At the same time, many employees are taking on more responsibility at their jobs, which can lead to burnout (adding to the existing labor shortage problem). This also contributes to some of the supply-chain issues that we’re seeing today. Per the Fundstrat data below, technology / software spending has historically increased during times of labor shortage as companies rely more heavily on automation to make up for fewer available resources. Again, this is how software can be deflationary: It can reduce labor needs and allow the production of goods to scale more efficiently, both of which help stabilize price increases during periods of inflation.

In the case of Snowflake and also privately held companies like Netskope and Databricks* (which recently announced its annualized revenue had topped $1 billion after growing 80% year-over-year in 2021), customers are accelerating their transition from on-premise data stores to the cloud as they look to boost productivity, scale their workforces more efficiently and cut down on unecessary labor (it takes people to manage legacy, on-prem data infrastructure). That allows employees to focus on more mission-critical tasks. Further, by shifting the responsibility for hardware ownership, ongoing maintenance and refresh costs to the software vendor (i.e. from CapEx to OpEx), customers can reduce their total cost of ownership by using this type of cloud technology. We think other cloud software companies will ride similar tailwinds in the coming months and years, despite the broader economic uncertainty.

Consumption-based pricing

Another trend fueling more adoption of cloud software is consumption-based pricing. Under this model, software is treated like a utility, allowing customers to pay only for what they consume (instead of getting locked into a pre-defined, fixed-rate contract).  While not all software companies can implement consumption-based pricing, the elasticity and flexibility of cloud software often lends itself well to this model.

And obviously, during times of financial belt-tightening, companies may prefer not to make a large, upfront financial commitment to a new type of technology, and opt for a cheaper, pay-as-you-go strategy instead. Snowflake’s consumption-based pricing model has helped the company deliver roughly 170% net dollar retention and around 40% customer growth for the past two quarters, according to earnings reports.

Overall, markets are likely to be volatile in the near term, affected by interest-rate changes and inflation concerns. Nonetheless, we feel the mid- to long-term future for software, especially cloud software, continues to be bright. If high inflation persists in the near term, cloud software may prove a deflationary counterbalance; on the other hand, if there’s an interest-rate induced recession, companies build out their tech stack with cloud software to grow their businesses efficiently. Cloud software is riding some critical technical and macro-economic trends right now, and we feel will continue to be an economic bright spot as large tech companies continue to report results over the coming weeks.

Battery Ventures provides investment advisory services solely to privately offered funds. Battery Ventures neither solicits nor makes its services available to the public or other advisory clients. For more information about Battery Ventures’ potential financing capabilities for prospective portfolio companies, please refer to our website.

*Denotes a past or present Battery portfolio company. For a full list of all Battery investments, please click here. No assumptions should be made that any investments identified above were or will be profitable. It should not be assumed that recommendations in the future will be profitable or equal the performance of the companies identified above.

Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.

Back To Blog
Related ARTICLES