Back in January I had read some reports indicating that after a strong 4Q10, the US economy was showing the signs of a slowdown. During January and February in particular businesses slowed their investment activities. These sobering reports were counterbalanced with more upbeat reports that small and larger enterprises continue their switch to SaaS solutions with CIOs looking to invest in new SaaS applications. This trend was reflected in the sales pipelines of our SaaS portfolio companies that continued to show strong growth during the quarter. However, ultimately our SaaS portfolio performance was ordinary, more reminiscent of the performance during 2Q10 rather than that of 4Q10. In other words, about 40% of our SaaS portfolio companies made or exceeded their quarterly financial targets, with over 70% coming to within 80% of their targets. By comparison, over 80% of our SaaS companies made or exceeded their financial targets during 4Q10.
The public SaaS companies are starting to present a more hopeful story. As these companies are starting to report their quarterly results, e.g., Success Factors, RightNow, netsuite, Constant Contact, SPS Commerce, Vocus, we are seeing bookings and revenue growth that meets or exceeds the guidance they had provided. This growth is coming from multiple industries and particularly from the mid-upper enterprise segment. We are also seeing the public SaaS companies accelerating their M&A activity (see Salesforce, Success Factors, VMWare) as they try to expand the functionality of their core solutions. Such moves of course will likely have a negative impact on margins.
Over the past couple of weeks my partners and I attended several board meetings to review the 1Q11 performance of our SaaS companies. As I mentioned above, the great momentum our SaaS companies achieved during 4Q10 was not carried during 1Q11 resulting in an OK quarter. Our analysis of their performance is leading us to the following conclusions:
- Companies of different sizes and from several different industries are considering SaaS applications to address their business needs. This is reflected in the overall size of the sales pipelines of each of our SaaS portfolio companies by number of opportunities and the size of each opportunity. In general we are seeing
- the size of the average opportunity increasing,
- the age of each opportunity remains small, i.e., few opportunities are over 3-4 months old,
- the distribution of contract duration has remained steady, i.e., the distribution among one-, two- and three-year contracts has remained the same as in the previous two quarters,
- the distribution among the size of the prospects, i.e., among small, mid-size and larger enterprise companies, has remained the same as in the past two quarters, and
- while the geographic distribution of the deals continues to be US-centric, the number of foreign companies in the pipelines is increasing.
- Analysis of the deals that were won and lost during the quarter indicates that while companies are accelerating their adoption of SaaS applications, in this economic environment they tend to prefer to sign deals with larger, public SaaS vendors rather that smaller, private ones. Many other companies decided to push their purchase decisions out by 1-2 quarters presumably in order to see how the economy will do during this time.
- Regardless of the customer size, and similar to 3Q10 and 4Q10, the majority of the sales closed during the last 2-3 weeks of the quarter.
- Customer churn remained 7-10%.
During the past two weeks I have also had the opportunity to talk with other investors with significant SaaS portfolios and heard that their companies reported similar quarterly performance.
Our management teams feel rather upbeat about 2Q11. They are basing their optimism on the discussions they are having with the prospects that didn’t buy during last quarter but have indicated that they will make a decision in the very near future, as well as the overall size of their sales pipelines which have continued to grow with consistent regularity. Finally, as investors we hope that the problems with Amazon’s AWS service that impacted many SaaS companies last week will not have any negative material impact in the 2Q11 revenue and bookings of these companies. It was fortuitous that it happened relatively early in the quarter.