Great Expectations for Private SaaS Growth Subdued by COVID-19 Crisis

While the industries that have already borne the brunt of the COVID-19 epidemic are clear, the impact on private Software-as-a-Service (SaaS) companies is less obvious. The KeyBanc Capital Markets® (KBCM) Annual SaaS Survey has become the industry’s go-to benchmarking report, and for its 11th edition, the survey focused on gauging financial and operating performance in the context of the COVID-caused economic crisis. Though SaaS companies have had to dial back their expectations for 2020 significantly, many firms are still poised for impressive growth – a bright spot amid unprecedented and unforeseen circumstances.
The report, which was previewed during the firm’s Future of Technology Series, analyzed data from more than 500 private SaaS company respondents, focused on baseline performance for 2019 and 2020 year-to-date through May 31, with responses collected from mid-June through early July. The responses tell a tale of disruption and uncertainty – one that has yet to resolve as the pandemic continues.
Looking at the Big Picture
Top-line median 2020 growth expectations for the SaaS companies surveyed have been cut roughly in half compared to last year's growth and initial 2020 estimates entering the year. The median 2020 growth rate outlook for companies with annual recurring revenues (ARR) of at least $5 million is approximately 20%, a major decline from the 36% median growth achieved in 2019 and the nearly 40% original outlook for 2020. Even the fastest-growing companies are seeing a significant slowdown, with the top quartile growers in 2019 seeing a median reduction of ARR growth from 96% in 2019 to 41% now expected for 2020.
David Spitz, managing director of KBCM's Technology Group and a longstanding leader of the firm’s Software investment banking practice, called these results startling, but not surprising. “An economic crisis of this magnitude simply must take a toll, even if there are counter-balancing opportunities,” he said.
Other key learnings from the survey include:
- Reduced bookings are the primary driver of the decline for most.
- Churn has ticked up for most respondents, but only incrementally – so far.
- Sales productivity is down, but not as severely as one might have predicted.
- Companies are cutting burn rates in part by reducing their workforce.
Yet, in the challenging 2020 environment, growth of any kind is remarkable, agreed Spitz and Adam Noily, director, KBCM. And especially for the top performers examined in the report, 50% growth is off the charts compared to the marketplace.
Digging into the Figures
Last year, 2019, was a typical growth year for SaaS, and going into 2020, expectations were even better. But as the impact of the pandemic shutdowns hit, company outlooks began to reflect the new, more challenging business-to-business environment. The vast majority of companies in the survey reduced their 2020 forecasts by at least 5%, with only 13% of respondents expecting zero impact or a positive tailwind.
The KBCM SaaS Survey broke down the responses to look for trends and identify those companies that are outperforming and those who are struggling in this new reality. Notable positive outliers include SaaS businesses that accelerate work-from-home, virtual and e-commerce operations, and those serving infrastructure software, development operations and security sectors. Meanwhile, it’s as expected that SaaS companies that market to COVID-affected verticals, such as airlines and hospitality, have the most negative impact. The group identified as “steady-Eddie” growers are those with low churn rates that will continue to book long-term contracts. Companies with high churn or that were underperforming before the pandemic are under serious pressure.
Looking at churn rates, the annual percentage rate at which customers stop subscribing to a service, the median rate has gone up only incrementally. In 2019, the median rate was 12.5%, and in 2020, based on the results from the first five months of the year, the median gross churn is expected to be 13.9%. About 20% of that difference was attributed to COVID-19, but it’s important to note these estimates are based on a first half that was only partially impacted by COVID-19. Renewal rates for the third and fourth quarter will give a fuller picture.
The survey also asked companies what the impact of COVID-19 was on the forward six-months pipeline and close rates – and both are showing stress. More than 30% of respondents expect the six-month sales pipeline to be down 10% to 25%, and more than 20% say it will be down greater than 25%. In light of this outlook, 39% of the surveyed companies conducted layoffs or furloughs.
Conclusion: COVID-19’s Full Impact on SaaS Growth in 2020 is Yet to Be Known
The pandemic and its related shutdowns have slowed the pace of growth for private SaaS firms, but the impact isn’t dire so far. In fact, the highest performing SaaS firms are still expecting growth of 50% in 2020. However, it is more difficult and expensive to book new business during this downturn. Mergers and acquisition activity also slowed during the first half of the year, and now companies must be able to show how they’re handling the COVID-19 environment.
KBCM experts recognize that we may still be in the early stages of the market disruptions caused by COVID-19. To understand how performance continues to evolve, the team plans to survey the companies in the fourth quarter and compare those results to the current findings. As the market continues to respond to the COVID-19 crisis, private SaaS companies must be more focused on results than ever before and must rely on trusted advice rooted in research, such as the KBCM SaaS Survey, to guide their adjusted plans. To receive a copy of the full 2020 SaaS Survey results, go to www.key.com/saassurvey. To discuss the results more in depth or learn more, reach out directly to David Spitz or Adam Noily.