Q&A: Send in the Cloud

Baird’s Steve Ashley shares positive outlook for SaaS

- Ahead of Baird’s Global Consumer, Technology & Services Conference, Senior Software Analyst Steve Ashley shared his thoughts on the evolving SaaS ecosystem including challenges, opportunities and headwinds impacting the space.

What is your outlook for the sector going forward this year?

Ashley: We remain upbeat about the outlook for the Software and SaaS sector.  While there were some companies that reported below average first quarter results (MSFT, SAP, SYMC, MKTO), the majority of Software and SaaS vendors reported solid results and either maintained or raised prior 2016 guidance, led by ServiceNow (NOW), Citrix (CTXS), VMWare (VMW), and The Ultimate Software Group Inc. (ULTI).  Importantly, first quarters are notoriously squishy with soft seasonality following strong fourth quarter spending. 

As you consider the biggest challenges to growth across the industry, which players are on the right track?

Ashley: The biggest challenges are not new, but they are profound and involve Cloud, Social and Mobile.  The move to the Cloud continues unabated in all its variations -- infrastructure, platform and software.  We have seen continued strong growth from Salesforce Inc. (CRM), ServiceNow (NOW), as well as the emergence of private clouds with Red Hat OpenStack (RHT).

Within the sector, upselling existing clients accounts for less than 20% of revenue. Why is that, and who is best positioned to take advantage of the opportunity upselling represents?

Ashley: Upselling is challenging when customers are on legacy client/server architectures.  They simply don’t want to add to them if possible.  However, in the Cloud customers are open to trying anything new, and adding services tends to be a more seamless process. As a result, upsells remain strong among cloud companies. Salesforce, the largest SaaS vendor in the world, reported stronger-than-expected 4Q16 (January) results driven by large upsells, two of them totaling $100M. 

How will the industry continue to evolve, particularly in the instance of industry-specific Vertical SaaS, and the investments needed to compete effectively in that space?

Ashley: Workloads will continue to migrate to the cloud over the next 5-10 years.  Large company specific applications will remain on premise, but smaller less mission critical software will continue to move to the cloud for the next several years.  To support this migration leading cloud vendors will need a global footprint, so you will see the large players continuing to build out data centers around the world. 

Steve Ashley is Baird’s senior analyst covering Software & SaaS. During his career, Steve has been named in The Wall Street Journal “All-Star Analysts’ Survey,” and highlighted as one of the NASDAQ-StarMine top analysts within the Internet Software & Services industry.