Baird 2022 Q4 Software Earnings Insights

Abstract image of a lock with social media and technology icons floating around it

In this report, the Baird team provides insights into earnings report trends and key themes in Q4:

SIGN UP TO RECEIVE THIS REPORT

Emerging this quarter:

  • Net revenue retention contraction is offsetting pandemic gains as seat expansion continues to slow
  • Robust 2022 pipelines are supporting new business wins, while investors shift focus to pipeline replenishment outlook
  • Pricing increases are aiding 2023 revenue growth outlook
  • Quality of earnings is in focus as companies are increasing useful life of networking and server assets or incorporating other adjustments and delivering elevated profitability results

Continued 2022 earnings themes:

  • Platform solutions vs. “best of breed” point solutions competition in light of budget optimization and vendor consolidation, especially in the security category
  • IT budgets remain under scrutiny and investor focus remains on mission critical software 
  • SMB customer base is demonstrating continued softness
  • Customer-friendly payment terms are continuing with impact on revenue visibility and free cash flow conversion 
  • Elongated sales cycles and C-level engagement in contract negotiations are the new normal; focus on pipeline conversion and large deal push outs
  • Macro backdrop is causing narrower revenue beats and cautious outlooks, but customer trends and macro sentiment have stabilized
  • High-growth consumption models are delivering volatile results and forecasting sharp revenue growth cuts in 2023
  • Cloud Titans continue to benefit from optimization trends, but growth outlook has decelerated
  • Security vertical has proven resilient to macro headwinds

Q4 earnings recap:

  • Reported median Q4 Y/Y revenue growth was 18%, compared to 22% in Q3 and the 2021 quarterly median of ~26%
  • Revenue growth trends are projected to decelerate further with estimated Y/Y revenue growth of 17% in Q1 and 14% for CY 2023
  • Revenue growth projections for 2023 fell by ~2% when comparing estimates published pre and post Q4 earnings
  • Meanwhile, EBITDA margin estimates for 2023 have increased by ~2% from early 2022 as companies are focusing on profitability and providing guidance with positive margin revisions
  • Similar to last two quarters, 87% of software companies beat or delivered in-line revenue results, showing more challenging earnings seasons compared to the median of 93% since 2020 

REQUEST THE REPORT

Baird welcomes the opportunity to connect and discuss these trends and Technology market activity. Contact Baird Equity Capital Markets Team to learn more.

Macie House
+1-503-273-4937
mhouse@rwbaird.com

Renn Anderson
+1-503-273-4903
rkanderson@rwbaird.com

Tom Schadewald
+1-414-298-7479
tschadewald@rwbaird.com

Kotryna Smith
+1-414-298-5170
kpsmith@rwbaird.com

Patrick Doyle
+1-414-298-1801
pdoyle@rwbaird.com