Baird 2023 Q1 Software Earnings Insights
As the Q1 software earnings season concludes, we are sharing key trends that emerged in earnings calls and consensus estimate adjustments.
Many trends identified in prior quarters have continued into Q1, including resiliency among Cybersecurity companies and scrutiny around IT budgets. This quarter also saw a massive shift in focus to Generative AI and its current and potential impact on software. In addition to earnings details, this report takes a closer look at key trends around AI, Cloud spend and consumption-based software.
Emerging Q1 Earnings Themes
- Generative AI is benefiting Cloud Titans with monopolistic characteristics and cost of capital advantages
- Macroeconomic uncertainty is the new normal
- Platforms are taking share across the entire software ecosystem
- Vendor consolidation is leading to larger deals while deal close timelines remain challenged
- Cloud revenue growth continues to moderate with expectations to bottom out in late 2023
- Consumption-based software companies are under the microscope
- Investors are awaiting a reversal in sequential consumption trends as an indicator to rotate into software
- AI dominated Q1 earnings discussions with 1 in 5 companies in S&P 500 citing AI on earnings calls
- The Semiconductor sector remains the most crowded within Technology as developments in chip technology are leading to AI enablement
- Learning how to harness and implement AI effectively will be a key next step in transformational software development
- Overall IT spend remains relatively linear despite macro headwinds contributing to difficult budgeting decisions
- Cybersecurity continues to be resilient; data analysis programs are becoming more important given AI developments
Q1 Recap and Earnings Outlook
- Reported median Q1 Y/Y revenue growth was 16%, compared to 18% in Q4 2022 and the median for quarterly 2021 revenue growth of ~26%
- Revenue estimates remain little changed for the remainder of the year following Q1 earnings as companies take a more cautious approach to guidance
- Technology companies have outperformed the broader market post earnings by ~5% as investors rotate into growth sectors
- 89% of software companies beat or delivered in-line revenue results, showing moderate improvement over the last three quarters
Baird welcomes the opportunity to connect and discuss these trends and Technology market activity. Contact Baird Equity Capital Markets Team to learn more.
The Software Quarterly Update presents M&A and capital market trends and events that affect different companies within the sector.
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