IT management software companies adapt to face new challenges

<p>IT management software companies adapt to face new challenges</p>

In a recent survey of value-added resellers (VARs) conducted by enterprise software analysts at KeyBanc Capital Markets (KBCM), respondents indicated that budget growth for 2023 would be around half of what they had reported in the previous quarter.

IT management software companies rocketed in 2020-2021, as companies needed help to administer and optimize technology solutions that were hastily deployed in the early days of the pandemic. While the sector has continued to trend up in 2022, there may be clouds forming on the horizon. In a recent survey of value-added resellers (VARs) conducted by enterprise software analysts at KeyBanc Capital Markets (KBCM), respondents indicated that budget growth for 2023 would be around half of what they had reported in the previous quarter – an abrupt pullback in planned spending that could presage lower sales in the IT management sector.

At the KeyBanc Capital Markets Technology Leadership Forum in early August, KBCM Managing Director Michael O’Hare brought together three IT management software leaders to discuss trends the sector is seeing, their short-term outlook and the changes they expect as companies “return to normal.” O’Hare was joined by panelists Tom Barrett, president and CEO at 7SIGNAL; Dave Hafner, CFO at Tricentis; and Sonal Puri, former CEO and current board member at Webscale.

To kick off the session, O’Hare invited two KBCM colleagues – Michael Turits, Managing Director, Equity Research Analyst for Enterprise Software, and Associate Analyst Eric Heath – to discuss what they’re seeing in the broad enterprise software space.

 

The tech slump hasn’t trickled down to IT management software companies – yet

During the pandemic, tech adoption rates skyrocketed, digital transformation became compulsory and tech companies benefited – either directly or indirectly – from trillions of dollars in stimulus funds. These spikes led to record-high levels of funding, record-breaking IPOs and sky-high valuations. But just as COVID infection rates waned, the tech funding fever ran its course. Both private and public tech company valuations have fallen back to earth in 2022.

“Whether you want to call it a recession or not, the corporate leaders we talk to are getting more negative,” said KBCM Senior Analyst Michael Turits. “There certainly is concern out there at this point.”

The good news for IT management software companies is that they are likely to see less of an impact than their consumer-focused peers. In fact, Dave Hafner, CFO at Tricentis, said he has yet to see any sign of a downturn in his business. “It’s been mostly business as usual,” said Hafner. “With the sales results we’re putting up, we haven’t been affected yet.” He added that no one’s immune, however.

 

Whether you want to call it a recession or not, the corporate leaders we talk to are getting more negative. There certainly is concern out there at this point. 


Michael Turits, KBCM Senior Analyst 


Hoping for the best but preparing for the worst

“As we look forward, given the environment and the change in investor sentiment, we're not in ‘growth at any cost’ mode,” added Hafner. “To the extent that it gets worse again, we’ll shrink our cash burn with an eye toward an IPO. But we're also girding ourselves internally for what may be a protracted period of economic difficulty.”

Tom Barrett, president and CEO at 7SIGNAL, said that his company saw explosive growth during the pandemic. That growth continues, but Barrett said he’s seeing a shift in its source. “More than 66% of our annual recurring revenue (ARR) is coming from current customers expanding,” said Barrett. “That’s really helping, because it means we don’t need to add salespeople to hit growth targets. We just need to keep expanding the product.”

Sonal Puri mentioned that her company, Webscale, had also seen tremendous growth throughout 2020. Much of that growth was attributable to the organization’s focus on e-commerce. Within that segment, Puri said 2022 has been a mixed bag, with some of their customers continuing to do well, while others struggle.

 

Consolidation of corporate IT functions drives change

Webscale’s focus on online shopping has given Puri some insights into how companies are changing their approach to compliance and security.

“Companies are thinking about security holistically,” said Puri. “We're seeing the silos of compliance, cloud, application, secure access server edge (SASE) and all the rest of it being consolidated. Companies are saying, ‘We really need the outcome to be solid security for our entire enterprise, whatever that looks like.’”

Consolidation and closer scrutiny of systems and solutions is being mirrored on corporate org charts, with CIOs taking over responsibility for marketing, IT, DevSecOps, cybersecurity and compliance functions. IT management software companies will have to adapt to meet changing preferences and expectations from their clients.

“Take digital experience monitoring (DEM) for example. We sell to the IT network teams and device teams, but with DEM, the budget may be coming from another group,” said Barrett. “That overlap has allowed us to tap into multiple budgets, which has been helpful. And this is across all industries.”

 

Rethinking sales strategy to appeal to a new generation of buyers

“Buyers aren’t the same as they were several years ago, when you could fill up a meeting room with 15 people for a demo,” said Barrett. “It’s the next generation now that are buying, and the customer will do 80% of the research on their own, before they even talk to you.”

Buyers are attending webinars, going to conferences and talking to their peers so that by the time they interact with a salesperson, they already know what they want. Sales structures must adapt to that new reality, according to the panelists. But the silver lining is that these changes may also reduce costs.

“Companies have to re-architect their sales model to cope with the flow there,” said Dave Hafner, CFO at Tricentis. “They have to drive more leverage and efficiencies from their sales model.” They’ll also assess how their sales teams are structured and motivated to drive productivity across the board.

 

Buyers aren’t the same as they were several years ago, when you could fill up a meeting room with 15 people for a demo. It’s the next generation now that are buying, and the customer will do 80% of the research on their own, before they even talk to you.


Tom Barrett, President and CEO at 7SIGNAL


Doing more with what you already have

By the time public and private company valuations started to head lower in the first quarter of 2022, many companies had already implemented hiring freezes. Now, they’re focused on getting more out of the employees they have.

“Our main assets walk out the door every day at five o'clock, right – 70% of our cost structure is people,” said Hafner. “But in this new world, where people aren't actually physically together, the productivity has just fallen dramatically. So, we think we’ll get leverage next year just by slowing down hiring and trying to force more productivity out of our existing heads.” As an example, Hafner cited Alphabet’s “Simplicity Sprint” initiative, designed to identify and eliminate distractions, waste and inefficiency. 

 

Conclusion: Operational decisions will capture near term growth in IT management software

For IT management software companies, the past thirty months have been an almost constant case of “shoot first and ask questions later.” But now, the bankers advise that it’s time to take a breath and be deliberate in forward-looking decisions – whether those address product packaging and presentation, sales strategy and structure, or the steps needed to keep staff motivated and focused.

“If you're relatively new to the game, you think, ‘Gee, whiz, valuations are down so much right now,’” said Hafner. “But, if you look at the valuations over a longer time frame, you'll realize that we're pretty darn close to historical norms in terms of valuations.” The goal now is to focus on operational actions that will have significant impact on the bottom line and capture available growth. 

To discuss this content and to learn more, contact your KeyBanc Capital Markets investment banker.

To learn more about attending one of our conferences, email the Corporate Access team.

 

About the 2022 Technology Leadership Forum

The 2022 Technology Leadership Forum attendees included 170 institutional investors, 124 private equity/venture capital and corporate development investors, 72 public companies and 82 private companies. The agenda included 56 Fireside Chats/Presentations, 11 thematic panels, 8 industry specific spotlight sessions, 3 banking workshops/industry deep-dives and 5 Keynotes.

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity.

KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp® and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A.

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