Over the past two weeks, we've seen three different cloud software firms initially see profit-taking following good-but-imperfect earnings reports that followed big run-ups, only to quickly recover their losses -- and in two cases, close higher -- as markets decided the numbers were good enough for the companies to hold onto their recent gains. As much as some investors holding big paper profits had the urge to cash in.
The reactions to the reports say a lot about how the momentum behind enterprise cloud software adoption looks even stronger than it did to start the year. If business conditions look fairly healthy for older enterprise software firms making successful cloud transitions -- think Microsoft Corp. (MSFT) or Autodesk Inc. (ADSK) -- they look superb for major software vendors to have focused from the start on providing cloud apps and services to businesses.
Cloud human capital management (HCM) and financials software leader Workday Inc. (WDAY) and cloud content management software provider Box Inc. (BOX) have served up the latest evidence. Though it traded lower after-hours on Wednesday after beating July quarter sales/EPS estimates, missing billings estimates and hiking its full-year subscription revenue guidance, Workday opened higher on Thursday and closed up 2%, making new 3-year highs along the way.
Box opened down over 3%, as disappointment over its roughly in-line October quarter and full-year guidance overshadowed its July quarter sales, EPS and billings beats. But shares quickly moved higher and closed nearly unchanged. They're up 42% on the year.
Cloud CRM software leader Salesforce.com Inc. (CRM) , meanwhile, has made fresh highs since posting its July quarter report on August 22nd. Salesforce's sales, EPS and billings all beat estimates and the company's quarterly and full-year sales guidance were both solid. But disappointment over the company's subdued October quarter deferred revenue growth -- growth is expected to be stronger in the January quarter -- and lack of full-year margin and cash flow guidance hikes briefly weighed on shares.
And in late July, cloud IT service management (ITSM) software leader ServiceNow Inc. (NOW) moved higher after beating Q2 sales, EPS and billings estimates and issuing strong Q3 and full-year guidance. Shares have made fresh highs over the past week and are up 52% in 2017.
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Admittedly, Veeva Systems Inc. (VEEV) , the top provider of CRM and content-management software to life sciences firms, wasn't as fortunate. Its shares tumbled last week, as markets decided a July quarter sales/EPS beat and strong guidance weren't good enough. But shares have recovered some of their losses since, and remain up 46% on the year.
Helping the aforementioned companies continue trading at elevated levels: Outside of quarterly fluctuations, their top-line growth rates show few signs of significantly slowing even as larger revenue bases make it tougher to keep growing at such rates. Workday saw 40.6% annual revenue growth and 29% billings growth last quarter, and just upped its full-year growth target for subscription revenue (accounts for the lion's share of total revenue) to 36% from a range of 32% to 33%. Box saw 28% revenue growth and 31% billings growth last quarter after respectively seeing 30% and 31% growth in the April quarter, and is expected on average by analysts to see 27% full-year sales and billings growth.
As an aside, the billings figures posted by cloud software firms get a lot of attention, since these companies will often bill clients for cloud subscriptions 1 or 2 years at a time (and be paid up-front), but only record the revenue a quarter at a time. But billings growth also sometimes doesn't tell the full story -- both since companies may have booked a lot of long-term subscription deals that they've only partly billed clients for, and because there can be seasonal changes in when customers get billed.
Salesforce's revenue and billings growth both came in at 26% last quarter -- its April 2016 purchase of e-commerce software firm Demandware helped a little -- and the company is now guiding for 23% to 24% full-year revenue growth, down just a bit from fiscal 2017's 26% growth. Billings growth is expected to slow to around 10% in the October quarter due to growing seasonality, but is expected to bounce back to the 20% range the following quarter.
ServiceNow saw 41% revenue growth and 35% billings growth in Q2, and is now guiding for 37% 2017 revenue growth -- down just slightly from 2016's 39% growth -- and 34% to 35% billings growth. Veeva posted 27% July quarter revenue growth and is forecasting 24% full-year growth.
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This continued top-line strength -- often in the face of growing competition from enterprise software giants such as Oracle, SAP and Microsoft, all of whom are eager to grow their cloud sales -- has much to do with how pure-play cloud software vendors have been successfully branching out as growth in the product lines they cut their teeth on has slowed.
Salesforce, whose Sales Cloud software is now widely used by sales pros within major enterprises, has seen much of its recent growth come from its customer support, marketing automation, e-commerce and cloud app platform (PaaS) product lines. Workday is still seeing decent growth for its core HR products, but is also now getting a sizable contribution from its financials apps and expanding into areas such as learning, talent management and analytics apps.
ServiceNow has expanded beyond its core ITSM apps -- now used by many IT service desks -- to offer a slew of IT operations management (ITOM) and IT business management (ITBM) apps, and also offers customer service, HR and app development tools. Box has been upselling clients on encryption, governance and data migration tools. Veeva, which now has high penetration rates for its sales apps at life sciences firms, has been relying heavily on its content management tools for growth.
The fact that these companies are solely focused on cloud apps and services, with their management teams, salespeople, developers and customer support workers having no need to spend time concerning themselves with older on-premise software lines, generally seems to have helped their cause as they branched out and stepped further on the toes of old-guard IT giants. And in some cases, the fact that their apps have been built from the ground up to run in the cloud, and haven't had to support any legacy code, has been an advantage.
For now, with research firm Gartner forecasting total enterprise software spending will rise nearly 9% in 2017, there's enough room for both cloud upstarts and old-guard firms executing well on their cloud transitions to see market-pleasing growth, even if the first group's growth is much higher than the second's. But if the upstarts keep growing the way have been in recent quarters, some of the old-guard vendors could eventually be in a tough spot.