Software Companies: No Collapse in Demand

A big concern with the pandemic was whether demand for all sorts of products and services would collapse. And for sure the demand for many things did collapse or get postponed for parts of March and April.  An area that has shown surprising resilience through Q2 is software demand. Every quarter I take time out to read a few earnings reports, and this quarter one of them was Upland Software. There were a couple of reasons to read it:

1. It's a local Austin public company - there aren't so many of those that it isn't worth keeping up with them to get a sense of how things are going in Austin's tech community.
   
   
2. Jack McDonald is a well-known figure in Austin because his previous splash was running Perficient.
   
   
3. A few former Lombardi or Trilogy colleagues are over at Upland, including Rod Favaron (President and Chief Commercial Officer), Jim Rudden (Chief Marketing Officer), and Virginia Miracle (Chief Customer Officer), not to mention Matt Dussling and Brandon Baxter.

And the earnings call for Upland didn't disappoint. Bhavan Suri got the first question, which finished with

"Just when you were at Perficient and you went through several cycles there during the downturn, some of those were economics, some was real estate, et cetera. But just talk a little bit about how that compares to what we’re seeing now and Perficient was a totally different business. It was people-based, and this is software-based, so some difference is there. But just sort of what you’re seeing the similarities and sort of the experience you bring to the table sort of to manage for this process. I think that would be helpful for people trying to understand sort of how is the company navigating this time."

And Jack's response here: 

Sure. Really, during the 10 years that we grew Perficient than I was running it, we took that business from eight people and $500,000 in revenue to 1,200 people and $250 million in revenue. And we really had two significant crises that we had to manage through. The first was the dot-com bubble bursting and the second, of course, was the Great Recession in 2008 and 2009. And in both cases, you really saw, I think, in contrast to what we’re seeing here with COVID, in those two earlier cases, you really saw a lapse of demand. And so you’re looking at significant hits to revenue. And I think the difference between the winners and the losers there was that those folks who confronted reality and adjusted their cost structure and who had, in fact, gone in with the right kind of solid customer base actually came out stronger than they went in, and that was the case for Perficient. In fact, the dot-com bubble bursting, probably, the best thing that ever happened to that business, taking out five or six out of 10 of our competitors and then setting us up for 10 years of great growth. But after 10 years, which I guess has turned into 20 years, the business is still doing incredibly well, which we’re very proud of.

By contrast, with Upland and COVID, we’re not seeing a collapse in demand. If anything, we’re seeing organic growth here at 8%, above our 3% to 7% target range. And as our strong guidance indicates, we are seeing organic growth continuing at strong levels into the second half of the year.

And I think that's the key message - contrasted to 2008-2010, or 2001-2003, there's not been a collapse in demand. And that has held true across most of the software companies I follow.

Within our own ecosystem, while we saw some demand push further out, the overall demand for automation has increased, and we're busier now than we've been at any time in 2020. Every business that has had to go remote, is finding their feet under them and looking to continue to improve their business.  Many of these businesses are finding new reasons to automate or find new ways to get work done now that they're not always in the office.

There aren't many silver linings right now given the unemployment rate and number of insurance claims. But, we can hope that this strong demand for technology and services will translate into a stronger economy when the pandemic recedes, and stronger companies who are prepared to grow on the other side of this.

As a footnote to this, one of Rod's answers was vintage Rod Favaron: 

That being said, putting those in [new selling methodology] and being great at them is not the same thing. So we’ve got real-time here, as Jack put it. This is a journey that we’re going to be on for a while and really making that part of our muscle memory is sort of what – we got it started in the second quarter, but really a lot more work to do. So I think it’s a good start, but as Jack said, our product usage really drove the quarter. Some of the products that really are digital engagement products really had a big quarter, and so that really helped a lot.

I can just hear his voice saying it. Rod knows it takes time to really be great at a new process, and not to get too enamored of the first early returns.