2Q10 Proved Harder than Expected but SaaS still Comes Through

We are in the midst of the reporting season. Several public SaaS companies have already reported the results of their 2Q10 financial performance and a few more will do the same in the following days. These reports continue to tell a very positive story for SaaS companies as the majority of the companies met their financial targets demonstrating a 10-30% revenue growth with the majority in the mid teens. During a series of board meetings and calls over the past 2 weeks, our own SaaS portfolio companies also reported their 2Q10 performance. This quarter was more challenging for our portfolio companies than 1Q10 (see the 1Q10 analysis here). A summary of our conclusions from these meetings:

1. The same number of companies made their numbers as in 1Q10. However, new deals were harder to close and many of them came at the end (last 2 weeks) of the quarter. In past quarter we were able to see a better “pacing” with deals closing every month.
2. QoQ revenue growth in the 5-10% range. However, after the performance of 1Q10, we were expecting revenue growth in the 20-30% range. Peeling the onion we saw the following:
   1. While the US market appears to have been slower during the quarter, the international markets for SaaS are starting to open up. Even our smaller companies are starting to receive inbound leads from European and Asian corporations that are now considering SaaS solutions.
   2. Upsell targets were met or oftentimes exceeded as existing customers expanded their use of SaaS applications. Furthermore, renewals and upsells were done on time compared to new deals that, as I mentioned, closed at the end of the quarter, implying that customers continue to see strong value with SaaS
   3. SaaS adoption by larger companies continues to accelerate while the small businesses continue to struggle as they try to exit from the recession. Over 60% of the deals closed by our SaaS portfolio on the aggregate are now coming from larger corporations (with over $300M in annual revenues).
   4. Larger companies signing annual and multiyear contracts, rather than going month to month or six-month contracts, implying that they are embracing SaaS quickly and their comfort with the use of SaaS applications continues to increase. This corroborates data recently reported by Gartner and IDC.
   5. International markets are coming on strong. Many of our smaller SaaS companies are starting to sign deals with international customers. They have also started receiving inbound interest from international partners.
3. Social media and word of mouth are playing a more prominent role in demand generation, much more than I had expected for enterprise software. During the quarter, webinars proved again the most effective lead generation channel.
4. Continued growing emphasis on field sales. Prospects are asking for more elaborate and company-specific evaluations of the SaaS applications requiring more touch. As a result of the increasing emphasis on field sales, the gross margins continue to be negatively impacted.
5. Partners are becoming more engaged with SaaS application companies and are initiating more sales opportunities for our portfolio companies than in the past 3 quarters, i.e., it’s becoming easier for our portfolio companies to sign up partners and the partners become effective faster than before because they see market demand and are figuring out how to make money through the model.

The results of 1Q10 had left us particularly enthusiastic about the prospects of our SaaS portfolio companies for the remaining the year. While the 2Q10 results tempered the enthusiasm they continued to validate the power of the SaaS model. Because of the overall macroeconomic trends, particularly in the US, our partnership and our management teams realize that achieving the budgeted financial targets will require even harder work than we had thought at the end 1Q10.