SaaS companies Smartsheet and Adobe reported positive earnings this week, which prompted a spike in shares, although cloud expert Oracle posted a narrow miss. Following a turbulent 2022, the industry is predicted to grow in value, despite the current economic downturn.
- Adobe reports record revenues; Oracle posts a narrow earnings beat but misses revenue estimates; Smartsheet delivers surprise profit.
- SaaS market predicted to grow to $328bn by 2027 at a CAGR of 6.6%.
- Direxion Work From Home ETF offers exposure to all three companies and is up 6% year-to-date.
It’s been a busy week for the share prices of software companies, with Oracle [ORCL], Smartsheet [SMAR] and Adobe [ADBE] all having reported earnings.
Cloud specialist Oracle was first in line when it posted third quarter (Q3) 2023 results on 9 March. Revenues of $12.4bn represented a hike of 18% year-over-year, but narrowly missed analyst expectations of $12.42bn. The company reported non-GAAP earnings per share (EPS) of $1.22, beating forecasts of $1.20 per share, according to Refinitiv data. Oracle stock traded down 5% after hours. The share price has gained 1.9% year-to-date, but is down 6.1% over the past month.
Software peer Smartsheet posted revenues of $212.3m, up 35% year-over-year in its Q4 2023 earnings on Tuesday. The company announced diluted EPS of $0.07, compared to losses of $0.12 in the year-ago quarter, beating FactSet analysts’ predictions for losses of $0.01. The Smartsheet share price surged 17.8% on Wednesday.
Adobe released its Q1 2023 earnings on the same day. Record revenues of $4.7bn represented a jump of 9% year-over-year. Diluted EPS came in at $3.80 on a non-GAAP basis, trouncing forecasts of $3.68 from Refinitiv analysts. Adobe shares price traded up as high as 5% after hours.
Cloud growth and conversions success
Oracle’s cloud-related sector – which includes infrastructures as a service (IaaS) and software as a service (SaaS) – delivered revenues of $4.1bn, leaping 45% year-over-year. Driving that revenue were large cloud deals that Oracle signed with high-profile clients including Uber [UBER], which it signed a seven-year strategic partnership with in mid-February.
Safra Catz, CEO of Oracle, said EPS reached the high end of guidance. However, the company said a strong dollar compared to foreign currencies dented EPS, which would have been $0.05 higher otherwise. Non-GAAP operating income of $5.2bn was up 8% year-over-year. Catz expects Oracle’s cloud business to grow 50% in the present quarter. Despite the forecasted cloud growth, Dan Morgan, senior portfolio manager at Synovus Trust, told Bloomberg that Oracle’s results were “a little bit of a disappointment”.
For Smartsheet, the total customers holding annualised contract values (ACV) of more than $100,000 surged by 45% year-over-year to 1,484, with 45 customers worth more than $1m each.
Speaking with Jefferies analyst Brent Thill at the earnings call, Smartsheet CEO Mark Mader said the company’s “conversion of pipeline” was especially successul, adding: “One of the things that was really encouraging to see was in business that did extend last quarter, a lot of that business converted this quarter.”
Meanwhile, Adobe’s digital media segment experienced healthy growth, with revenues climbing 9% year-over-year to reach $3.4bn. Creative revenues increased 8% to $2.8bn. The company’s digital experience segment revenue grew 11%.
Adobe chairman and CEO Shantanu Narayen singled out Adobe’s Creative Cloud, Document Cloud and Experience Cloud offerings as “mission-critical in fueling the global digital economy".
Positive future for SaaS despite macro challenges
Companies offering SaaS solutions are slated for future growth. Recent data from Globe Newswire forecasts the SaaS market will rise from $235.6bn last year to $253.6bn in 2023, growing at a CAGR of 7.7%. The report also predicts growth to $328bn by 2027 at a CAGR of 6.6%. Another report by Fortune Business Insights forecasts the global market will reach a colossal $883.3bn by 2029.
While Adobe stock fell 40% across 2022, the company raised its full-year forecast for 2023 at its earnings announcement, suggesting better times are ahead. It forecast adjusted EPS of $15.30 to $15.60 (up from $15.15 to $15.45), and digital media growth, including $1.7bn-worth of new annualised recurring revenue (up from $1.65bn).
Elsewhere, analysts at Jefferies recently retained a ‘buy’ rating on Oracle stock. According to a consensus of analysts at CNN, Smartsheet is also a ‘buy’.
However, SaaS remains vulnerable to macroeconomic trends, including inflation and high interest rates potentially hitting companies’ cloud computing budgets – something investors will want to consider.
Funds in focus: iShares Expanded Tech-Software Sector ETF
Investors seeking exposure to all three stocks could look at the iShares Expanded Tech-Software Sector ETF [IGV]. As of Wednesday, Adobe is the third-largest holding in the fund’s portfolio with 7.96% of assets under management (AUM). Oracle is the fourth-largest with 7.24% and Smartsheet accounts for 0.33% of AUM.
The fund is up by 9.3% year-to-date, but down 5.4% in the past month.
For those wanting greater exposure to Smartsheet stock, it is the second-largest holding in the Direxion Work From Home ETF [WFH], with 3.51% of AUM as of Thursday. The fund also holds Oracle as its seventh-largest holding, at 3.27% of AUM and Adobe shares at 2.63%.
The WFH fund is up 6% in the year-to-date, but down 9.6% over the past month.