Software business models are relatively resilient, given the high-margin nature of their product as well as their typically strong proportion of recurring subscription-based revenues. Indeed, the mass shift to remote working has meant that many IT products have proved integral to the smooth operation of other businesses. Some in the industry have even noted an uptick in interest in the midst of the outbreak – take Computacenter (CCC), which has seen a surge in demand for laptops as companies ensure that their employees are equipped for working from home at scale.
But the sector is by no means immune to the wider crisis: Micro Focus (MCRO) has suspended its final dividend and Sage (SGE) has paused its share buyback programme. As the UK settles into lockdown, the principal threat to the software industry is a decline in new business wins. Travel restrictions limit salespeople, engineers and system integrators alike. The damage on sales cycles and new pipeline generation is likely to hurt companies with exposure to perpetual licenses – or, in other words, one-off sales. Sage has already said that it anticipates that its customers are likely to defer purchase decisions, which will lead to a slowdown in new customer acquisition, licence sales and services implementations.
Industrial software group Aveva (AVEV), which recognises revenue rateably and, like its peers, is also likely to suffer a blow to its new business wins – not to mention its exposure to difficult end markets such as the oil and gas sectors, which have seen significant disruption from coronavirus on top of price wars.
As headwinds to new licence growth loom, we are more optimistic on businesses with a high share of recurring revenue. But this is not always enough – Blue Prism (PRSM) is poised to achieve more than 80 per cent of revenue from recurring sources this year. However many anticipate that the company will need to go back to the market for new equity funding, as analysts guide for another cash loss in 2020. Still, the sector as a whole does not seem a likely victim of the wider crisis.
The non-physical nature of software companies' products means that they are relatively better protected than other sectors, but that does not mean they are completely immune. Be wary in particular of end markets that are being significantly disrupted by the coronavirus and keep an eye out for a healthy balance sheet.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?
