shows it’s possible to post great results even in a slow market is continuing its streak of quick growth following its IPO.

In addition to reporting a 42% rise in its revenue for the second quarter of 2023, the cloud-based platform that lets users create apps narrowed its operating loss and net loss, and improved its cash generation, too. Investors seem to like the progress, with its stock up by nearly 15% this morning.

Notably, however, is enduring the same sort of slowdown in net retention growth that we are seeing at many software companies. As a reminder, software-as-a-service (SaaS) companies grow by selling their products to new customers, and by selling more products to existing customers., which charges on a per-seat basis, is one such company.

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Slower growth of net retention, a metric which includes existing customer churn and upsells, means it can be harder to increase your revenue and make it costlier to do so, as it is more expensive to sell to new customers than to juice existing accounts for more seats.

The slowdown we’ve seen in net retention comes at a difficult time for many tech companies, looking to conserve cash while keeping growth warm. Startups, doubly so. So how did delight investors while also seeing its net retention moderate? Let’s find out.

It’s not as bad as it looks reported revenue of $175.7 million in Q2 2023, but narrowed its operating loss to $12.2 million from $46.2 million a year ago. The company also managed to dramatically narrow its net loss to $0.15 per share from $1.01 per share.

Excluding one-time costs, reported adjusted operating income of $16.6 million, far better than $15.4 million a year earlier.

The company also made impressive strides in improving its cash flows. In the company’s own words:

How SaaS architecture impacts pricing and profitability

Having worked as a solution architect and designed multiple SaaS applications, I believe many companies have struggled to choose the right SaaS architecture for their product offering. In this article, I will share my learnings to help companies that are building SaaS applications make a pragmatic decision about product architecture, while considering its impact on pricing and profits.

The pay-as-you-go pricing model has gained popularity because of the increased flexibility for customers. However, to enable pay-as-you-go, you need the right product architecture to support it, such as tracking the use of services and offering customers the flexibility of managing infrastructure as per their requirements.

A poorly designed SaaS architecture creates limitations in setting the pricing strategy for the offerings and impacts new customer acquisition. Conversely, a good architecture sets the appropriate pricing model and accommodates special architecture-design requirements, while enabling scalability and customizability.

Before setting up a SaaS architecture, it’s important to answer these questions first:

  • How would the customers pay?
  • For what services (computation and values) would the customers pay?
  • How will the usage be measured and invoices be created for the customers?

In a SaaS setup, costs incurred in managing operations impact profitability to a large extent. Operational expense optimization involved in managing the SaaS model depends on three crucial factors — infrastructure cost, IT administration cost, and licensing cost.

Image Credits: Talentica Software

However, the bigger question is: How do you ensure that these costs are well-optimized and priced correctly? Here are a few examples:

Salesforce Online: Salesforce provides a lead management system for enterprise sales and marketing teams. The online version uses the cloud to reduce the hassles of hardware and IT procurement. It also charges customers based on the size of sales and marketing teams to stop the payment of one-time high license costs.

Azure SQL: As the RDBMS (relational database management system) leader, the SQL server provides a hosted solution where customers pay a high license cost and hire a DBA (database administrator) for regulating backup, geographical replication, and disaster recovery. But Azure SQL is a cloud-based system that is accessible online and you pay only for storage and IOPS (input/output operations), with the rest taken care of by Azure.

WordPress: WordPress provides an online platform with white-labeled solutions, customization, and multiple integrations for its customers. Moreover, it collects customer usage data and charges on that bases.

Why is it important to pick the right SaaS type?

This is a common question. Let me explain why with two different examples.

Example 1

A company introduces isolated application VMs (virtual machines) for all its customers. In the majority of cases, these boxes will remain underutilized. If customers pay only for utilization, the company could end up with huge losses.

Microsoft and Alphabet’s results indicate the AI game is more of a long-term strategy

Alphabet and Microsoft’s quarterly results have sent their respective shares in opposite directions. Alphabet’s stock is up about 6% in  morning trading, while Microsoft’s is off a little more than 3.6%.

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It’s not too useful to compare the two companies’ overall performance given their varied product lines and the different economic conditions they have to navigate. But when it comes to AI-related costs and revenues, they share enough surface area that their comments are worth comparing.

This earnings season, we’re keeping an eye out for two big indicators: AI costs and AI revenue.

We’re several quarters into the generative AI era, and we’ve seen ample enthusiasm, significant improvement in the underlying tech, and large private-market investments. Analysts and investors, however, are studying companies with fingers in the generative AI pots for signs of adoption and if it’s actually helping them increase their revenue.

However, Alphabet and Microsoft’s results clearly indicate that the costs are high if you want to stay on the leaderboard in the modern AI arena. As for the resulting revenue, it’s starting to accrete but it largely remains something to look forward to.

In fewer words: All that AI-related work at these two companies will be likely more impactful to results in the next few quarters than it has proved thus far.

Still, Microsoft and Alphabet believe strongly that companies will spend to buy their tech and that they are laying the foundation for more growth. This morning, we’re reading earnings materials and transcripts of Microsoft and Google’s earnings calls to glean tidbits and hone our perspectives. To work!

Gotta spend to earn

Let’s start with costs, since they provide a decent look at what went down this quarter.

It seems there’s been massive investment in hardware to build the data centers needed to handle AI compute workloads. Alphabet discussed its AI hardware setup during its call, saying that it provides “AI supercomputer options with Google TPUs and advanced NVIDIA GPUs, and recently launched new A3 AI supercomputers powered by NVIDIA’s H100.”

Growth driven by AI will be the metric to watch this earnings cycle

With Alphabet and Microsoft reporting their quarterly results today, there’s going to be a lot of scrutiny on the ability of their investments in new AI tech to drive growth.

The two American tech giants have benefited from their early entrance into this space. Microsoft’s investments in OpenAI, its rapid integration of generative AI into various products, and the rising popularity of some of its services, like Bing, have greatly increased its worth — shares of Microsoft are up around 44% so far this year as of yesterday’s close.

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Alphabet is in similar waters. Like Microsoft, it has invested in generative AI companies, begun baking the tech into its own suite of products, and is even tinkering with its core search product.

Other tech giants around the world have also benefited from the positive investor attention as large language models (LLMs), which power generative AI services, have progressed quickly.

Indeed, investor attention has been so fixed on neo-AI technologies that you can easily surmise that for tech titans, AI prominence is the new measuring stick. Investors seem hell-bent on seeing evidence from major tech companies that they are not going to get left behind by generative AI, and demonstrations of any sort of AI edge are enough to send shares towards the ceiling.

Tech shares have generally appreciated this year. So far this year, Alphabet’s stock has climbed 36% so far this year; a popular basket of cloud stocks is up 32%, and the Nasdaq Composite has gained 35%. Meta’s been doing quite well, with its shares up a shocking 134% so far in 2023.

All things considered, the tech rally this year has been overshadowed by fears of a looming recession and the end of the Good Times.

Time for tech’s report card

A lot of the world is busy digesting Twitter being rebranded to “X,” but more serious things are happening in the world of tech: Worldcoin is here!

I kid. What actually matters today is that we are embarking on another earnings cycle, which means we can study tech’s largest and wealthiest companies’ results to get some perspective on the state of the economy as it relates to tech goods and services. Hardware and software, in other words.

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Of course, we’ll see some familiar themes in this cycle, but there are enough new trends going on that I wanted to pause and talk through a few points that we should all look out for.

Note that the earnings season affects the startup world in a few ways. Most importantly, it provides a directional signal: When public tech companies report rapid growth in a particular area of their market, investors gain interest in younger companies that may benefit from a similar wave of demand.

And, of course, startups should care about these results, as they can reprice the public companies that form their core comparable cohort, which can make it easier or harder to fundraise and help determine exit values.

It’s a big deal, in other words.

As we noted this morning on Equity, this week we’ll hear from Microsoft, Alphabet, Spotify, Snap, Roku, and many more. Given the breadth of companies reporting this week, we are officially heading into the breach.

Now, on to what we should all keep in mind for this particular earnings cycle! This will be fun, I promise.

Five things to look out for

Where AI hype is turning into dollars

By now, you’re probably more than bored of nearly everyone telling you how AI is about to change everything, bro. We feel you.

As Apple reaches $3T, it’s time to shake up the Big Tech club

Today, Apple saw its market cap pass the $3 trillion threshold. The iPhone maker has reached that landmark before but has never managed to hang on to it through the end of a trading day.

But this morning, with its shares up about 1.4% and a significant $20 billion to $30 billion above the milestone, it seems the company is on pace to finally pull it off.

Less than five years ago, the ‘Big Five,’ which comprised Apple and four other tech companies, was worth a combined $3 trillion. It’s striking how much of a difference a few years can make.

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Flying somewhat underneath the radar in tech and startup-land is just how far technology stocks have rebounded this year. As CNBC wrote this morning, the Nasdaq’s performance in the first half of 2023 could “be the strongest for the index since 1983.” For startups, the rising value of tech stocks is slowly lifting revenue multiples, which reduces the pressure on future fundraising because their public market comparable companies are now worth more.

Apple has certainly benefited from this recent recovery. Its shares had risen a little more than 45.5% so far this year as of Thursday’s close.

While Apple’s ascent to this milestone is notable, there’s been a greater reshuffling in the ranks of the biggest tech stocks. It’s time to update our acronyms and understand what the required changes tell us about the state of the world.

De-FAANGing the Big Five

The tech industry is too broad to discuss collectively. This is doubly true today as previously tech-forward methods of doing business, like e-commerce and mobile, have become the norm, expanding the list of ‘tech’ companies to ludicrous breadth.

As Apple reaches $3T, it’s time to shake up the Big Tech club by Alex Wilhelm originally published on TechCrunch

How one software company is beating the SaaS growth blues

The go-go days of software companies growing like crazy are now firmly behind us.

Data indicates that public software companies have added fewer sources of annual recurring revenue (ARR) in the first quarter of 2023 than they did a year earlier. In fact, that metric declined even more compared to the average quarterly number in 2022.

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It’s tough out there, but not every company is reporting lackluster results. Samsara, which went public in late 2021, recently proved that it is still possible to expand fast, and perhaps even more impressively, that it’s possible to hold on to value even if you listed at the end of a venture capital bubble.

TechCrunch+ caught up with Samsara’s CEO and co-founder, Sanjit Biswas, to talk about his company’s performance and the pricing and sales choices that have helped it at least partially buck the slowdown.

Let’s start with a quick refresher on Samsara and its IPO pricing. Then, we’ll explore its first-quarter performance and dig into how its sales model is providing it with a more durable revenue base than most other modern software companies.

The Samsara growth story

It’s fun to go back and read 2021-era coverage, because it was such a wild time. We even noted during Samsara’s IPO pricing run that it felt like no one was paying attention:

One more note before we can sign off on this topic for the day: Doesn’t it feel like a somewhat muted day for a decacorn IPO? Samsara raised venture rounds through a Series F! And yet this IPO feels like it’s skating right under the radar.

At the time, we hypothesized that NFT hype was consuming all the oxygen in the room, or that there were so many IPOs that year that it was just not as exciting as before. Ah, what a good problem to have!

Samsara’s late-2021 IPO set it up to raise capital and go public at a valuation that made little to no sense. We saw that happen to a number of other companies that went public in 2021.

How one software company is beating the SaaS growth blues by Alex Wilhelm originally published on TechCrunch

For startups, growth still trumps cloud cost control

There’s room for startups to cut their cloud costs, even if they have to balance the implicit costs of doing so, such as the time required and the potential for slower development. The question then becomes: How much of a priority is finding incremental savings for young tech companies?

A recent survey of founders by TechCrunch+ indicates that a change in investor expectations is spurring startups to take a closer look at their cloud spending and move away from a position more focused on speed than cost efficiency — just not too much.

The changing economy and the resulting impact on both venture capital availability and the price of money keeps showing up in our investigative work. Put another way, rising interest rates are having a knock-on effect on cloud spending at tech companies, and therefore, slowing growth at public cloud incumbents.

TechCrunch+ also recently asked startup founders if new startups should pursue a multicloud strategy. They answered mostly in the negative, with some caveats regarding edge cases.

This morning, we have a sheaf of perspectives to digest, building off our work in late 2022 aiming to understand how startups picked their first major cloud provider and why.

Finding fat to trim

Last year, Boldstart Ventures partner Shomik Ghosh told TechCrunch+ that for startups still “in early product or go-to-market stages, optimizing cloud spend should be the last thing on a founder’s mind besides utilizing as much cloud resource credits as possible.”

For startups, growth still trumps cloud cost control by Alex Wilhelm originally published on TechCrunch