First, an administrative detail: TEK2day readers may now find TEK2day on Substack HERE. We will publish our articles both here as well as on Substack. With respect to Enterprise Software earnings, I suspect that most Software companies will take a more conservative approach to their Q4 2023 and early 2024 outlooks as compared to prior quarters. The reasons for this conservative approach are not anything that we have not previously discussed in these pages. These elements include:
- Elevated interest rates / higher cost of capital;
- Commercial bankruptcies are up more than 50% over 2023;
- Loan delinquencies are up, especially within subprime;
- Yellen / Treasury is no longer stimulating the economy with its TGA drawdown;
- Inflation is here to stay as elevated prices are not going away. We will not see a 2% CPI in 2024;
- Student loan reprieve is over with interest accruing in September and payable in October;
- ERC credit program to small businesses is winding down.
While bankruptcies and credit delinquencies are symptomatic of a weakening economy, the other bulleted items are causal factors. Negative trends such as slowing cloud spend (which we predicted earlier this year in January and April), will get worse before they improve as corporate customers tighten purse strings. This is especially true of management teams that have been holding out for a Fed rate cut later this year. Those management teams are likely to abruptly tighten the purse.
I can’t think of any positive macro trends that would move the needle for companies as they work through framing their revenue and earnings outlook for investors. Why be bullish? New product release? Not a good enough reason. Better to be conservative in terms of setting expectations, especially if business fundamentals and the macro environment deteriorate from this point forward as we expect them to.
Earnings and profit margins are likely to get squeezed in 2024. Many companies won’t be able to exercise the same pricing power in 2024 as they exercised in 2023. That is a negative for Revenue growth and Operating margins. Input costs, especially wages, are not coming down – also a negative for margins. Let us not forget that the cost of capital remains elevated. These factors are likely to result in another round or two of headcount cuts in Q4 2023 as well as in January 2024. Revenue and earnings estimates will have to be adjusted accordingly.