Investors have been hitting hard on software makers catering to small and medium-sized enterprises in light of a worrying outlook.Reports suggest that restaurants, retailers, and other small-scale companies are cutting back on their software expenditure because of a less favorable consumer climate.Nick Martin, co-founder and CEO of Joe Coffee, commented: "Every subscription we have is being scrutinized closely right now".
Nick Martin, the co-founder and CEO of Joe Coffee, is so troubled by the current state of the economy that he is finding ways to save money. Martin and his brother Brenden established the Seattle-based business in order to help local coffee shops compete with Starbucks, making the process of fulfilling mobile orders, tracking analytics, and automating their marketing simpler. Although the 8-year old company has been able to persevere through the economic downturn that started in 2022, Martin has noticed that his customers have recently cut back on their lattes. Prompted by this, Joe Coffee is staying proactive - they have lowered their number of subscriptions to HubSpot, a marketing automation software vendor, and are taking a close look at their commitment to payment processor Stripe, to decide if it is worth renewing. Martin declared that every subscription they have is subject to evaluation. Reports from software companies that cater to small and medium-sized businesses (SMB) portray a similar story, as evidenced by the latest earnings reports from HubSpot, Bill Holdings, Paycom, and ZoomInfo. Consumer data also demonstrates the widespread sensation of inflation and high interest rates, for instance, retail sales for October sank by 0.1%. The Bureau of Labor Statistics noted a 3.2% yearly increase in the consumer price index for the same month.
Wall Street is jittery; while the main market indexes have seen a slight rise since midyear, firms in the SMB space are feeling the pinch. An extraordinary example of this comes in the form of Paycom’s 38% stock plunge on Nov. 1, following the announcement of 2024 revenue forecast at 10-12%, much lower than expected by analysts. This was shortly followed by Bill’s stock plunging 25% when their own predictions for 2024 were lowered. John Rettig, Bill’s CFO, expressed concern over the ‘increasing economic choppiness’ and the pressure being put on small businesses. Even ZoomInfo, who help track leads and customers, saw a dramatic 16% fall in stock prices after their fourth-quarter forecast fell short. CFO Cameron Hyzer has commented that the market conditions remain difficult. HubSpot has suffered a 6.1% drop since their earnings report last week, although the stock has since rebounded. CEO Yamini Rangan has mentioned the ‘lumpy sales cycles’ and ‘low buying urgency’ that clients are facing. Responding to a request for comment, representatives from each of the aforementioned companies were unavailable. During the period from June to November, their respective stocks have fallen anywhere from 12-49%, whilst the Nasdaq has increased by 2%.
The sector of the market served by companies is significant to the U.S. economy. According to the Chamber of Commerce, small businesses have represented 40% of the country's gross domestic product over the past two decades and are responsible for 46% of American jobs. Longbow Asset Management CEO Jake Dollarhide stated that results from companies that focus on the SMB market give insight into the nation's economic health. He observed, "Whenever people don't feel well-off, they tend to reduce spending."
The Martin brothers are fully aware of the struggle to make ends meet. Their hometown of West Richland, Washington (200 miles southeast of Seattle) is the site of their father's small business, which made sheds until bigger companies entered the region and eventually closed it. Nick and Brenden, both with technology-based backgrounds, have turned their attention to understanding why small business owners rarely get the support they deserve. "Why isn't anyone standing up for them?" remarked Brenden. "That is our mission." Nick and Brenden both have served in tech-related roles, including Nick's stints at Microsoft and Zillow and Brenden's experience in product strategy and web development with assorted companies.
Both Joe and Brenden Martin had worked as baristas in the past, and they wanted to assist small cafes in competing with Starbucks. When Starbucks implemented mobile ordering in 2015, Joe Coffee had not yet been created. Despite this, the brothers recognized that small businesses still needed the technology. In August 2018, they got their chance when they were granted $1 million in funding through an event known as Coffee Fest. The two initially developed a mobile-order-only platform, but in light of the Covid pandemic, customers required additional services. By 2021, the company had grown to include 17 employees and had produced a full software and payments suite. In order for Joe Coffee's venture to be successful, it must generate quick revenue and profit for its clients, who often function on narrow budgets. The Martins only charge a percentage of each transaction, but do not require a lasting subscription.
Nick Martin noted that Joe Coffee has reduced the quantity of software products it purchases due to increased borrowing costs. The company now has around six software subscriptions, a decline from 12 to 15, which amounts to a 3% to 5% decrease in its operating expenses, dropping from 8%. Decisions to remove programs are judged on whether the product is necessary or a luxury. Martin stated that Joe Coffee made decisions concerning which HubSpot services to jettison via a spreadsheet. The company remains a HubSpot member yet has significantly reduced the number of seats and tools it has subscription to. In regards to Stripe, a private entity, Martin mentioned Joe Coffee is considering payment processors with lower charges. Stripe declined to comment on specific customers.
Software companies will likely be impacted differently by macroeconomic conditions depending on their revenue models and industry reliance. Bill, in particular, could be more immediately affected because the majority of its core income comes from transactions, with the rest stemming from contracts.Taylor McGinnis, an analyst at UBS following Bill, ZoomInfo, and HubSpot, has stated that this puts Bill in a position to have their payment volume from small businesses monitored. Investors in the sector are currently determining if SMB spending has reached a limit or if companies are still searching for ways to decrease their software costs should the economic outlook become worse.Bryan Keane, an analyst at Deutsche Bank covering software and payments companies, commented that the B2B sector seems to be much more susceptible to macroeconomic conditions than was previously understood. He further indicated that another downturn would likely cause more downside risk.Finally, it was expressed that Xero will remain focused on its core target markets of small businesses.
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