Morning Report: Without Cheating, How Big Was The Q2 SaaS Market?

Morning Report: It’s trivia Friday!

Yesterday Crunchbase News explored the recent share price movements of Box and Workday, leading SaaS companies that reported earnings this week. Despite largely beating expectations, the firms saw muted responses to their recent financial performance.

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It wasn’t hard to come up with a reason or two as to why, including the fact that the firms had already staged dramatic price recoveries from 2016 lows. SaaS had an up-and-down last year, and Box, for example, has the scars to prove it.

Something that we noted in that short discussion was growth. I’ve long harbored a small mote of curiosity about SaaS companies and their growth rates, especially compared to their costs.

Let me explain.

SaaS companies sell recurring revenue, top line that should compound over time. To understand that, think about the compound rate as the result of each revenue cohort’s upsell per year, minus its churn. (We could make that explanation more technical and accurate, but it’s enough to get the picture.) So as strong SaaS companies grow their revenue base, that base should create goodly sums of revenue growth by itself—presuming competent customer success teams.

In light of that, why does Box still spend so much money on sales and marketing to grow just 28 percent in the last quarter, the bulk of which comes from its compounding and previously-acquired SaaS revenue?¹

Perhaps because the pie is smaller than I previously thought. That implies that to pick up new revenue, Box and its peers have to compete incredibly hard for each new dollar of SaaS top line they snag.

How small is the pie? Recall the headline of this short note and answer the following question with your best guess: how big was the SaaS market in the second quarter as measured in dollars?

How Big Is SaaS?

The correct answer is $15 billion according to a recent report from the Synergy Research Group. Here’s how it summarizes the current SaaS market:

New Q2 data from Synergy Research Group shows that the enterprise SaaS market grew 31% year on year to reach almost $15 billion in quarterly revenues, with collaboration being the highest growth segment. Microsoft remains the clear leader in overall enterprise SaaS revenues, having overtaken long-time market leader Salesforce a year ago.

I think that this explains our conundrum. Why do SaaS companies have to work so hard and spend so much money to buy new revenue? Because the total bucket of dollars is shallow and competition is fierce.

SaaS firms still have strong margins, proven paths to cash flow positivity, and the like. But their high customer acquisition cost makes their low COGS a bit less attractive.

That’s enough work. Go enjoy your weekend!

Box spent $73.3 million in its second fiscal quarter on “Sales and marketing” expenses. It grew 28 percent, year-over-year, to revenue of $122.94 million in the quarter. The firm claims in its earnings presentation that it has retention of 113 percent. How did it cost Box so damn much money to grow the other 15 percent?

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