Not so Fast, Tech Companies Aren’t Recession Proof

When the world is showing signs of an economic slowdown, there’s always an urge to look for businesses or jobs that offer immunity to recessions. The tech industry is one that often comes to mind. This prompts people to ask are tech companies recession-proof? The straight answer is–it depends.

The first half of this year saw numerous announcements of layoffs and freeze hiring among tech companies. From Apple to Meta, Uber, Salesforce, and Twitter, the list keeps growing. Also, the tech market has been on a downward trend since early this month. These events show clearly that tech companies are not immune to the recession.

However, big tech companies have deep pockets and other thriving segments in their business that can offset their losses. For example, Amazon reported better-than-expected Q2 revenues despite its suffering retail business. Amazon’s core business remains e-commerce but online sales are no longer growing at the same pace they were at the height of COVID-19. E-commerce revenue declined 4% YoY. The company is able to recover this loss through its cloud (AWS) and digital ads business.

Meanwhile, Google’s revenue from Cloud fell short in the second quarter ($6.28 billion vs. $6.41 billion expected). But it was able to make up for those losses thanks to its search, ads and other revenues.

Tech startups, on the other hand, could be a different story. During a recession, tech startups are at a higher risk of getting wiped out. They could lose funding sources in a slowing economy and their employees, even engineers, could become unemployed.

SaaS Performance During a Recession

Q2 enterprise spending on cloud infrastructure services was almost $55 billion. The market experienced a 29% growth compared to last year. But the decline in earnings of Google Cloud shows that the cloud is also not recession-proof. They face the same macroeconomic challenges just like other industries. Factors such as the Ukraine-Russia war, rising inflation, and disrupted supply chains due to COVID-19 lockdowns in China are kicking tech companies hard.

SaaS makes up 75% of the total workload of cloud data centers. So its performance during a recession directly impacts cloud revenues. Even at a time when businesses are cutting IT spending, SaaS remains on the budget priority list.

Based on a study by SaaS credit provider, SaaS Capital, no public SaaS company went belly up during the last significant tech downturn in 2008. The study looked at the quarterly revenue and operating expenses of 17 companies. In terms of growth, the decline was substantial—from 40% before the recession to 10% when it ended.

The impact of the recession on profits was less clear but indicated a break-even trend before and during the recession. Overall, the study concluded that the SaaS model is resilient to economic downturns. This is of course assuming that the companies are able to make it through to the other side successfully.

In a slow economy with wary consumers, vendors face the challenge of signing up new customers. Current ones might also delay upgrades to subscriptions or worse, decide not to renew them; thus, shrinking revenues. Customer retention, therefore, is a critical metric that vendors should check. Releasing upgrades, adding new features, and improving software performance are all important product aspects that can convince customers to stay.

In the case of a customer wanting to leave, vendors can ask for an exit survey. Vendors can leverage exit surveys to gain insights into the things they need to improve. This will help increase the retention rate for future users. The good news is that companies that are able to weather an economic storm face less competition, which paves the way for growth opportunities during the next boom.