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MarketWatch First Take: Earnings show cloud and security software are not immune to the economic downturn

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Cloud-computing companies have shown that they are not recession-proof, with many reporting either disappointing earnings or a weaker outlook in the past few days as quarterly earnings season nears its conclusion.

While results for the slew of companies reporting were mixed, there were two main themes to emerge from cloud-computing providers and some security software firms: a slowing of spending by corporate customers and, leading to the second theme, belt-tightening by all.

Read also: The cloud boom is coming back to earth.

Snowflake Inc.
SNOW,
+7.80%

and Salesforce.com Inc.
CRM,
-8.27%

each reported some slowing of revenue growth, and talked about customers slowing spending in certain areas. Snowflake, the data analytics cloud-software firm, still showed high double-digit revenue growth of 67% in its fiscal third quarter, but then forecast revenue growth of just 47% for fiscal 2023, which will also include a slowdown in its hiring.

Read more about Snowflake’s results and the debate among analysts.

Snowflake’s admission that its outlook was conservative probably helped investors adjust to the slower growth rate. “If things turn around, that’s upside for us,” said Snowflake Chief Financial Officer Mike Scarpelli. Snowflake’s shares, which tumbled more than 10% in after-hours trading Wednesday immediately following the report, climbed 8% on Thursday, after a wide-ranging catch of comments from Wall Street.

“Just a quarter after Snowflake downplayed the impact of a tougher macro, the weakening IT spend backdrop caught up with Snowflake,” said Karl Keirstead, a UBS Securities analyst, in a note Thursday, adding that its 67% quarterly growth was very impressive in the current macroeconomic backdrop. But, “investor expectations were running high into this print and it disappointed,” Keirstead wrote.

Salesforce, though, was a bit more disappointing. While the customer relationship management-software company reported results that beat expectations, its forecast disappointed, not to mention the surprise that co-CEO Bret Taylor is leaving. Shares of Salesforce tumbled 8% on Thursday, with the company declining to give guidance for fiscal 2024, amid a “very unpredictable macro environment.” Salesforce, too, said it too will continue a measured approach to hiring,

“Starting in July of this year, the buying environment became more measured and foreign-exchange headwinds were becoming increasingly complex,” co-founder and co-CEO Marc Benioff told analysts. “We told you then we didn’t believe this challenging macro environment was going to be a short-term problem.”

JMP analyst Patrick Walravens believes Salesforce needs to make some deeper cuts. “It is time to consider things like a significant headcount reduction, requiring more roles to be back in the office, eliminating or spinning off businesses that are not working, driving higher margins, and, most importantly in our view, judiciously applying the company’s constrained resources to its best opportunities,” he wrote.

The news Thursday from Zscaler Inc.
ZS,
+8.28%

was not much better, with the cybersecurity company telling analysts that deals were taking longer than usual — about four months — to close. The company also said it did a reorganization of its salesforce, but not a full reorganization. “They’re not massive changes, but they are more than normal than we typically have done,” Zscaler CEO Jay Chaudhry told analysts.

Crowdstrike Holdings Inc.
CRWD,
+5.46%

also said customer-spending decisions are being delayed, which hurt the cybersecurity company’s forecast. Its shares tumbled nearly 20% on its disappointing forecast.

Okta Inc.
OKTA,
+26.46%
,
which reported better-than-expected results, made cautionary comments about the macro economy, saying that the worst is not over. “While we didn’t experience a meaningful change in sales cycles, we are seeing signs that the environment has further weakened since we spoke last quarter,” Chief Financial Officer Brett Tighe told analysts. “For example, in Q3, new pipeline is more weighted towards upsells and we’re experiencing some softening demand in the SMB [small, medium business] market in North America.”

Okta said it also has slowed its hiring.

But in the crazy stock-market environment right now, Okta’s improved performance, after a year of salesforce issues and a major hack, fueled a 26% jump in its shares Thursday.

Overall, cloud stocks and cloud-based security software have had a rougher ride, after being such high-fliers, compared to the overall market. The Wisdom Tree Cloud Computing Fund
WCLD,
+2.96%

is down about 49% this year, compared to the S&P 500
SPX,
-0.09%
,
which is down about 15%.

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