COVID-19 Expected Economic Impacts

To our partners,

As you know, Tech Soft 3D partners with hundreds of software development organizations around the globe, mostly focused on applications for the manufacturing and building and construction industries. As the COVID-19 pandemic began, we have been in touch with dozens of those partners to better understand what impacts they are expecting for their businesses.

As your Strategic Technology Partner, we thought it would be useful to aggregate and share what we are seeing across the spectrum of our partners, in the hope that this summary may be useful for you in your own planning. Since the situation remains fluid, we will provide an updated summary if we begin to encounter new trends or have useful information.

When we first started talking with partners in mid-March, the general view was that this crisis, and the resulting stay at home orders would last just a few weeks and thus economic impacts on the broader engineering software industry would be both modest and short-lived. As the depth and breadth of the pandemic became clearer near the end of March, there was an increase in uncertainty and predictions became more pessimistic – based mainly on not being able to predict when people would be able to get back to work.

As of this week the general summary is that while there is still a fair amount of uncertainty, there is an expectation that the economy will begin to restart in June. With that expectation, companies are starting to feel they can better predict the impacts. Below is a summary of what we’re hearing:

• No one believes the issues are systemic, so it’s just a matter of getting through it and back to business fairly quickly.
• Most companies did not begin to see much impact in Q1, even though the economy began to shut down in March. In fact, most partners report having had a very strong Q1.
• If indeed we can begin to get people back to work in early June, most companies expect to see very poor sales numbers for Q2, with some halting improvements in Q3, with accelerating improvements in Q4. Most believe that by Q1 2021 we will be back to nearly ‘normal’ levels of revenue and sales activity.
• Based on the assumption that people will begin going back to work in June, most of our partners are currently forecasting that their revenues will be 5% to 15% less than their original 2020 revenue targets. Most of our partners’ estimates are clustering around a 10% shortfall, though a very small number of partners report that conditions for them are favorable and they’re doing a bit better than planned.
• We do have some partners who are very geographically focused. Those who are located in Asia are optimistic and on the low end of the 5% to 15% range in terms of expected impacts. Those who are highly localized in particularly hard-hit areas such as Italy are expecting a shortfall of 20% or more, although there are only a small number of such companies.
• Our partners with significant business in APAC, particularly in China, are reporting that things have bounced back fairly well – with activity now back to January levels. If the U.S. and Europe can get people back to work that quickly, these companies are hopeful that negative impacts in places like Europe and North America will be less than anticipated. However, we did hear from a couple of people that they were skeptical about this ‘bounce back’ in China, with some saying that the gains may not last because China may not truly be through it and may have sent people back to work too early – sparking a second wave. On balance, though, people view the bounce back in China and Korea as clear reasons for optimism that we can achieve the same in Europe and North America.
• If people continue to be asked to stay home beyond early June, the impacts will be significant and will take much longer to bounce back from. The longer it goes, the worse it gets, and few are willing to guess at the impacts of that, but clearly the expectation is that it will be a considerably worse scenario. The phrase we have heard a few times is a variation of, “it takes much longer to re-build something than to destroy it.”
• Most companies don’t feel they need to plan for a second wave of the virus in the Fall, with the assumption being that this will be localized and more limited in impact. The consensus seems to be that a second wave triggering a massive shutdown like we are experiencing is fairly low.
• While recurring revenues (maintenance, subscriptions) have remained pretty stable, the fall-off is most felt with new sales as potential buyers/users are suddenly cautious as they assess the situation and risks – so they’re being very careful about spending. Most of our partners feel that if things turn around quickly this will just end up looking like pent-up demand and the pipeline will lag consistent with the time it takes for the economy to re-start. If people are locked down for 3-4 months or more, the sales pipelines will hollow-out.
• There is an expectation that, once companies have laid off a portion of their workforce in manufacturing or building and construction, the painful part has occurred and they will be thinking carefully whether they should bring 100% of the staff back – or whether they should invest in technology to gain efficiency instead. Which will mean a slower return to lower unemployment rates, but perhaps a faster adoption of technology.
• Companies with enterprise sales models are seeing significantly more slow-down in new sales than those selling directly to users at lower price points and with shorter sales cycles.
• Companies with subscription business models are less nervous than those with the traditional perpetual model and maintenance. Companies with a very large percentage of their business coming from maintenance feel like they are on pretty safe ground, though those tend to be lower-growth companies. Newer-stage companies are almost always on subscription, but they also depend heavily on new sales, which are expected to be stagnant. So, the longer you’ve been going with a subscription model, the better!
• Many companies are seeing this as a time to implement changes. We have heard of initiatives like taking all user training online (which has the added benefit that this will not require travel or minimum class numbers), to using the time to focus on technology and development and emerge from this with better products. Some are saying they see this as an opportunity to do some things they should have done years ago.
• Some vertical markets believe that market conditions will be favorable for them in the short and medium terms because this crisis has highlighted their value proposition, or in some cases the way people work will change. These verticals include additive manufacturing as companies work to make their manufacturing capacity far more flexible and also de-risk the supply chain – same with MaaS as companies try to reduce their reliance on having their own fixed-asset manufacturing capacity. Anyone doing AR/VR or collaboration software feels good that people will realize that they can and should be doing things more virtually rather than needing people to get together in the same room. Anything to do with Digital Factory and Automation, including robotics, IOT, etc. will all benefit as companies try to move faster to a situation where they don’t need to rely so much on people. It will be much easier to sell Digital Factory solutions if your opening line is, “the next time an event like this occurs, your factory will just keep running...”
• The idea of node-locked software is suddenly highly unpopular among users as the world accepts that people may not work from the same desk at all times. This situation of remote working will also push many companies to push more of the services and tools they use to the cloud so they’re less dependent on on-premise hardware.
• Everyone is concerned about cash flow if their customers start to have trouble paying, so people are being cautious about spending, but we’re still seeing new product initiatives moving forward. It might be a bad time to launch a new product, but it’s a great time to try to generate new revenue streams!
• VC and Private Equity investments are still moving forward, and deals are happening. VCs see the market opportunities as fundamentally the same and a difference of a quarter or two doesn’t really phase them if the fundamentals of the target market are sound. Private Equity still needs to put their money to work and they think there could be some deals to be had with smaller acquisitions, especially if things get tight for these companies and if debt-financing is not available. However, it’s hard to get new deals going because the target companies and the PE firms have trouble properly pricing what they are worth in this environment.

We hope that this is helpful in some way for your efforts to plan. If you’re seeing something different, or you’d like to talk more, please reach out and let us know. We’re happy to engage in any way that would be helpful.