Software

Can the Software Sector Duplicate Its Breakout Year?

The pandemic-led digital transformation may set the stage for another strong year for enterprise software vendors. Our Technology, Media, & Telecom Equity Team explores the outlook for the software sector in “The 2021 Software Outlook: Hope You’re Ready for the Next Episode,” published on December 15, 2020.

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By RBC Technology, Media & Telecom Equity Research Team
Published January 25, 2021 | 3 min read
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Disclosure and Disclaimers


2020 will go down in history as the year the pandemic changed the technology landscape for decades to come.

Coronavirus-led shutdowns not only changed how we work, but also advanced the notion that work and other activities can be location-agnostic. As we deepen reliance on online connections, companies are accelerating digital transformation as they look to improve business resilience and drive scale and automation in both front- and back-office functions.

We expect corporate spend on public cloud infrastructure and other software to pave the way for another solid year for the enterprise software sector.

Our software outlook explores key technology trends that are likely to see an acceleration.

Here are the main takeaways from our report:

 

Cloud competition heats up

Companies’ heightened focus on migration to the public cloud escalated the competitive pressure among cloud providers. From 2019 to 2020, Gartner* estimates the market for IaaS accelerated from 18% growth to 20% and the market for PaaS accelerated from 15% to 17%.

Last year was considered a stress test for public cloud providers. Not only did many of them pass the test, but we also believe they will retain their competitive positions post-COVID.

 

Convergence, robotics, and data

Below are snapshots of six app software themes to watch:

  1. Communications convergence. The pandemic has accelerated the convergence of communications among Unified Communications as a Service (UCaaS), Contact Center as a Service (CCaaS), and Communications Platform as a Service (CPaaS). We expect more companies with footholds in one category to expand into others to consolidate budgets and to improve the digital experience for customers and employees.
  2. The rise of consumption-based pricing. Although observers were wary of these pricing models because they believed their recurring, high-visibility revenue would not hold up in a recession, the pandemic has proved that pay-as-you-go-models can offer many incentives for consumers.
  3. Revenue Operations. Revenue Operations is becoming a functional unit within modern organizations, as sales, marketing and service organizations work in sync to support greater revenue generation. We believe the rise in RevOps will create more innovative cloud suites and point solutions for sales, marketing, and service teams to drive clear outcomes and tie back to the system of record (CRM).
  4. Robotic process automation (RPA). Adoption of RPA has grown tremendously over the past few years due to improved technology, increasing competition, and awareness.
  5. Moving from an app- to data-centric world. Most companies are drowning in data “siloes.” To use data effectively, companies will need to shift their focus to projects that harmonize these siloes and empower their entire organization to drive business impact and outcomes.
  6. The rise of low-code, no-code. The shortage of developers has democratized application creation and augmentation. The low- and no-code application development platform market is expected to grow to $45.5B in 2025, a 28% CAGR over a 5-year period. But we believe companies can gain competitive share by introducing no- and low-code features in traditional software categories.

“We predict digital and security transformation budgets will rise this year, allowing organizations to focus on front-office modernization, enhanced data, and back-office automation, leading to another solid year for software vendors.”

RBC Technology, Media & Telecom Equity Research Team

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ESG gains momentum in the software sector

We believe ESG will become more important to the software sector — especially as younger people comprise a larger portion of the workforce.

Our proprietary survey of approximately 1,400 individuals revealed that at least 80% of employees (particularly younger employees) consider ESG at least somewhat important while making employment decisions, investing in, and buying from a company. Transparency topped the list of considerations, followed by environmental impact and diversity and inclusion.

Within our universe of Morningstar-tracked global, U.S., and sector-focused equity funds with meaningful ESG holdings, we identified $1.7 trillion AUM that consider ESG to some degree, and $378B AUM that heavily emphasize sustainable investing practices.

Among categories, investors showed increased engagement with climate change and environmental opportunities funds, as well as human capital management (diversity and inclusion in particular). We believe this heightened focus will prompt software companies to become “enablers” of ESG adoption for the broader market.

 

Despite challenges, disruption may drive higher technology spend

The pandemic forced sweeping changes to our work/life behavior that we can now expect to last for decades. As businesses direct higher spend to cloud infrastructure and other enterprise software applications, we believe the software sector may be well positioned to benefit.

The RBC Technology, Media & Telecom Equity Research Team authored “The 2021 Software Outlook: Hope You’re Ready for the Next Episode” published on December 15, 2020. For more information about the full report, please contact your RBC representative.


*Source: Gartner; Visible Alpha; Gartner report Forecast: Public Cloud Services, Worldwide, 2018-2024, 3Q20 Update by Colleen Graham, Et al., October 1, 2020

All statements in this report attributable to Gartner represent RBC Capital Markets' interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this report). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice.

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