For almost two decades, investors have rewarded cloud providers for growth, creating many businesses with strong defensive barriers. The poster children for this strategy include Amazon and Salesforce, each of which has redirected potential profits to define a new business sector that it has come to dominate. Unlike other sectors, profit was secondary to growth, as in first things first and second things never.

Delaying profits is hardly a new idea, but the concept was exaggerated with cloud-delivered services. Cloud dynamics accelerate valuations. However, over the past few weeks, weve seen that growth isnt enough anymore.

Profits Become a Priority

In the broader market, weve seen several high-profile startups, such as Peloton, Uber, and Lyft, struggle after their initial public offerings. WeWorks attempt to go public completely failed. It seemed that the growth-only mantra is also no longer a surefire way to build a new cloud-related business. The new rule is the old rule: profitability matters.

Its not just a change in priority; its an acknowledgment that growth rates are slowing. This shouldnt be too big of a shock. Cloud-delivered services are still strategic and viable, but the sector is maturing with larger providers and increased competition. Today, cloud communications is a redundant term; just about every vendor is also a cloud provider, and the competitive landscape includes the largest companies in technology like Microsoft, Google, Facebook, and Amazon. So, of course, growth rates are slowing.

Theres also increased concern over economic uncertainty. For the first time in U.S. history, a decade will pass without the country falling into recession. How much longer the good times willlast is the proverbial $64 million question. Theres a nagging sense of an imminent correction that could be triggered by any or multiple events such as Brexit, impeachment, trade wars, terror, U.S. debt, and more. The benefits of cloud-delivered services remain attractive or even more attractive in recessionary times, but they arent immune to recessions causing wallets to lock tight.

The Cloud Market Responds

We can also see the shift at Ooma Networks. The company reported its first-ever quarterly profit (Q3 2020). The company beat expectations on profitability and growth, and share prices increased 24% the following day. Oomas business products division increased revenue by 67% through growing both subscribers and average revenue per user.

CEO Eric Stang communicated that Ooma will remain profitable, and Ooma also raised its full-year revenue guidance. Stang expects Ooma to continue growing because of recent foundational changes such as its recently refined core product/service offering, integrated acquisitions of Voxter and Broadsmart, and newly launched Ooma Office Pro for small businesses.

That detailed explanation regarding growth is also a new development. Growth now needs to be explained with more than "more salespeople." For example, Zoom reported both profits and growth higher than expectations but saw a decline in its share price because it also reported a decelerating growth rate. CEO Eric Yuan explained that new products (Zoom Phone) and new markets will continue to fuel Zooms growth. He said Zoom already supports Chinese local numbers and expects sales will expand across Europe and APAC markets.

There are no golden rules, and valuation and stock price changes thrive on exceptions. Consider Slack: It remains unprofitable, yet saw its stock increase after its recent Q3 2020 results. Slack increased revenue 60% to $168.7 million and ended its Q3 with 821 customers that were contributing more than $100,000 in recurring revenue, up 67% from the previous year. Investors seem to agree that Slack needs to continue to focus on growth. Also, its stock boost was still recovering from a disastrous Q2.

As far as technical solutions go, nothing has really changed. The market will continue to migrate from premises-based to cloud-delivered solutions. What did change was the game plan that most providers will be following. They are now expected to behave better and balance the business goals of growth and profits.

Read the original here:

Has the 'Focus on Growth' Mantra Come to a Head in UC? - No Jitter