Israeli high-tech is facing a new threat: its main customers. The information systems industry in organizations is facing drying up, according to a new survey conducted among information system managers at major US companies. According to the survey, it seems that the willingness of companies and organizations to continue purchasing computers, software servers, cyber systems and artificial intelligence has decreased dramatically. The phenomenon is already threatening threatens the forecasts of the technology giants for next year and leads to a second wave of layoffs in the industry. This is particularly bad news for Israeli high-tech, most of which relies on the sale of software and cloud systems to companies. In fact, 56% of the startup and growth companies that raised capital in the past year are in one of the three affected areas: enterprise software , cyber and fintech.
The figure that explains the crisis
The computing budgets of the giant companies are expected to grow at the lowest rate recorded in years. According to the survey from September, it seems that IT budgets are going to grow by only 1.8% – a low figure that has not been recorded in the last five years, except for the months of the outbreak of the corona virus in early 2020. For comparison, the growth forecast between 2016 and the beginning of 2020 stood at a rate of over from 3%, and usually in ranges ranging from 4% to 5%. Due to the high annual inflation, analysts estimate that this is a realistic cut in budgets that may reach 8%.
The reduction in procurement budgets is explained by the continuous decrease in revenues and profits, and the deepening of the negative forecasts in the field. This is due to the global economic situation – inflation, the strengthening of the dollar, the war in Ukraine and the loss of large markets such as China. Another major reason for this phenomenon is the hiring freezes in the economy, or the waves of layoffs – moves that reduce the need to purchase computers or software licenses for new employees.
The high-tech industry is already in the midst of a second wave of layoffs, according to the website Layoffs.fyi. In October, there was a sudden revival in the trend of layoffs, with approximately 12,400 workers being laid off worldwide from the industry. At the peak of the first wave of layoffs, in June, 17,700 high-tech workers were let go. A similar phenomenon was also recorded in Israel: the number of laid off workers in Israeli companies crossed the threshold of a thousand employees – foreigners and Israelis – last October.
Who will be affected by the new trend?
Computing (IT) budgets are of great importance to the Israeli high-tech industry since many of the companies in it market products to organizations, and not to private consumers – including development management software, marketing and sales, cyber systems, cloud services and artificial intelligence, servers and software licenses. Therefore, this decline has a possible impact on cyber companies such as Checkpoint, Palo Alto Networks and Sentinel One; Companies that market tools for managers in organizations such as Monday and Similarweb; Companies that produce tools for development management such as Jayprog and Corelogicx; Human resource and financial management system manufacturers such as Haibob and Deal; and video and conference management systems in organizations such as Kaltura and Bizabo.
The slowdown in the growth of computing budgets is bad news for the technology giants and software companies (SaaS) – which make up the bulk of the technology industry in Israel and abroad. This is one of the reasons why there has been a large wave of layoffs among Israeli cyber companies such as Veronis, Scenic, Forescout, Cyberizen, etc. Kamerx. The Israeli-American Veronis reported an increase in losses and revised its forecasts downward, which led to a 40% drop in its stock in a single day. At the beginning of the week, it laid off more than 100 employees, about 5% of the workforce. Even a giant like Microsoft, which records a rate Double-digit annual growth, recorded a slowdown in its cloud division, and it also decided to embark on a round of job cuts and freezes.
“It’s the business customers’ turn to reduce consumption”
“In the first and second quarter of this year, we saw corrections in the value multipliers of the public companies, but in the third and fourth quarter we are already beginning to see them reflected in the real data: a decrease in revenues, in forecasts as well as in expenses,” Amit Karp, a partner at the Bessemer Fund, which specializes in investing in companies, tells Globes software and publishes the index of companies in the field (the SaaS index, AG). “After the correction in the field of private consumers, it is always the turn of the business customers to reduce consumption, and you will see this happening in quite a few companies in the next six months, of course also because of the increase in interest rates and the increasing focus on efficiency as the leading measure.
Amit Karp, partner in Bessemer Fund / Photo: Avishai Finkelstein
“After the declines in the field of electronic commerce, we also saw the cuts in the marketing and sales budgets, and now it also comes to the procurement of software and technology, and in particular in the field of cyber,” Karp continues. “We will continue to see the trend of cuts in cyber: many companies in the field raised too much money, and it became clear that there is no room for five competitors in every market category. So it is true that cyber will have a higher average real growth than other fields, but it will be much lower than the original expectations.”
“From the conversations we have with the information systems managers at the companies, there is increasing caution regarding procurement in the near future: anything that does not generate an immediate return on investment for them will not be in the picture,” Shahar Cohen, CEO of Lucid Capital, a fund specializing in public and private investments, tells Globes. It is about stopping, going through iron combs from department to department to reduce the number of licenses, and re-examining the usage packages. One of the procurement managers went so far as to randomly cancel 20% of the licenses to see where they would pay attention. Another trend is the reduction of work with specialized companies or startups and the expansion of engagement with large suppliers that offer discounts and promotions on bundles of software, or baskets of diverse solutions – such as Palo Alto, Microsoft or Service Now.”
Part of the vicious cycle of layoffs
The layoffs in technology companies, as well as in other industries, create a vicious circle that in turn lowers procurement budgets. “Naturally, when workers are laid off and when fewer candidates are recruited for companies – fewer computers and fewer software licenses are needed for each of them,” says Cohen. “For example, from conversations with some of them, it appears that there is a decrease in the growth rate for cloud activity monitoring systems (Observability) based on the volume of use by organizations, especially in a market segment such as e-commerce which is a large consumer of these services – this will affect companies like Corelogics , Elastic or Logz A. Or”.
The cuts in computing budgets are bad news for the major software companies, some of which also have development centers in Israel – such as Oracle, Salesforce, Snowflake, Zoom Info, Data Dog and Service Now. In recent days, other enterprise software companies have registered a sharp decline in the stock markets following the update of their forecasts: Fortinet reported difficulties in increasing sales volumes to existing customers at the beginning of the month and suffered a 19% drop in the share price at once. Twilio, one of the most prominent companies in the cloud market, updated its annual growth forecast from 30% to a range ranging from 15% to 25%, and at once lost a third of its value.
The difficult data of the software companies is also reflected in the indexes: Lucid Capital’s bubble index, which calculates the sales multiples of the software companies in the coming year according to Morgan Stanley, has reached an all-time low since the index’s activity began in 2014. The Crunchbase index that tracks the enterprise software companies that were issued last year – including Kaltura, Toast and Aplobin – recorded a 58% decrease in the value of the companies.
There are those who benefit from cutting costs
This is not necessarily bad news for Israeli high-tech – sometimes a cut in growth and budget tightening may bring opportunities to certain startups. And in particular if they offer products that make it possible to save costs and get rid of outdated and expensive systems. “There are quite a few opportunities in what is happening for startups in the software field,” reassures Yuval Cohen, founder and managing partner of the Stagevan Fund, which specializes in software companies among other things. “Quite a few corporations are cutting back on the development of unprofitable products, and they can purchase them from start-ups, instead. Products that help large companies to streamline and save internal processes, improve their customer service, prevent customer abandonment or allow them to increase their sales to existing or new customers – may actually benefit from the situation.”
Such is the case of the digital travel agency Tripactions, of Ariel Cohen and Ilan Twig. Last month, the company managed to increase its value from 7.5 billion dollars to 9.2 billion dollars, and prepare for an IPO at a value of 12 billion dollars. The reason for this is the cost savings Tripactions provides compared to business travel agencies that charge a higher fee. Another company that benefits from the reduction in costs for organizations is Mash Payments, owned by PayPal and Pioneer veterans Oded Zahavi and Eran Kotoni, which offers CFOs a system that allows them to control expenses in the organization and prevent unplanned waste by employees and managers in an uncontrolled manner.