Mom and pop shops are cutting software spending, causing panic on Wall Street

Martin started the Seattle-based company with his brother Brandon to help local coffee shops better compete starbucksBy making it easy for them to fulfill mobile orders, track analytics And automate their marketing.

While his 8-year-old business has remained fairly stable during the economic downturn that began in 2022, Martin said he’s seeing evidence that people are buying fewer lattes now than they did a year ago. Any consumer slowdown that follows is a potentially troubling sign for coffee customers, and the company is actively gearing up.

Martin, 38, told that Joe Coffee has reduced its membership numbers. hubspotStripe, a marketing automation software vendor and payment processor, is taking a closer look at its spending to see if it would be worth renewing its agreement with the company.

“Each of our memberships is under a magnifying glass,” Martin told. “We have to have a really good business case to make new spending.”

The Martin brothers aren’t alone, based on the latest earnings reports from software businesses serving small and medium-sized businesses (SMBs), which could be your local shoe store, a small restaurant chain or a neighborhood spa.

hubspot, bill holdings, Paycom And zoominfo Everyone warned investors about a possible crisis. His comments reflect macroeconomic data, which shows consumers are feeling the ongoing effects of inflation and higher interest rates.

Retail sales fell 0.1% in October, underscoring pressure from higher prices. The consumer price index rose 3.2% last month on an annual basis, according to the Bureau of Labor Statistics.

Wall Street is on the rise. While broader market indices are up slightly from mid-year, tech companies specializing in the SMB sector are suffering losses.

Paycom, which provides payroll and human resources software, saw its stock drop 38% on Nov. 1, a day after the company said revenue growth in 2024 would be 10% to 12%, beating analysts’ expectations of 20%. The above increase is much lower than expected.

Two days after Paycom’s decline, Bill’s shares fell 25%. The company, whose software helps customers track and control their payments and receivables, has lowered its profit and revenue guidance for 2024. Bill’s finance chief, John Rettig, said on the earnings call that the company is “operating in an environment of increasing economic volatility and small businesses are under increasing pressure to adjust to current realities.”

On the last day of October, ZoomInfo shares fell 16% due to a weaker-than-expected forecast for the fourth quarter. CFO Cameron Heizer told analysts that “it remains a tough world out there” for revenue retention. ZoomInfo helps sales and marketing teams track leads and customers.

HubSpot shares fell 6.1% after its earnings report last week, although the stock has since recovered. The company’s outlook was largely in line with estimates, but growth is slowing and CEO Yamini Rangan described the environment as “volatile and challenging” with clients “continuing to optimize spending.”

“The sales cycle remains sluggish, budgets are still under scrutiny and buying urgency remains low,” Rangan said on the earnings call.

Representatives for Paycom, ZoomInfo, HubSpot and Bill did not respond to requests for comment. Stocks are down between 12% and 49% since June 30. The Nasdaq is up more than 2% on that spread.

The market segment that those companies serve is important to the domestic economy. Over the past two decades, small businesses have accounted for 40% of U.S. gross domestic product, according to the Chamber of Commerce. They also employ 46% of the American workforce.

Jake Dollarhyde, CEO of Longbow Asset Management, said the results from Paycom and other SMB providers provide a window into the state of the economy.

“Whenever people don’t feel rich, they retreat,” Dollarhide said.

The Martins know what it’s like to deal with the everyday challenges of making ends meet. His father’s small business built sheds in his hometown of West Richland, Washington, about 200 miles southeast of Seattle, until bigger companies came to town and ran it into the ground.

“If America is really built on the backbone of small business owners, why are they the ones who never catch a break?” said Brandon Martin, Nick’s younger brother. “Why isn’t there anyone fighting for them? For us, that’s our primary driver.”

The Martin brothers’ background is in technology. they both worked here Microsoftand nick walked away district, While Brendan had jobs in product strategy and web development at various companies.

They also both loved the role coffee shops play in communities, having worked as baristas in the past, and wanted to help small cafes move away from Starbucks.

When Starbucks launched mobile ordering in 2015, Joe’s Coffee wasn’t even on yet. But the brothers saw an imminent opportunity in the market.

“At first we were like, we missed our shot,” Brandon said. “And then we realized, well no, small businesses still need it.”

They got their big break in August 2018 at Coffee Fest, a venue for coffee brands to debut their products and services. Just before the event in Los Angeles, the Martins learned that they had received $1 million in funding, their first outside investment.

They initially built a mobile-only ordering platform, but the COVID pandemic created a new set of demands from customers who were struggling to stay afloat. In 2021, Joe Coffee, which now has 17 employees, created a complete software and payments suite for coffee shops.

For Joe Coffee’s business to run, its technology must generate almost immediate revenue and profit for its customers, who are already operating on tight budgets. The company does not charge recurring subscription fees, but only takes a percentage of each transaction.

Nick Martin cited high borrowing costs as the main reason Joe Coffee has reduced the number of software products it purchases. The company now has about six software subscriptions, down from 12 to 15, he said, which has reduced the number of operating expenses from about 8% to 3% to 5%.

The decision about what to get rid of is based on whether a product is “good to use” or essential to business operations.

“Can we just get away with doing this in a spreadsheet?” He said. This is how the company decided which HubSpot services to cut. Joe Coffey is still a HubSpot customer but is paying for fewer seats and fewer tools, Martin said.

As for Stripe, which is privately held, Joe Coffey is looking at other payment processors that have lower fees, Martin said.

Stripe said it does not comment on specific customers.

The macroeconomic story for software companies will look different depending on their revenue models and their dependence on certain industries.

The bill may see a more immediate impact than others as more than three-quarters of its core revenue comes from money made on transactions, while the rest comes from subscriptions, which are contract based.

“The bill that’s most exposed will be the payment volume coming from those SMBs,” said Taylor McGinnis, an analyst at UBS.Which follows Bill, ZoomInfo and HubSpot.

Investors across the region are trying to figure out whether SMB spending has slowed or whether businesses are still looking for opportunities to reduce their software portfolios, as the economic picture worsens.

“I think what we’ve learned, particularly in B2B, is that it’s more macro-driven than it used to be,” said Brian Keane, a Deutsche Bank analyst who covers software and payments companies. “If another shoe drops, there will still be some downside risk.”

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