US Markets
Software, Consulting Firms Not Facing Doom Still Likely to See Pain From AI Spending
Software and consulting companies aren't facing the doom-and-gloom scenario expected earlier this year after Anthropic released its Claude AI plugins that some investors thought would render firms such as Workday (WDAY) and Accenture (ACN) obsolete.Fundamentals for such companies remain on solid ground, and firms are finding ways to protect margins, Steve Koenig, the US head of software and services research at Macquarie, said in a note to clients. Companies in the bank's growth software index increased annual recurring revenue in March and April as they had in previous quarters, he said.At least so far, Koenig said in his note, there's little evidence of disruptions to software business models. Twenty-three out of the 40 companies in Macquarie's growth software index said they accelerated their annual recurring revenue on a yearly basis, which is well within the historical range."Our industry conversations suggest demand conditions remain intact," he said. "Software company hiring has trended downward year to date as many firms restructure their workforces or slow hiring to protect their margins, as token expenses mount for coding -- but turned up slightly in May."Anthropic at the end of January released a suite of plugins for its Claude Cowork AI agent that automates several tasks including data entry, marketing and others that investors feared would render traditional software companies irrelevant. Shares of software and consulting firms plunged in the days after the release but have traded in a range since.While software and consulting companies may not be facing pending doom, they certainly are feeling some pain that's likely to continue as clients spend more on AI.Shares of such companies have dropped since the beginning of the year, with Workday down 38% and Accenture down 51% since the start of 2026, mainly after Anthropic released its plugins. Salesforce (CRM), Thomson Reuters (TRI), and other large incumbents also suffered hits to their share prices after the plugins were released.Workday said subscription revenue grew by 14% year over year in the first quarter of fiscal 2027. While that's roughly in line with levels seen in the first quarter of 2026, it's down from growth of 17% in 2025, 19% in 2024, and almost 23% in 2023. Accenture's total sales growth averaged 4.8%, and consulting revenue was up 0.7% over the past three fiscal years after overall sales and consulting revenue surged by 26% and 22%, respectively, in 2022."Enterprises, Fortune 2000 companies, have limited budgets, and with that budget they need to figure out what to do with it," Bloomberg Intelligence Senior Technology Analyst Anurag Rana said in an interview. "And if they're allocating more toward AI-related activities, that money has to come out of somewhere. It comes out of consulting revenue, old hardware, and new software licenses."Peers such as ServiceNow (NOW) and Salesforce (CRM) have seen similar declines in revenue growth in recent years.Morgan Stanley's first-quarter chief investment officer survey indicated "disappointing" services budget growth of 2% year over year in 2026, slightly down from 2.1% in 2025. Faster services budget growth is core to the bank's overweight thesis on Accenture, Morgan Stanley said.Total IT budget growth is roughly flat year over year despite the growing emphasis on AI, "suggesting pilots have yet to demonstrate meaningful returns, while rapid model advancement pressures leaders to keep investing at the expense of discretionary spend," Morgan Stanley Analyst James Faucette said in a separate note.Also of concern to software firms, which use per-seat pricing models, is a run of dismal jobs reports showing their clients aren't hiring at the same pace they were in years past."They're adding no more seats," Bloomberg Intelligence's Rana said. "If you're not adding more seats, you're not going to be able to sell more seats."Rana said there's no evidence indicating a near-term rebound, as IT clients add fewer employees and ultimately reduce software spending."The need to invest heavily in AI-related products and infrastructure is shifting corporate budgets away from software subscriptions and consulting projects," he said. "We aren't anticipating a significant change in 2H revenue-growth rates for most large vendors, with potentially greater pressure on smaller companies."Software and consulting firms have also received good news on the macroeconomic and geopolitical fronts in recent weeks. The US economy added 172,000 jobs in May, topping expectations, and the US and Iran, despite ongoing skirmishes, recently reached a preliminary peace deal.Those positive vibes were diminished Thursday after the Bureau of Labor Statistics said nonfarm payrolls rose by just 57,000 in June, well below the median analyst estimate of 113,000, while May's total was revised down to 129,000.Firms that can adopt AI will likely fare better than those that avoid it, Rana said."The system-of-record software companies that sell into the enterprises and are able to add AI capabilities will likely generate more sales in the future," he said.Tim Weatherhead
$ACN
