SAP Hits a Wall at the End of September

Published: October 13, 2008

by Timothy Prickett Morgan

While IBM did its best to try to calm Wall Street down last week when it preannounced its earnings for the third quarter on Wednesday after the market close, enterprise software juggernaut SAP had already undermined confidence in the IT space on Monday morning when it warned that it would not make its numbers in the third quarter.

"The market developments of the past several weeks have been dramatic and worrying to many businesses. These concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter," said explained Henning Kagermann, the co-chief executive officer at SAP explained in a statement. "Throughout the third quarter we felt quite positive about our ability to meet our expectations. Unfortunately, SAP was not immune from the economic and financial crisis that has enveloped the markets in the second half of September, causing us to report numbers below our expectations."

Business is not lower than 2007's levels, but the slowdown only hit in September when the credit and stock markets collapsed. SAP said in the statement that it expected software and related services sales to be between €1.97 billion and €1.98 billion, which is a 13 percent or 14 percent increase over sales in the third quarter of 2007, The company added that pure software revenues would come in at between €740 million and €750 million, which is 4 percent to 5 percent better that the €715 million it posted in the year-ago quarter. Sales in the Americas for software and related services are expected to rise by 12 percent, in EMEA by 14 percent, and in Asia/Pacific-Japan by 18 percent as reported using U.S. accounting principles. (If we really have any here any more.)

As was the case with IBM's Sam Palmisano last week, Kagermann reminded everyone in his statement that SAP has a broad portfolio, a diverse customer base, and global coverage, which positions it better than some of its competitors to weather economic storms.

Wall Street and the other exchanges where SAP's stock is traded were not buying it. In fact, they started selling. By the end of the trading day in New York on Monday, SAP's shares were off 13.1 percent to just under $40, and as we go to press on Friday morning as Wall Street was opening for what looks like another stunning decline, the shares are breaking through $32 a pop. The German newspaper, Rhein-Neckar-Zeitung is reporting that SAP is looking around at where to slash costs and has implemented a hiring freeze. Clearly, this is about more than two bad weeks in a quarter.

And it is very likely about more than SAP. If SAP catches a cold, so does Oracle, Lawson Software, Microsoft, and Sage, as well as myriad smaller ERP, CRM, and SCM software developers. The situation is very likely not limited to SAP, and we will know for sure in the coming weeks as companies report their numbers. It will be interesting to see how the credit crunch is affecting financing for midrange companies and small businesses, which often do not have squeaky clean credit and access to cash in the best of times.

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