Oracle Beats and SAP Misses, What Does it Mean? More Noise than Anything Else

SAP’s preliminary Q2 results indicate that the company fell short of their target growth range for product revenues of 15% to 17% year over year for the first half. Despite the miss in license revenues, management has reaffirmed their 2006 operating objectives based on strong order entry. As a reminder, SAP does not provide detailed quarterly guidance and the company’s business has a long history of substantial seasonality.

SAP’s disappointing Q2 license revenue performance raises a number of questions. Is the weaker growth a reflection of overall demand softening? Is it a reflection of a significant change in the competitive balance vs. rival Oracle? Or is it a short term reflection of a transitory seasonal shift in the competitive balance? Or is it a reflection of the differences in SAP’s areas of vertical industry strength vs. Oracle?

Since our retirement from the sell-side we have stopped maintaining detailed earnings models and likewise we no longer provide investment recommendations. Nonetheless we continue to spend time speaking with a wide range of industry contacts and tracking industry trends.

Our view is that we don’t believe investors should get too hot and bothered by the miss. While there are a myriad of specific factors that bear on the results, our discussions with various contacts (systems integrators, consultants, field managers, industry analysts, and users) lead us to believe the following.

First, that overall demand is steadily to gradually improving (despite the bigger issues being debated regarding the broader macro-economic outlook).

Second, while we have long been known as bullish on Oracle (and we took great pleasure in their strong May quarter performance) and believe that Oracle’s market share on an organic basis should grow we do not believe that this is at SAP’s expense. The ERP market is consolidating and SAP and Oracle are the beneficiaries with the losers generally being numerous smaller companies.

And third, although we don’t believe that SAP is being hurt in a major way by Oracle, we do believe that the seasonal aspect of Oracle’s fiscal May fourth quarter did have a short term impact.

We will do further checks on demand, but as of now we remain pretty confident that business prospects are good.

So what should investors do? Our bias is to view the sell off in SAP (and for that matter Oracle as well), combined with the continuing sharp decline in the broader market averages, as an opportunity. Next week Oracle is hosting a luncheon for analysts in New York City and we would be surprised if the company doesn’t argue that SAP’s miss is a function of Oracle’s gaining visible momentum. Likewise SAP with their detailed earnings announcement out next week will further affirm their target ranges for 2006. The battle continues.

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