SAP’s Miss – Part II: New Attack on the SMB Market
When SAP released their disappointing Q4 results a few weeks ago, we raised the critical question as to what do they mean. Was it a company specific issue, or a reflection of a broader weakening of demand for enterprise software companies?
Recently SAP hosted a meeting with financial analysts to discuss in greater detail its results for 2006 and provided a preliminary outlook for 2007.
The 2007 outlook calls for product revenue growth in constant currency terms on the order of 12% to 14%, which is similar to the growth seen in 2006 and for operating margins to take a hit of 1 to 2 percentage points to a range of 26% to 27% owing to the decision to develop an on-demand offering. While the revenue outlook should not be surprising, the lack of license revenue guidance along with the indication that profit margins would decline took the market by surprise and led to a further sell-off in the shares.
The presentations by SAP’s senior management illustrated the challenges to the leading enterprise applications vendor. In its traditional market serving relatively large companies the market share gains that SAP has enjoyed over a number of years owing in part to Oracle’s various fumbling of earlier releases of its eBusiness suite, and later anxiety over the company’s aggressive acquisitions have come to an end. In addition the long standing effort to build SAP’s presence in the strategically important small, medium business (SMB) market has not been as successful as hoped. Or put another way, SAP recognizes the need to address the sizeable portion of the SMB market that wants a different value proposition that emphasizes the low upfront costs and predictability offered by the software as service subscription model. Finally, compounding the fundamental challenges SAP also confronted the significant increase in the value of the Euro which visibly dampened the company’s reported top line growth. Despite the disappointment the actual results in absolute terms are not bad rather management was clearly overly optimistic in initial outlook for the year.
The biggest surprise was management’s intention to sharply increase its investment in building an easy to use, on-demand solution to more effectively address the all important SMB market. The announcement represents an admission that despite SAP’s claims during the past several years of its success in the SMB market, that the company is losing ground to a range of competitors that arguably include a number of traditional ERP software companies (Lawson, Oracle, et al.) not to mention on-demand offerings from Salesforce.com, NetSuite and others. While the move to on-demand makes sense, it raises a lot of questions regarding SAP’s current mid-market offering as well as to the underlying assumptions the company is using with regard to prospective market penetration, revenue contribution and longer term profitability. Our conversations with investors underscore these concerns as does the reaction of the stock.
Perhaps most importantly nothing in SAP’s presentations suggested a fundamental softening of demand for broader IT spending on enterprise software. In fact management continues to characterize the spending environment as “healthy,” which is consistent with the inputs we get from various industry contacts (systems integrators, market research analysts, independent consultants and field sales).
One bit of good news for SAP is that Henning Kagermann will continue at least one more year as CEO, forestalling a much anticipated horse race between leading executive board members Shai Agassi and Leo Apotheker and the risks that one of these key executives will leave.
Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.
Recently SAP hosted a meeting with financial analysts to discuss in greater detail its results for 2006 and provided a preliminary outlook for 2007.
The 2007 outlook calls for product revenue growth in constant currency terms on the order of 12% to 14%, which is similar to the growth seen in 2006 and for operating margins to take a hit of 1 to 2 percentage points to a range of 26% to 27% owing to the decision to develop an on-demand offering. While the revenue outlook should not be surprising, the lack of license revenue guidance along with the indication that profit margins would decline took the market by surprise and led to a further sell-off in the shares.
The presentations by SAP’s senior management illustrated the challenges to the leading enterprise applications vendor. In its traditional market serving relatively large companies the market share gains that SAP has enjoyed over a number of years owing in part to Oracle’s various fumbling of earlier releases of its eBusiness suite, and later anxiety over the company’s aggressive acquisitions have come to an end. In addition the long standing effort to build SAP’s presence in the strategically important small, medium business (SMB) market has not been as successful as hoped. Or put another way, SAP recognizes the need to address the sizeable portion of the SMB market that wants a different value proposition that emphasizes the low upfront costs and predictability offered by the software as service subscription model. Finally, compounding the fundamental challenges SAP also confronted the significant increase in the value of the Euro which visibly dampened the company’s reported top line growth. Despite the disappointment the actual results in absolute terms are not bad rather management was clearly overly optimistic in initial outlook for the year.
The biggest surprise was management’s intention to sharply increase its investment in building an easy to use, on-demand solution to more effectively address the all important SMB market. The announcement represents an admission that despite SAP’s claims during the past several years of its success in the SMB market, that the company is losing ground to a range of competitors that arguably include a number of traditional ERP software companies (Lawson, Oracle, et al.) not to mention on-demand offerings from Salesforce.com, NetSuite and others. While the move to on-demand makes sense, it raises a lot of questions regarding SAP’s current mid-market offering as well as to the underlying assumptions the company is using with regard to prospective market penetration, revenue contribution and longer term profitability. Our conversations with investors underscore these concerns as does the reaction of the stock.
Perhaps most importantly nothing in SAP’s presentations suggested a fundamental softening of demand for broader IT spending on enterprise software. In fact management continues to characterize the spending environment as “healthy,” which is consistent with the inputs we get from various industry contacts (systems integrators, market research analysts, independent consultants and field sales).
One bit of good news for SAP is that Henning Kagermann will continue at least one more year as CEO, forestalling a much anticipated horse race between leading executive board members Shai Agassi and Leo Apotheker and the risks that one of these key executives will leave.
Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.
posted by jcm at 11:03 AM
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