ICT and Internet Business is an Independent Blog Focusing on ICT and Internet Business, eBusiness, Digital Media, Online Advertising, Internet Marketing, Mobile and Wireless, etc.

SAP Warning Drives Market Dive

  • Posted: Thursday, October 09, 2008
  • |
  • Author: pradhana
  • |
  • Filed under: Business Analysis

By David Mitchell, SVP IT Research at Ovum

SAP announced yesterday that sales had slowed down in the last two weeks of September and that, as a result, IT may not meet its previous revenue expectations. This, together with the general market turmoil, caused significant market impact among the NASDAQ-listed stocks, and will be taken by many as a sign of general market conditions.

The cliff edge can appear very rapidly

The last two weeks of September saw a slowdown in deal flow. This is true of many companies and not just of SAP. Deals were either cancelled or deferred because of the current market climate. Losing a deal to ‘no deal’ rather than to a competitor was commonplace. The suddenness of the stall should not surprise anyone that is familiarity with the way the software market works; market changes can be quite sudden. The reversal of the trend can be equally sudden and each sales week is significant in the current climate.

Most global software companies have very uneven revenues, with revenue peaks in 4Q being the most visible phenomenon. \However, there is also significant revenue variation within each quarter, with large volumes of business being signed in the last few days of each quarter. While this may not be healthy, it is a fact of life in this market and one that customers use to their advantage to gain the most favourable commercial terms. I have seen situations when 50% or more of the revenue in a given quarter is booked on the last 2-3 days.

When SAP announced yesterday that it may not meet prior revenue expectations, there was a large market impact – not only on SAP stock, which dropped by over 15%, but also on the broader technology market. Companies such as Oracle also took a hit, and the overall NASDAQ composite was dragged down by over 4%. However, SAP should not be blamed for the general market malaise. Many other companies have reported a softening of market demand and each will have its 15 minutes of fame when it either posts revenue figures that do not meet expectations or pre-warns of those results.

Structure is the defence, but prudence is the tactic

Although some companies will look to make cost corrections, staring with the inevitable hiring freeze policy, this is only a short-term response – albeit a necessary one. A broader and longer-term response is revenue diversification. Companies looking for a more robust position need revenue diversification of multiple types.

In the press Henning Kagermann, SAP co-CEO, is reported as confirming that a hiring freeze was in place and that more general cost-reduction steps were being implemented. This is entirely prudent. It is also in line with what others in the industry are doing and I know that many of the other major companies are doing the same – it’s a market response not a SAP response. It needs to continue but it should not be main focus of the executive team; selling their way out of the problem is more worthy of their focus.

The first is geographic diversity. When the US started to decline there were still pockets of growth in EMEA and parts of Asia-Pacific. As the EMEA markets enter their phase of decline it is likely that Asia-Pacific will still see growth pockets, but – more significantly – that we’ll see the US markets emerging first from the crisis.

Second is product category diversity. In an economic downturn business applications are frequently a leading indicator, with business-change-led projects being first to be suspended while ‘spend to save’ infrastructure projects, such as consolidation initiatives, continue unaffected. Having exposure to multiple technology product lines allows the counter-cyclicality smoothing effect to take place.

The third diversity facet is the balance of product and services, especially those highly valuable recurring revenue services. Companies with diversity along these three axes have the best chance of riding out the storm more smoothly. Inevitably, these facets of diversification mean that the largest software companies, with the broadest portfolios, will remain the most solid during the market turmoil. /PR

0 people have left comments

Commentors on this Post-