SAP Q3 Report Card: Could Try Harder

(By Philip Carnelley, 29 Oct 09, 18:00) We have already given the key messages regarding SAP’s Q3 results issued yesterday (SAP software decline slows). But having reflected, and having listened to the conference call, we’re left with the thought: shouldn’t SAP be doing better? The key question raised is: is it all the fault of the economy? Should other companies be content with, or expect, similar declines? Well, it ain’t necessarily so. Even the good news – that SAP’s OP margin is up 2pp to 24% – isn’t so great when you look at other global software players: say, Oracle: Oracle’s OP margin last quarter was 34% - up from 28% the prior year. Let alone Microsoft, which just reported OP margin of 35%, despite deferring $1.4bn of revenue and thus showing 14% decline in revenue and 25% drop in operating profit. OK, so Microsoft has a very different business model and business lines. Oracle has its infrastructure sales. But, even so... SAP has a 'medium term' goal of 35%. It still looks a long way off.

As to SAP’s 30% decline in new licence sales (35% for the 9 months): we don’t think that’s just the economy. We suspect that SAP’s customers have taken as much new stuff as they can cope with, and they don’t want any more. That isn’t exactly SAP’s fault, but it does seem to be a SAP-specific problem. Maybe SAP could make it easier to buy new stuff in small increments. SAP has now reduced its full year revenue forecasts by a further 2 pp – it is now forecasting a drop of 6–8 percent. While company fortunes are varying wildly at the moment, our analysis shows that they’re averaging out at about a four percent decline, globally.

The most comparable data point, in our view, is Oracle’s applications business. Oracle’s sales of new licences for its applications in its last reported quarter were down 1%. New apps sales were down 11% and 4%, respectively, in the previous two quarters – all at constant currency. So we’re left with the thought that, no, it’s not just the economy. It must be SAP – at least in part. If its core high-end market is saturated, it still hasn’t managed to sufficiently broaden its reach into SMBs or worked out its SaaS strategy – things which could give it more resilience and flexibility. On the call, CEO Leo Apotheker talked of us learning more about on-demand solutions for SMEs and large companies “in 2010.” Till then we'll have to continue to speculate. The markets seem to be wondering about all this too – SAP shares have dropped almost 9% since the results announcement.