Tuesday, 7 October 2008

Not a good day to bury bad news

(By Anthony Miller). There’s never a good time to issue a profits warning, but SAP found itself doing just that on one of the worst days on world stock markets for years. Reporting a “very sudden and unexpected drop in business activity” at the end of September, SAP Co-CEO Henning Kagermann completely back-tracked on his more bullish statements made at the end of July when the company raised full-year guidance on the back of equally unanticipated strong 2Q results. On yesterday’s concall, Kagermann referred to a sea-change in customer sentiment resulting in “deferred” decisions, though he said that underlying business drivers were “solid(Ed. I assume, as in “jelly”). As a result, SAP has instituted a hiring freeze; no leavers will be replaced, contractors will be cut, and they are reducing variable expenses. However, Kagermann said they are not downsizing “as that would be too extreme at this time” (Ed. I wonder how bad they think it has to get before they downsize?). The problems are broad-based i.e. not just restricted to the financial services sector, and seem to be more prevalent in the SME market, where, by the way, SAP has effectively bet the business, pouring hundreds of millions of euros into its hosted service, BusinessBy Design, already late to market. SAP’s stock slumped 15%, more than double the DAX’s 7% fall. SAP’s archrival Oracle contained its fall to 7%, steeper than the 3.6% Dow Jones decline or the 4.3% Nasdaq decline.

As we all know, SAP was far from the only stock that suffered yesterday. In the wake of Angela Merkel’s 'unilateral declaration of economic independence', compatriot database and middleware software vendor, Software AG, crashed 18% and even Swiss-based banking software player, Temenos was down 16%. Leading UK software stocks got off lightly in comparison, with Sage down 4%, Misys down 6% and Autonomy down 6% against a 6% FTSE100 and FTSE Software and Services fall. Services stocks were also pretty horrible with only Computacenter among the leaders that we follow showing a rise, albeit 1%. The Indian stocks were in a dreadful state, especially those with US listings, though a few are showing a small recovery this morning in Mumbai. I’ll be spending Thursday with Satyam’s top management so I hope to get a much better view of how things are in the UK and beyond for the Indians and their competitors.

So where does this leave us? Much as where we have been saying we were for some time. Software vendors will have to forget about new licence or upgrade sales and work out how to subsist on recurring revenue sources, mainly maintenance and support. IT services players are perhaps in a more perilous position. With less than three months to go before the end of the year, the chances of customers kicking off any new projects is next to nowt, as nothing started now will pay back by then – and that is going to be the determining factor as customers clamp down on all spending. 'Time-and-materials' projects already underway will be scaled back where at all possible and then frozen at the next practical milestone. About the only work likely to remain relatively unaffected will be 'keep the lights on' operations and critical application maintenance. Honestly, we don’t like being the harbingers of doom but we have seen it all before so we (and you) should all know what to expect.

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