SAP's first fourth quarter miss in seven years has analysts painting a grim picture in the enterprise applications market as new trends such as services oriented architecture (SOA) win out.
The picture goes something like this: SAP's big miss in the fourth quarter is likely to give it a small first half deal pipeline, says Pacific Crest analyst Brendan Barnicle. Meanwhile, both Oracle and SAP are struggling to hit big growth numbers for their traditional enterprise applications. Toss in a price war between SAP and Oracle and you have issues--unless you're a tech buyer looking for upgrade your enterprise applications.
Zooming the picture out a bit Barnicle notes that new technologies are working against both SAP and Oracle. "On-demand solutions, open-source applications and service-oriented architecture (SOA) are all working against SAP and Oracle. With SOA, enterprises can more easily build custom applications and are less dependent on packaged applications from SAP," says Barnicle.
SAP said late last year that SOA was a big priority for the company, but that vision is in the early stages. As an aside, there are some excellent posts from Joe McKendrick, and Phil Wainewright should you want to deep dive on SOA and Saas, respectively.
The biggest problem facing SAP and Oracle is that CIOs increasingly view enterprise applications as plumbing that can run in the background as more lightweight front ends are added onto them. This is the enterprise 2.0 effect Dion Hinchcliffe reports about.
Peter Goldmacher, an analyst at Credit Suisse, adds that "in addition to more competition and likely pricing pressure from a reinvigorated Oracle, we believe SAP is poorly positioned to benefit from other, non app related growth areas in software, primarily SOA."
"Customers' desire to invest in SOA and buy more products from fewer vendors puts SAP at a disadvantage, partially because this competitive dynamic is ratcheting up pricing pressure which SAP feels the most given it's relatively limited solution set relative to Oracle and IBM."
One thing is certain--with CIOs shunning major three year application implementations--"SAP's visibility in the business has deteriorated," says Jeffries analyst Ross MacMillan, who also notes:
"It’s not just that Oracle and SAP have both missed their most recent quarters. We think closure rates have fallen as we enter a seasonally weaker part of the year. Another cautious negative data point for software. Following Oracle's miss in November, to Amdocs miss yesterday SAP is another data point to suggest all is not all perfect in the spending environment. While competition may have some influence we don't think it’s the main reason for the shortfalls."
Many of these aforementioned points are on target--especially the ones about enterprise application growth slowing. After all there's a reason Oracle is buying up a lot of legacy apps--it wants to charge you maintenance and support fees. That's Oracle's real business.
But there's another item that should make you pause before writing SAP's obituary--the Euro. SAP's results are reported in euros, which have been a lot stronger than the U.S. dollar. Just as a weak dollar can help U.S. company results look better abroad (manufacturer in dollars sell in euros), SAP has the inverse issue. It's collecting dollar revenue and converting it to euros. Part of the growth issue is clearly currency exchange rates.
Currency isn't the entire story--Barnicle notes that SAP would have missed its projections even excluding currency effects--but it's one to note in the future.