SAP scraps year end guidance: why I'm not worried. Yet.
When I first heard about SAP's expected Q3 results I was as shocked as anyone. Earlier today, the company's executives added color on the results and explained what it is doing to steady the ship and ride out the storm. The fact it has yanked the year end forecast has grabbed the headlines but I am not surprised. The financial markets remain a mess and credit is hard to come by, especially for the SME's in EMEA upon which SAP has a significant dependency. How long these conditions remain is anyone's guess. It would be a foolish management that stuck its neck out.
On the analyst call, Leo Apotheker co-CEO said the company is focusing on providing "Compact ready to run software packages targeted at specific business processes to alleviate pain points... [in areas such as] liquidity management, inventory optimization and energy data management." Henning Kagermann fleshed out the revised go to market strategy, emphasizing a degree of repackaging for lower cost and lower TCO solutions in business intelligence solutions along with a renewed emphasis on Business All-in-One.
During the call, the company said it has taken measures to reduce cost by some €200 million in the current quarter largely made up of the widely publicized hiring freeze and elimination of non-customer facing travel. While this seems like a large number it is only around 10% of expected cost. That suggests SAP is more confident about where it stands on margin. It compares sharply with reductions seen among the Silicon Valley startups where workforce reductions alone are being reported at 20-30%.
What the company did not mention but which has been reported in Compterwoche.de is a plan to sell of its data center near the company's HQ in Walldorf to BT. It is thought this is part of SAP's attempt to get Business ByDesign economics right before they try and drive it into the market. No numbers have been put on this but I am pleased that SAP has finally realized that it isn't in the business of running data centers when there are others out there far better qualified to do so at lower cost. How this will impact the cost mix for ByDesign remains to be seen.
The crucial question now is whether SAP can stand firm on pricing or will be forced to be more flexible in its negotiations. It is vulnerable in the middle and SME sections of the market where there are choices that don't exist at the top end of the market and where it really only has to slug it out with Oracle and, on occasion IBM. Microsoft can for example offer far more competitive if not as fully featured database offerings than Oracle but with the bonus of applications that are maturing well. I am also hearing that some customers are willing to consider alternatives that take advantage of MySQL although I suspect that is of limited scope.
The immediate price differential alone is enough for companies to be tempted by these alternatives where systems replacement is necessary. I am also seeing mid-range vendors prepared to be more flexible in financing terms such that customers can spread finance costs.
The next couple of months are going to be interesting and while SAP can live a very long time on its non-license revenues, it needs to tread carefully. The market is changing and it needs to ensure that its carefully built market position isn't eroded by economic circumstances that allow competitors to steal share.