| Abstract: | Company sees “truly extraordinary” drop in business; says third-quarter results will be lower than expected and imposes a hiring freeze. |
| Keywords: | drop in business, hiring freeze |
Enterprise software market leader SAP today said the worldwide economic crisis undermined its business in the last two weeks of September, pulling third-quarter financial results well below expectations.
Top SAP officials called the sudden slowdown in the company’s business dramatic and said SAP is responding by instituting an immediate hiring freeze.
“Nobody … could have predicted what happened in the past two weeks,” said Co-CEO Henning Kagermann on a conference call with journalists. “Many customers reacted with a suddenness that I haven’t seen in the last years.”
Kagermann’s co-CEO, Leo Apotheker, on the same call, termed the sudden drop in business “truly extraordinary.”
SAP said non-GAAP software and software-related services revenue for the third quarter, ended Sept. 30, are expected to grow by 16% to 17% compared with results from the same period last year. Non-GAAP results for the third quarter exclude a €40 million write-down related to SAP’s acquisition of Business Objects.
SAP is expected to report official third-quarter financial results at the end of October. Officials declined to discuss possible revisions to SAP’s financial forecast for the rest of 2008.
Just over a week ago, SAP predicted that its third-quarter non-GAAP software and software-related revenue would rise by 24% to 27% compared with the year-earlier period. At the time, Apotheker said SAP was seeing a slackening of customer concerns about the slowing economy.
Today, however, SAP said the accelerating economic crisis hit its business hard at the end of the third quarter.
“The market developments of the past several weeks have been dramatic and worrying to many businesses,” Kagermann said in a prepared statement. “These concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter.”
SAP said its Americas region is expected to report the weakest performance for the quarter, with GAAP software and software-related service revenue expected to rise 12%. GAAP software and software-related services revenue is expected to grow by 14% in SAP’s Europe/Middle East/Africa region and by 18% in its Asia/Japan region.
The preliminary third-quarter numbers represent a significant decline from SAP’s recently reported second-quarter results, which showed a 32% year-over-year increase in non-GAAP software and software-related revenue.
At that time, Apotheker had said of the business climate in the first quarter of this year, “We had a lot of hesitation in the market. People were becoming nervous.” But, he said, “In the second quarter, the situation has normalized. We are now facing demand that is strictly value-driven. People demand very demanding business cases, and they are checking out the capability of the particular vendor to deliver that value.”
The worldwide economic crisis, however, changed enterprise software buying behavior suddenly. Changes in financial markets made it difficult for SAP customers to predict business results. As a result, Kagermann said, “This had a strong impact on our ability to sign contracts.”
Some deals also were undermined by customer concerns with obtaining financing, he said.
Apotheker said he believes the slowdown that SAP has seen is likely to affect other software and IT hardware vendors. “It is a broader-based decision customers have made to cut back,” he said.
SAP officials insisted that, despite the sudden slowdown, the company’s business is solid, with a diverse customer base, broad geographic distribution, and a strong recurring maintenance revenue stream. Kagermann said he believes SAP is gaining market share even in a slowing market.
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