By Yaser Anwar, CSC of Equity Investment Ideas
On Jan. 13th, SAP pre-released 4Q 06 results yesterday afternoon, posting lighter than expected license and total revenue. Investors expected a solid 4th Q and given the strong run in the shares, the ensuing correction is not surprising.
SAP now expects 4th Q software revenue of 1.26 bil Euroes, which is below the 1.38-39 bil estimate of The Street . Total revenue is expected to be 2.95 bil vs Street forecast of approximately 3.08 bil Euros. Also, SAP had previously guided software rev. growth of 15-17% vs reported 7%.
So why did the company miss?
- I believe that SAP’s competitive position is weakening evident by its 2nd negative pre-announcement in 3 Qs. In addition to more competition and likely pricing pressure from a revitalized Oracle, I believe SAP is poorly positioned to benefit from non-application related growth areas in software. Comparisons could be tough going forward, as double digit license revenue growth may be difficult to achieve.
- Given this lower growth profile and inconsistent execution, investors can expect to see multiple compression. Investors will want to see consistent signs of reacceleration growth before getting more positive on SAP.
- On the positive side, SAP’s license revenues increased 7% in 4th Q vs ORCL’s reported organic growth of 1%. SAP’s results suffer from a dollar headwind which benefit-ed/s Oracle.
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- If one looks at the weakening revenues, the business software market itself maybe slowing down. Last month, Oracle announced disappointing 2nd Q revenue of $4.16 billion, sending the stock down 4.5%
- For 4th Q, SAP expects total revenue to be 2.95 bil vs consensus estimate of 3.05 bil Euros. License revenue is expected to be 1.26 bil vs consensus of 1.35 bil Euros.
- SAP needs to show operating margin expansion of 27-30% alongside double digit license revenue growth. While this may appear difficult, SAP has historically proven it can deliver on heightened expectations. That being said, Investors of SAP and ORCL will be eager to hear what SAP has to say when it issues guidance with its results on Jan 24.
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