SAP Likely To Weather The Downturn Well

Posted by: Jennifer L. Schenker on October 07, 2008

Business software company SAP’s shares dropped 7.34% on Oct. 7 after it announced that it will not hit its numbers for the third quarter. Investors may be jittery, but if history is any guide the German software maker is likely to weather the global financial downturn better than tech companies in other sectors.

SAP said Oct. 6 that market turmoil had “triggered a very suddenly and unexpected drop in business activity” at the end of the third quarter. “Unfortunately, SAP was not immune from the economic and financial crisis that has enveloped the markets in the second half of September, causing numbers below our expectations,” Henning Kagermann, co-CEO of SAP said in a statement.

Still, SAP said it expects software and software-related service revenues for the July-September period to be between $2.66 billion and $2.67 billion. That’s up about 13% from $2.36 billion in the third quarter of 2007, and Kagermann says the company expects to gain further market share, even during unfavorable market conditions.

That’s not an unreasonable expectation, given that software companies tend to do better than hardware companies during hard times, says John Gantz, head of research at technology consultancy IDC. Back in July, IDC forecast that the entire European IT sector—software and hardware combined—would grow 3.9% in 2009. Due to market turmoil and the state of the European economy, it now expects growth to fall below 3%. But, says Gantz, “software has the best shot at beating that overall average as it has generally done in the past.”

It’s easy for businesses to delay buying new personal computers, but it’s more difficult to put off the second phase of a three-phase software installation, notes Gantz. Like a half-built building, a multi-stage software project doesn’t do a company any good until it’s completed, so many figure it is better to proceed and reap the benefits.

“A lot of SAP sales are to customers who are in some phase of upgrading and doing something new,” says Gantz. So, he predicts, after an initial slowdown, SAP’s customers are like to cautiously move forward on their software projects. Financial analysts at Dresdner Kleinwort also are predicting that SAP is likely to show earings resilience during the downturn.