IT spending pull-back: SAP warns on Q3 earnings

In what may be an early sign of cuts in IT spending, SAP is warning that its Q3 results will be below the firm's previous forecast. In the announcement, Henning Kagerman, SAP's co-CEO said:

The market developments of the past several weeks have been dramatic and worrying to many businesses. These concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter. Throughout the third quarter we felt quite positive about our ability to meet our expectations. Unfortunately, SAP was not immune from the economic and financial crisis that has enveloped the markets in the second half of September, causing us to report numbers below our expectations.

Keep in mind, however, that SAP's revenue is not actually shrinking--just not growing as much as it previously forecast. SAP said that it expects non-GAAP revenue to increase of 16% - 17% compared to the third quarter of 2007.

Dennis Howlett quotes Kagermann during an analyst conference call accompanying the announcement:

Many customers felt the need to focus on shorter term concerns and put planned IT investments on hold for now. There was some hesitation on software purchases where financing was an issue. No company including SAP is immune from a sudden and serious economic downturn....We are not cutting out or downsizing, that would be too extreme at this time but we are in preparedeness mode....We remain in the middle of the range of our guidance for software and software related revenues.

SAP's warning will likely be followed by similar announcements from other enterprise system vendors. The easiest thing for buyers to do during times of economic crisis is to defer major spending decisions. ERP, CRM, and other enterprise system acquisitions are big ticket items. So far as other types of IT spending--hardware, services, infrastructure software--is pulled through by application software sales, IT spending overall is likely to decline.

Our analysis at Computer Economics earlier this year showed more organizations increasing IT spending in 2008 than decreasing. However, in light of the current situation, all bets are off. We hope to have a new projection in the next few weeks, and my guess is that it will show a severe drop off in IT spending intentions.

Update, Oct. 7. A Spectator reader wrote me this morning on a key point that I missed. He points out that SAP's announcement does not indicate how much of its Q3 revenue is from Business Objects, which was not part of SAP in 2007 Q3. So, SAP's revenue growth is certainly not 16-17%. Frankly, I think it is a little misleading on SAP's part to warn on quarterly results on not give the entire picture.

Update, Oct. 7. An article in Datamation points out that there could be an uptick in some IT spending as a result of the many mergers and acquisitions currently taking place in the financial sector. It postulates that consultants and systems integrators serving this sector may see increased demand for services as organizations are unlikely to have sufficient headcount for the integration effort. But I'm not buying it. The combined firms will likely have excess IT headcount that they would otherwise terminate. Any increase in integration projects just means that fewer of them will be laid off.

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