SAP Outlook Errs on Side of Optimistic

Applications giant SAP, one of the sector’s most important bellwethers, has provided an outlook that is closely in line with PAC/teknowlogy’s “optimistic” forecast for the software market.

The company announced preliminary figures for its first quarter ending March 31, which revealed a 7% increase in overall revenue to €5.4bn (on an IFRS basis – or a 5% increase on a non-IFRS, constant currency basis).

The underlying trend was the same that it has been for some time. Strong growth in revenue from cloud services (+29%), which now account for more than 30% of total sales. In contrast, revenue from traditional licenses was down 31% to €450m. This is a natural swing as the company focuses its sales and marketing efforts on migrating its huge userbase to its cloud-based offering, but it is worth noting that in the first quarter of 2019, license sales actually rose by 4%.

But of even greater interest was SAP’s expectations of how the Covid-19 pandemic will impact its business in the coming months. The company noted that “a significant amount” of new business was postponed in March, and it has responded by slowing hiring, cutting discretionary spend and where possible, shifting sales and implementation to virtual models.

The company expects a continued slow-down through the second quarter before a “gradual” improvement in the second half of the year. For the full-year period, it has shaved approximately 5% off its forecast for cloud revenue, and 6% off its overall outlook for total software sales, with growth expectations for the two areas now standing at between 18% to 24% (cloud) and between 1% to 4% (total software) respectively.

These cuts to the outlook are largely in tune with the more “optimistic” of our scenarios for growth in software investment this year, which is based on the assumption that the peak of the virus is contained and significant economic activity resumes within the current quarter.

It is interesting that SAP talks about the postponement of new projects rather than cancellations. And while this is to be taken with a pinch of salt, our recent discussions with the market suggest that businesses are not yet changing their minds about new platform choices, and that they will stick with their selection once they are in a position to release budget.

We will continue to reassess our expectations for the software and IT services market as more of the leading suppliers issue updates and guidance during the next three weeks. For full coverage of our analysis on the impact of Covid-19 on the software and IT services market, please visit our dedicated microsite.