SAP McDermott Sees Choppy Public Spending in U.S., China

SAP AG, the largest maker of business-management software, projected a difficult market for its government business amid cuts in U.S. federal spending and China’s transition to a new leadership.

“It’s going to be choppy out there in the public sector,” co-Chief Executive Officer Bill McDermott said in a telephone interview today. “Chinese purchasing patterns have definitely slowed down.”

The U.S. Congress and President Barack Obama are at loggerheads over how to replace the across-the-board federal spending cuts, called sequestration, which kicked in earlier this year and aimed at lower deficits. Meanwhile China’s first-quarter economic growth slowed and trailed estimates in a challenge to new Premier Li Keqiang.

Standard & Poor’s downgraded SAP today to hold from buy after the Walldorf, Germany-based company posted first-quarter software sales and operating profit trailing analysts’ estimates following a failure to close contracts in the Asia-Pacific region. Public-sector revenue is important for SAP, spokesman Daniel Reinhardt said, declining to specify how much of the company’s sales it accounts for.

Sales of new software licenses, an indicator of future revenue, rose 3 percent to 657 million euros ($860 million). That was slower than the 9 percent growth in the previous quarter and missed the 726 million-euro median of estimates compiled by Bloomberg. Operating profit adjusted for some items rose 8 percent to 901 million euros, also missing estimates.

SAP fell the most since Jan. 15, dropping as much as 4.3 percent to 57.05 euros and traded at 57.45 euros as of 4:55 p.m. in Frankfurt. The stock has gained 16 percent in the past 12 months, valuing the company at 70.6 billion euros.

‘Notch Better’

Standard & Poor’s cut its 12-month target price to 65 euros, analyst James Crawshaw wrote in an e-mailed statement from the credit-rating company.

SAP joins other software makers in reporting slowing traditional license sales. Oracle Corp. on March 20 reported revenue and profit that fell short of analysts’ estimates as demand for Web-based programs hurt sales of its hardware and on-premise software. SAP took market share from Oracle in cloud and database software during the quarter, McDermott said.

“Still a notch better than Oracle’s straight miss and negative newsflow from other IT bellwethers,” Thomas Becker, an analyst at Commerzbank AG in Frankfurt, said in a note. “Not a great quarter either, but Q1 is always the smallest quarter and does not establish a trend.”

Leadership Transitions

Sales in the Asia-Pacific and Japan region were hurt by SAP’s leadership transitions China, India and Southeast Asia but will be “back on track” in the second quarter, McDermott said. The co-CEO said he has “a lot of confidence” in Stephen Watts, who has overseen operations there since 2010.

A year ago, SAP’s North America chief Robert Courteau stepped down after 15 months in the job as the company reported falling sales in the region.

Software and cloud subscription revenue in the Asia-Pacific region fell 10 percent in the quarter. The region, which includes China, is growing in importance for SAP, accounting for 16 percent of sales last year. The U.S. is SAP’s single biggest national market, producing 28 percent of its 2012 revenue.

Asia still poses the “biggest growth opportunity” among all of SAP’s regions, co-CEO Jim Hagemann Snabe said in a Bloomberg TV interview.

Cloud Business

The global market for enterprise software will grow 6.4 percent this year and 6.7 percent in 2014 to reach $316 billion, researcher Gartner Inc. said last month. SAP has a target to increase revenue beyond 20 billion euros by 2015, compared with 16.2 billion euros last year.

McDermott confirmed SAP’s 2013 forecast and said the company plans to provide an updated long-term forecast early next year.

The company’s cloud business is starting to make up for slowing on-premise growth. Including Web-based software, SAP grew 25 percent in the latest quarter, excluding currency swings, compared with a 2 percent decline at Oracle, Snabe said.

SAP also won contracts against Inc. and Workday Inc. in the Americas, Snabe said. The co-CEO said he’s not concerned about customers simply replacing SAP’s more profitable on-premise products with cloud versions.

Quicker Suite

This year, SAP began selling a faster version of its mainstay applications suite, hoping to gain a better foothold in the database market with its rapid Hana technology. The release will start to boost Hana sales, which tripled to 86 million euros in the quarter, toward the end of the year, Snabe said.

Snabe and McDermott are trying to assure investors SAP will continue to grow faster than the market after missing its profit forecast last year as it hired thousands of programmers and salespeople. The executives have resisted calls to acquire hardware manufacturers, choosing instead to go after makers of on-demand software and programs for mobile devices.

SAP will use its presence in New York’s Hudson Yards development to show its commitment to the U.S. and showcase its software, which will be used throughout the compound, McDermott said. The company has no intentions to relocate to New York from Germany and will also maintain its presence in Newtown Square, Pennsylvania, he said.

“This is not about moving the headquarters,” McDermott said. “It’s about getting in touch with the global economy.”

Before it's here, it's on the Bloomberg Terminal.