JMP Analyst On SAP Soft Pre-Announcement: There Could Be More, Watch Oracle

JMP analyst Patrick Walravens said the soft preliminary first quarter results from SAP SE (ADR) SAP could have negative lateral implications for other large-cap technology companies such as Oracle Corporation ORCL, whose fiscal quarter ends May 31, 2016. The analyst noted that SAP reported revenue growth of 5 percent to €4.73 billion, but below the consensus of €4.82 billion, and non-IFRS EPS rose 9 percent to €0.64, below the consensus of €0.69. But, the company maintained its full-year 2016 outlook. According to the company press release, SAP expects full year 2016 non-IFRS cloud subscriptions and support revenue to be in a range of €2.95 billion – €3.05 billion at constant currencies (2015: €2.30 billion). The business software maker expects full year 2016 non-IFRS cloud and software revenue to increase by 6 – 8 percent at constant currencies (2015: €17.23 billion). The company expects full-year 2016 non-IFRS operating profit to be in a range of €6.4 billion – €6.7 billion at constant currencies (2015: €6.35 billion). "The company had a solid software revenue performance in EMEA and APJ. Continuing political and macroeconomic instability in Latin America, in particular in Brazil, weighed on first quarter performance. North America, coming off a very strong fourth quarter in 2015, had a slower than anticipated start to the year. SAP's pipeline remains strong across all regions," SAP said in a statement. http://news.sap.com/sap-announces-preliminary-first-quarter-2016-results/ "Our recent checks with industry sources suggest that SAP might not be alone in having a soft first quarter," Walravens wrote in a note to clients. He continued: "For example, we recently spoke with the head of services for a private software company. He told us, "Yeah, Q1 looked soft. Big deals are a lot farther apart. They take forever." "In particular, this leader indicated that sales cycles with large customers have gone from 6-10 weeks to 6-10 months. He further stated, "Funding cycles take a lot longer. People are making sure the numbers are there. The business case is much more important. It's like people are paralyzed," Walvarens noted. The analyst elaborated: "However, this individual suggested that the slowdown is not permanent, saying, "No, I don't see that. We are kind of through the trough of the S curve." Walravens added: "We also recently heard from the COO of a private IT solutions provider. He commented, "It's soft. End of the year is usually back-end loaded and we didn't have that. Typically, [that means] it usually falls into next year. That didn't happen [either]." This executive also suggested that his company's first quarter revenue would be down 30% y/y, well below his initial expectation of 0% y/y. This industry source also suggested, "Hardware's not doing so great – it's in decline. Huge refresh last year." Finally, the analyst attended the DocuSign Momentum conference in San Francisco last week and asked two of DocuSign's partners about whether they saw any softness in the first quarter. The analyst noted that a salesperson at a private software company that offers recruiting and applicant tracking systems responded, "Yep, we saw a little bit of a slowdown in the first quarter, but it wasn't quite as bad as everyone's been saying." But, Kevin Buttigieg of MKM Partners said that though SAP's miss raises concerns, it is mostly company specific. "SAP's negative 1Q16 pre-announcement, announced on Friday after the close, will likely raise concerns across the software sector given SAP's size and magnitude of its miss, but we believe the causes of the miss were likely mostly company specific. SAP said Software License revenues would be 610mn Euros, a sizable miss versus consensus of 672mn, and attributed the miss to its own execution," Buttigieg wrote in a note to clients. The analyst noted that SAP's license performance has largely bested that of Oracle, although both are undergoing cloud transitions. It is possible that ORCL's results are more representative of the SaaS transition than SAP's had been, the analyst added. "While ORCL would likely claim to be the cause of SAP's troubles, its stock is apt to come under pressure perhaps more so than others as SAP's closest peer. While Workday Inc WDAY 's stock could see pressure around demand environment concerns, it may also be seen as a beneficiary of SAP's miss, particularly given signs of more traction with its Financials product," Buttigieg said. Buttigieg likes Citrix Systems, Inc. CTXS (Buy, $93 PT) and The Ultimate Software Group, Inc. ULTI (Buy, $220 PT). He elaborated: "In the event that SAP's miss does prove more symptomatic, we continue to like Citrix as its restructuring could drive better margins and possibly better revenues as well from improved focus, and is largely independent of the macroeconomic environment. We like Ultimate Software for its consistent execution and incremental growth opportunities via its growing strategic accounts sales force." ADRs of SAP were up 0.61 percent to $77.17, while shares of Oracle rose 1.31 percent to $40.89.