1) SAP is sending mixed messages about license revenue growth
Q3 license revenues beat expectations (19% organically) and strength was balanced across all regions (this was the first Q that all regions enjoyed double digit growth since 2000). However, SAP management guided the Street toward the lower end of FY06 license revenues.
The company reaffirmed that it expects full-year 2006 product revenues to increase in the range of 13% to 15%, compared to 2005. This growth rate is based on the company’s expectation for full-year 2006 software revenue growth in the range of 15% to 17%, compared to 2005. From today’s perspective, it appears less likely that product or software revenue will reach the upper end of the aforementioned ranges. [quotes from SeekingAlpha's SAP Q3 Conference Call Transcript]
This may be a case of SAP being overly conservative heading into the traditionally massive Q4, but if we're to take management at their word (and Henning and his team choose their words carefully), he's signaling a slowdown in license growth in Q4. To hit the low end of full-year license revenues, it would imply E1.36B in Q4; which equates to 15% YOY growth.
Yet, as Henning discussed the 2007 plan conceptually, he backed away from prior commitments about growing operating margins if the opportunity presented itself for further license revenue growth.
Johannes Ries - Cominvest
Hello, this is Johannes Ries from Cominvest. ...
...Secondly, you talked in the past about a guidance of above 30% operating margin in 2007. Is it still valid? Because you mentioned you are on track with your roadmap, therefore I think maybe you need no additional pushing on deeper next year. Could we believe that? Could you speak to this?
In terms of next year, our ambition is unchanged, that we want to improve margin -- no doubt. We will finally give a guidance as always as to the beginning of next year. The point this year is that we, let’s say have accelerated R&D, and we indicated once we are through the roadmap, that we do not need to accelerate any longer, which is true and which we want to confirm.
Seemingly at odds, but the way I read this is SAP isn't closing the door on a more aggressive growth plan in 2007, which inherently would come at some op margin expense. Alternatively, if growth wanes, the business model should have room for further opex improvement.
2) Henning took the kid gloves off versus Oracle
Oracle (ORCL) (more specifically Larry, Safra and Chuck) never pass up a chance to tout their competitive wins versus SAP. SAP, in good times and bad, has historically avoided getting into that kind of pissing contest on their quarterly conference calls. Well this quarter, perhaps sick and tired of all the "Oracle is gaining market share" declarations, Leo Apotheker gave an explicit account of the competitive head-to-head situation:
Leo Apotheker: Yes, Henning, thank you for giving me this opportunity. We looked at the claim. As you know, Oracle claimed 88 head-to-head wins against SAP. They only identified certain names of those, which we of course proceeded to analyze in detail. Let me give you the detail of that analysis.
We chose not to compete on one of these deals. Six were not competitive situations, and all occurred before Q107 of August quarter, first quarter. Twelve of them we have no record on, so I cannot comment because we did not compete. We were not in the game. Seven were not a win against us. They must have counted some other wins. Four were indeed losses for us, so they did win four against us.
Just to put things into perspective, in this quarter, we had 247 competitive head-to-head against Oracle, of which we won 209. That is an 85% win rate.
Frankly, I find these tete-a-tetes to be silly, but I understand the necessity of setting the record straight. But ultimately, knowing how the enterprise software sales cycle works, my guess is the playing field is far more balance than either side contends. For a while, SAP was just dominating Oracle (particularly in the U.S.), but that's no longer the case.
What most people have to remember is that MOST deals are competitive in that even long-standing Oracle and SAP shops habitually bring in the other vendor to "compete" when it's time for a major renewal. That's just good business, even though all parties know that a displacement is unlikely in most situations.
The rest of the conference call was standard fare. Here are a number of writeups on the quarter worth perusing if you want further detail:
Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained a long equity position in SAP but did not maintain a position (long or short) in ORCL. We also may, at times, carry derivative options on underlying positions as a hedge.
SAP 1-yr. chart