Enterprise Software Outlook: Parsing the Earnings Calls

Includes: BMC, BOBJ, ORCL, SAP
by: William Trent, CFA

With the much anticipated consumer slowdown now looking more likely it is becoming increasingly important for business to take up the spending slack. As I have mentioned before, that hasn't been happening. Still, the GDP numbers are backward-looking by quite a bit so I thought I would take a quick look at what the enterprise software vendors are seeing in terms of pipeline.

Oracle (NASDAQ:ORCL) says things are great.

Heather Bellini - UBS

Well, I just was wondering if you could comment on the pipeline this Q1 versus last Q1, given how well you outperformed last year?

Safra Catz

It's significantly higher. I mean it's really...

Heather Bellini - UBS

And that does mean Agile, right?

Safra Catz

No, no. And, in fact Agile shareholder vote will be in the middle of July, and none of this guidance includes Agile at all. So, assuming that we closed, let's say sometime at the end of July, assuming a favorable shareholder vote which I do. It should be little bit higher, but Agile is a pretty small company compared to us. So, I think that the reality is the pipelines look extremely good. We took a brush through them and assumed lower closing rates than we usually use, and we still came up with this guidance.

(Excerpt from full ORCL conference call transcript)

BMC Software (NASDAQ:BMC) is a little more circumspect.

Robert E. Beauchamp

We feel good about the pipeline in general for the rest of the year but the big deal pipeline is not as strong as say, for instance, last year’s pipeline in the second half. We had a really strong second half last year. This year, as we guided 90 days ago and again today, the first half of this year is a little stronger on a relative basis. So we are looking for a solid second half but not as many whales floating around out there in the second half of this year. That’s included in the guidance. There’s no change there. There’s nothing -- there’s no new news there. That was in the guidance we gave when we set guidance originally.

(Excerpt from full BMC conference call transcript)

Business Objects (BOBJ) is reporting a good pipeline for its XI product upgrade cycle.

Adam Wood - Exane BNP Paribas

I just had two questions. The first one is on the services and gross margins. Obviously, a great performance there in terms of the improvement. Can you just help us to understand which side that comes from? We’ve seen it's more on the actual [professional services business? And whether that type of margin profile is sustainable, going forward?

And then really just following up on a couple of your comments and a couple of your other questions, talking about the 65% of the installed base is now either migrating to or are on XI. I think from what we’ve heard from you in the past suggests that the percentage is higher in the Americas, and maybe even we're getting to the stage when most of the installed base are either through or in that process. What should we expect from the Americas going forward? Should we maybe expect that geography to slow slightly as that upgrade matures? Or should we expect maintenance or even acceleration as they start to search and buy new products?

John Schwarz - Chief Executive Officer

Well that’s quite a breadth of questions. So let me start with the second part and I’ll ask you to restate the first one when I finish. Clearly, the migration process is moving along very well. We reported being around 50% of the population kind of in the process of migration in the last quarter. We’re running at 65% or better now. And if you look at the pipeline and the customers’ intention to buy and to migrate, it is a chock full off people who are lining up to execute.

(Excerpt from full BOBJ conference call transcript)

And SAP says things are looking good.

The Americas came in with the eighteenth consecutive quarter of double-digit growth, which is quite a performance in itself. By the way, just to give you an indication and to give you a sense of the metrics, the U.S. has basically doubled over the last three years.

We continue to gain share against the competition in all of The Americas' markets, including the U.S. We have the highest customer satisfaction in the Group. In fact, in The Americas, it's an all-time high. And we see very strong performance in Latin America, in Canada, good SME performance across the board including in the U.S. And, therefore, this explains how we got to strong double-digit growth in The Americas.

If I look at EMEA, as you have seen already, very strong quarter, 17% in Software and Software-related Services. It was a balanced performance across the entire Continent. We had very strong performance in Russia, very strong performance here in the U.K., good performance in France, good performance in The Nordics and Germany came in single digit as predicted, and 7% is okay.

We see good overall economic environment. That helps, of course, the business as well. And in fact, what we do see is quite a lot of pent-up demand here in Europe. Many European companies are now trying to catch up when it comes to IT spending to what North American companies have done a few years ago. And in particular, that is noticeable in the small and mid-size business segment.

In Asia Pacific, extremely strong results in China and India, supporting also the strong growth in Japan. Asia Pacific Japan is clearly the growth engine for the Group in terms of growth rates. Actually, they do this in two ways; by their own organic growth, of course, but also by attracting investment from other regions into Asia Pacific Japan and, therefore, we can pull for more demand through what's happening there.

(Excerpt from full SAP conference call transcript)

So altogether I would have to say that the outlook from software management teams looks decidedly more optimistic than the recent GDP data. Whether that optimism translates into the expected sales, and whether the sales growth related to 20% of GDP can overcome a slowdown in 65% of GDP (consumer) will be the next question for Wall Street to fret over.