SAP warning sends shock waves through IT sector

SAP, the German software group, yesterday issued a profit warning that wiped 15 per cent off its market value and sent shock waves through the European information technology industry.

SAP, world leader in the supply of enterprise resource planning software that helps clients link different functions in an organisation, said pre- tax profits for the year to December had risen by about 15 per cent - half the level of growth expected by the market. SAP predicted sales growth of 20 to 25 per cent in the current year compared to hopes of up to 40 per cent.

The warning raised fears that the long-awaited downturn in demand for software and IT services has come earlier than expected. Many analysts have cautioned that a slowdown at SAP could lead investors to dump IT stocks.

However, the fallout from the warning was limited as SAP blamed the shortfall wholly on slower demand in Germany and the economic crisis in Russia. The two factors combined to wipe some DM240m (pounds 85m) off annual revenues.

SAP stressed that growth in Europe and the US, where revenues rose by 40 per cent and 50 per cent respectively, had been "extraordinarily strong".

In the UK, some stocks suffered. Shares in FI Group, the outsourcing specialist, fell 8.5p to 320p, while rival ITNET's shares dropped 7.5p to 471p. Larger computer services companies companies such as Logica and Sema were also marked down.

However, shares in UK companies specialising in implementing SAP packages, such as Diagonal and Druid, were unaffected. Banking software group Misys and Sage, the accounting software supplier, saw their shares rise.

"Obviously sentiment towards technology stocks in general will be affected by this," said Derek Brown, an analyst at BT Alex.Brown, the investment bank. "But there are no companies in the UK that are directly comparable to SAP."

The factor that most sets SAP apart from others is its dependence on revenue from software licences, which can be highly volatile. "They don't have much forward visibility," Mr Brown said. "Misys have a one-year order backlog, so they can feel pretty comfortable with analysts' forecasts."

Companies that implement SAP software will also find revenues easier to predict as contracts are often booked well in advance and can run for longer than a year. "You could turn off the tap of new sales tomorrow and the implementation revenues would keep flowing in," said one expert.

That said, many industry observers are still expecting a rapid slowdown in demand in the second half of 1999 as companies make final preparations for the millennium date change. The need to bring computer systems up to date before the end of 1999 has been one factor driving the phenomenal growth in demand for SAP's software.

"SAP is more or less a one product company, and the millennium bug is one of the main problems. The bug had a positive impact on results in 1996, 1997 and the first half of 1998. But now no one is investing in SAP software," said Jochen Klusmann, an analyst at Bank Julius Baer.

Although companies which depend on licence revenues will be hit hardest by the slowdown, other IT players will feel the effects. Shares in companies that supply IT contractors, such as MSB, have suffered in recent months because of fears demand will suddenly dry up.

With many IT stocks still trading on very high multiples of expected earnings, the question is whether investors have been sufficiently prepared for a sudden slowdown in growth towards the end of the year. A number of industry experts feel investors are overly optimistic and could suffer a few nasty shocks this year.