- Unlike consumer tech spending, which remains pretty strong nearly across the board, business tech spending trends remain pretty mixed, with cloud-related spending often looking better than on-premise spending.
- COVID-19-related macro risks haven't gone away, even if the risks are a lot more pronounced for enterprise spending within certain industries/verticals than within others.
SAP's Downbeat Guidance
SAP, which ended Monday down 23% post-earnings, missed Q3 revenue estimates and issued full-year guidance that implies downbeat Q4 expectations.
After respectively missing its Q3 cloud revenue and total revenue estimates by €150 million and €300 million, SAP respectively took down the midpoints of its constant currency-based, full-year, cloud revenue and total revenue guidance by €400 million and €650 million.
The midpoint of SAP's new 2020 constant-currency revenue guidance (€27.5 billion) is actually slightly below reported 2019 revenue of €27.63 billion. With the dollar weakening against the euro in recent months, SAP's 2020 outlook isn't quite as bad when translated into dollars, but it's still a far cry from what bulls were hoping for.
Also: SAP, which in April 2019 set a goal of generating more than €35 billion in revenue in 2023, now says it expects "muted" revenue growth over the next two years, followed by "accelerated" growth in the following years.
SAP partly blames its expected top-line headwinds -- both for Q4 and later periods -- on accelerated cloud adoption, which it expects to heavily weigh on traditional software license revenue. SAP's license revenue (it drives future, high-margin, license support revenue) fell 19% annually in constant currency (CC) in Q3 and is expected to "continue to trend lower" in the coming years.
SAP also blames COVID-19's impact on "hard-hit industries," with CEO Christian Klein stating on the earnings call that SAP has "seen significant investment delays" among firms in such industries for on-premise IT projects (i.e., projects involving traditional SAP software licenses). CFO Luka Micic added that COVID-19 case spikes in some regions have weighed on demand.
Finally, though some of SAP's cloud app businesses still appear to be doing well, its Concur travel/expense software business and to a lesser extent its Ariba procurement software business are struggling. COVID-related macro pressures are headwinds here (needless to say, corporate travel is down a lot right now), as is the fact that much of Concur and Ariba's revenue is transaction-based rather than subscription-based.
Mixed IT Spending Trends
Last Thursday, Intel reported that its server CPU division's enterprise and government-related sales were down 47% annually, and also forecast enterprise/government-related sales would be weak in Q4. Though this decline is partly the result of inventory corrections among enterprise server OEMs following heavy first-half buying, Intel also made it clear that end-customer demand was soft.
Three days earlier, IBM reported (in addition to ongoing pressures for various on-premise software and IT services businesses) a 15% annual sales drop for its Systems (hardware plus OS software) unit, with revenue of $1.26 billion missing consensus by nearly $300 million. Weaker-than-expected mainframe revenue (it was down 20%) appears to have been the biggest culprit.
At the same time, it's worth keeping in mind that top-line disclosures from enterprise tech firms in recent weeks haven't by any means been uniformly negative.
Three software firms -- Alteryx (AYX) , Twilio (TWLO) and Model N (MODN) -- have hiked their Q3 revenue guidance, with Twilio also issuing above-consensus Q4 guidance on Monday afternoon. And while Citrix Systems (CTXS) and Manhattan Associates (MANH) both sold off post-earnings, they both topped Q3 estimates and issued above-consensus near-term guidance (admittedly, Manhattan's 2021 guidance was a little light, with the company forecasting the second half of 2021 will be stronger for it than the first half).
In addition, a number of upbeat analyst notes regarding cloud-related spending have been shared over the last couple of weeks. On Sunday, Mizuho's James Lee reported (following a call with a contact at a major IT consulting firm) that many enterprises are looking to shorten their cloud migration cycles to 2-to-3 years from 3-to-5 years, and that "late adopter" industries such as insurance and healthcare have shown greater interest in cloud migrations post-COVID. He sees Amazon.com (AMZN) , which will be sharing its Q3 AWS revenue and much else on Thursday, as the largest beneficiary of this trend.
The Big Picture
Against such a backdrop, SAP's Q3 revenue miss and soft guidance should be seen more as a negative sign for certain types of enterprise IT deals, rather than for IT spending in general. Specifically, large on-premise software projects and transactional software spending tied to areas where companies are spending less right now.
But with that said, considering how high valuations generally are for many of the enterprise tech firms that have been doing well in the current environment, and how harshly markets are punishing the ones that fall short of expectations, investors in cloud software pure-plays still shouldn't ignore what SAP said about demand from companies within struggling industries. Such companies are also prone to reducing or delaying cloud-related purchases, if they don't view a particular cloud purchase as mission-critical.