SAN FRANCISCO --
got soaked after it warned of disappointing fourth-quarter earnings, and if one analyst is right, the news will soon get worse.
Tuesday morning, SAP said 1998 pretax profit would fall short of expectations, rising just 15%, while fourth-quarter results were pressured by a 200 million-mark software-revenue shortfall. The company attributed most of the fourth-quarter revenue shortfall to weakness in Japan and Russia.
Though SAP said 1998 revenue still rose nearly 40% from a year ago with help from strong performances in the U.S. and Europe,
Credit Suisse First Boston
analyst George Gilbert forecast more tough times for the German software giant. Gilbert wrote in a research note Tuesday that SAP cut its U.S. sales force over the holidays, adding that "what is most unusual is that SAP has been capacity-constrained in its ability to hire experienced sales reps for a long time and has suddenly found itself with too many."
"The cuts are a leading indicator of what's to come," Gilbert says. "This is going to be a tough year."
SAP didn't return calls seeking comment on the issue of layoffs. Gilbert's firm has no underwriting relationship with SAP.
"SAP reduced the number of quota-carrying sales reps in the U.S. by 60," Gilbert wrote. "An additional 30 to 40 marketing support personnel were let go as well." Gilbert believes SAP held meetings with the U.S. sales force on Monday, but the company hasn't disclosed any layoffs. SAP shares dropped 2 1/2, or 7.2%, Tuesday to close at 32 1/16. The stock dropped 1 7/16 Monday, with most of the decline coming late in the trading day after CSFB called its sales force to warn of the cuts.
in December they were considering reducing their fourth-quarter and 1999 estimates for SAP, and today's preannouncement hastened that process.
Salomon Smith Barney
analyst Neil Herman downgraded SAP a notch to outperform from buy immediately after SAP's press release. He lowered his fourth-quarter 1998 earnings estimate to 19 cents per share from 27 cents previously.
Herman noted that "although the next two quarters are likely to be challenging, we believe that the long-term fundamentals will be rewarded by withstanding the near-term negative currents."
Masters Capital Investments
fund manager Charles Haney agreed a challenge is at hand, and has avoided buying SAP stock as a result. "Everyone should be wrapped up with Y2K stuff by the end of the first quarter or end of the first half," says Haney. "So, dollars should start flowing back into other things like operations." He believes enterprise-software companies like SAP are still generally strong companies, just facing a tougher environment. But when that environment starts to ease as Y2K fears fade, they could start showing a buying opportunity again later this year.
But other analysts were skeptical that
signs of a turnaround could emerge this year for SAP. Though SAP's spokesman in Walldorf, Germany, denies aggressive price-cutting, many of its competitors here in the U.S. say SAP spent 1998 fiercely undercutting competitors like
to gain market share and "seed" the market for its upcoming products, a strategy that some analysts say clouds SAP's outlook.
"It's too early to tell what the aggressive pricing will do, but generally it's not a good thing," Gilbert says. Though aggressive discounting can offer an opportunity to sell more products in the future, it can also make customers accustomed to receiving discounts hold out for them, bringing the entire pricing structure down.
In addition to the price cuts, Gilbert also noted in December that he believed the development of new products at SAP had fallen significantly behind. That helped spur talk that SAP would make a bid for ailing supply-chain software maker
to speed up the process of getting new products to market. Manugistics said after it announced a disappointing third quarter that it was in talks to be acquired and would make an announcement this month. But Gilbert believes SAP's attempts to link up with Manugistics failed and that any link up now is unlikely. Shares of Manugistics added 4%, closing at 13 1/2. When Manugistics canceled its appearance at the
Morgan Stanley Technology Conference
this week, some investors were hoping it was a sign that a buyout was imminent.
Instead, SAP will likely reorganize and move forward alone. That, coupled with questions on how corporate spending will shape up later this year with the millennium change looming, will further keep pressure on enterprise-software companies like SAP this year. Gilbert says when SAP turns around, which he believes will eventually happen, signs will likely emerge in 2000 rather than in 1999.
But for investors long the stock, that might be too long to wait.
Frankfurt-based contributor Ned Stafford contributed to this story.