People in the tech industry have said for months that the sector was less likely to suffer in the economic downturn because tech companies tend to have vast cash reserves and don't do much borrowing. But an apparent flaw in that thesis came to light Monday: Tech companies may have cash, but their customers aren't so lucky.The conventional wisdom has been that corporate tech budgets were pretty trim to begin with; businesses were reluctant to stop spending on tech because investments in software and hardware lead to increased productivity.
But the big news Monday was SAP AG's announcement that its third-quarter revenue would fall short of its earlier guidance. For much of the quarter, SAP said that it wouldn't be impacted by the current economic environment.
"But over the last two weeks the tone has shifted," says Bill McDermott, chief executive of global field operations for SAP. "Customers decided to postpone their decisions."
Mr. McDermott says it's mainly businesses with less than $500 million in revenue that have elected to postpone projects. One reason is that these businesses tend to finance large purchases, often with the tech company, says Sarah Friar, an analyst at Goldman Sachs Group Inc. Now that it is harder to resell that debt, tech companies will either have to keep the loans or stop selling to these small businesses.
Mr. McDermott says that he thinks the slow sales could just be a symptom of several weeks of turmoil and not part of a larger slowdown in tech spending. Companies like SAP are under pressure to close deals by the end of a quarter so that they can include the revenue in their earnings statements, but delaying a software purchase a few weeks doesn't matter much to the customer.
But that argument doesn't hold weight with Mark Murphy of Piper Jaffray Co. He compares the current situation to a tower made of sand where one additional grain can cause the entire structure to collapse.
In fact, SAP wasn't the only company that signaled a tougher economic climate. RightNow Technologies Inc. said that while it expected to hit its numbers for the quarter, its cash flow would be negative. The reason: "We sent the invoices, customers just didn't send us the money," says Greg Gianforte, CEO of the customer-management software maker. "It's as simple as that."
By: Ben Worthen
Wall Street Journal; October 7, 2008
