SAP CoCEO McDermott On Turning Around Mixed Q2 Results We Are Getting The Memo

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The company’s stock has taken a tumble on the news, down $2.15, or about 2.8 percent, as of 4pm ET. But SAP reaffirmed its operating profit outlook for the full year despite its slowed revenue growth for the quarter, and co-CEO Bill McDermott spoke with FORBES to explain how the company will bounce back by year’s end.

On Thursday morning’s earnings call with analysts and in its statements SAP acknowledged that its results in Asia were lackluster for the quarter. Software and cloud revenue dropped in the region by seven percent. Weakness there is also the leading reason the company’s backbone software services have taken that guidance cut. McDermott says he is confident the worst is over. China’s focus on domestic consumption, McDermott claims, put trading pressures on other key Asian markets like Japan. Such pressures were also felt by competitors like Microsoft MSFT -11.37% and Oracle ORCL -1.91%, the co-chief executive claims.
SAP Falls Short Of Estimates On Weaker Asia Demand, Reaffirms Profit Outlook Alex Konrad Alex Konrad Forbes Staff

So why wouldn’t such pressures continue to choke software sales in the region for the rest of 2013? “The pipelines are showing pent-up demand, McDermott says. “It’s our belief and expectation that purse strings will loosen. McDermott says that after meeting recently with his Asia management team, he’s confident that there is pent-up demand that will turn around this year as the ‘China Effect’ stops slowing regional markets. “The pipeline is the healthiest I have seen it [this year], he insists.

Another  much-discussed outside force in SAP’s earnings outlook with analysts Thursday morning was what a competitor, Larry Ellison‘s Oracle, is doing to fight SAP HANA, SAP’s in-memory data platform. Oracle’s got several databases in the pipeline, the second of which is expected to more directly compete. On the morning call, SAP leadership scorned Oracle’s announcement strategy. Was that a sign of defensiveness? McDermott says his company is just trying to “set the record straight.

“Oracle spends a lot of time creating uncertainty and doubt for vendors, McDermott told me. He then proceeded to try to spread some of that same perceived negativity back at Oracle. “Let’s set the record straight on the cloud. They outsourced their [customer relationship management] to Salesforce and outsourced small business to NetSuite, McDermott said, point to Oracle’s recent single-digit software revenue growth.

HANA is McDermott’s main source of pride, the “architect of the future for SAP. The company reported that HANA contributed $134 million in revenue this quarter, up 21% year-to-year.

On SAP’s recent acquisitions, McDermott believes that recent pick-up Hybris will expand its CRM offering and defended the cost of its SuccessFactors and Ariba acquisitions, both of which cost several billion dollars. “Our acquisitions have performed at a rate greater than the initial business case by which we acquired each company, McDermott says. “People can say SAP may not have gotten the greatest price on a property, but they don’t say that we didn’t buy the best.

Still, SAP’s chief acknowledged that today investors are dubious that the company has “turned the corner in Asia as he insists and can pick up enough growth in those units and through the rollout of its SAP Fiori app system. The company is one in transition since its 2010 overhaul to redefine itself as a cloud company.

Being at an industry “inflection point, as McDermott claims, may not be a place that makes investors comfortable. The stock has taken a hit, and now SAP has to accelerate its momentum to meet guidance. As one reader commented this morning, that could put a lot of pressure on the company’s highest-flying programs like HANA and Hybris.

In the meantime, it’s co-chief is confident the stock will bounce back.

“We are very confident in our position, McDermott says. “We see the market responding in a way we expected until they digest. The clock is now ticking to produce revenue growth figures for its software unit with a little more meat.

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