Over the past few years, the software industry has undergone substantial consolidation. So far, it has worked to keep margins strong.
But the strategy is not fool-proof, especially with a likely global recession on the horizon.
Well, this is now the concern of major software players like SAP (NYSE: SAP). In fact, this week the company's shares plunged 13% to $39.68 on a gloomy earnings warning.
Going into Q3, SAP forecasts software revenues to come in at a range of $2.66 billion to $2.67 billion, up about 13% over the past year. However, in July the company thought the growth rate would be 24% to 27%.
Simply put, customers are skittish – and are also having difficulties getting financing or paying on existing contracts. Even if they want software to improve productivity, there is likely not enough juice to launch new projects.
According to SAP, the fall-off hit the company in the last two weeks in September. So it's pretty tough to get a sense of how long things will last.
Something else: much of the weakness has come from mid-market customers. Keep in mind that this segment has been a key growth driver for SAP.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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