In light of recent troubles, the software giant's first-quarter earnings announcement had some investors nervous, but results were pleasing
Though German software giant SAP (SAP) hadn't given the market any sort of cautionary warning before its first-quarter earnings release on Apr. 20, investors were still nervous heading into the news. After all, SAP's 7% revenue growth last quarter came in shy of expectations, helping spark a stock sell-off from which its shares still haven't recovered (see BusinessWeek.com, 1/12/07, "SAP Sags on Slower Growth").
What's more, archrival Oracle (ORCL) posted strong quarterly numbers a month ago, with revenues up 27% and profits up 35%. That suggested the California maker of databases and business management software could be gaining ground on SAP (see BusinessWeek.com, 3/21/07, "Oracle: Beating Indigestion"). And during the first quarter, SAP was rocked by two surprises: the resignation of its boy-wonder software architect, Shai Agassi, and a blistering lawsuit from Oracle accusing the company of stealing Oracle's intellectual property.
Given the troubling times, SAP pleased the market with results on Apr. 20 that largely met analyst expectations, including a 9.9% increase in net income, to €310 million ($421 million), and 6.1% revenue growth, to €2.2 billion ($2.99 billion). The company's shares rose 2.6% in Frankfurt, to €37.16, and were up 2%, to $50.15, in midday New York trading. "SAP has delivered a robust set of numbers," said Citigroup software analyst Marc Geall in a report.
More Good Tidings
Behind the headlines, analysts saw several key trends to cheer. First, SAP's new software license sales—the strongest indicator of future revenues—rose a solid 10%. In constant currencies, the gain would have amounted to 16%, but SAP has been hit by the rising euro. Overall, support and services revenues hit €1.52 billion (nearly $2.1 billion), up 11% in constant currencies. The company claims its market share grew to 25.1% in the trailing 12-month period, vs. 24.5% last quarter.
Investors were especially relieved that SAP did so well in the "Americas" region, which includes the U.S., Canada, and Latin America. Revenues there grew 12%, or 22% in constant currencies—the fastest rate of any area. The strong showing soothed worries that SAP was losing ground to Oracle and, perhaps more important, helped counteract concerns about the strength of the U.S. market raised by IBM's (IBM) poor results announced on Apr. 18.
Hundreds of Millions in Marketing
"We're seeing a healthy environment," said SAP Chief Executive Henning Kagermann in a conference call with reporters. "Both large and midsize clients are continuing to spend." Kagermann reiterated that he is expecting growth in software and services revenues this year to be between 12% and 14% in constant currencies—the same as, or slightly more than, last year.
Still, there were some grounds for concern. SAP's operating income was slightly below expectations, at €433 million ($589 million), and operating margins were flat, at 20%. In part, that's because SAP has opted to invest between €300 million and €400 million extra in marketing to seed the market for a new on-demand software package, called A1S, that it will aim at midsize and smaller companies. Kagermann says margins would be one-half to one point higher if not for this incremental investment.
Overall, SAP's first-quarter numbers did the job they were intended to do. Analysts said the figures restored confidence in SAP's strategy and execution. Investors got a pop in the stock. And by allaying fears of a U.S. IT slowdown, SAP may have contributed to the triple-digit gain scored by the Dow Jones industrial average on Apr. 20. All in all, not a bad day for the Germans.