SAP Software: No Global Upturn Yet

Corporate IT chiefs don't seem to have gotten the memo that a global rebound is under way. German software maker SAP (SAP), a technology bellwether, disappointed investors with worse-than-expected third-quarter sales and earnings on Oct. 28, blaming companies in Asia and other regions that remain reluctant to spend on IT. "Businesses are still very cautious in making major investments," SAP CEO Léo Apotheker told reporters on a conference call.

As the world's largest maker of software that businesses use to automate internal operations such as purchasing, distribution, and payroll, SAP's results always say a lot about the state of the global market for corporate technology and related services. The message wasn't very encouraging: The company reported sales fell 9%, to $3.7 billion, from a year earlier, more than analysts expected, led by big declines in key markets such as Germany and Japan.

The news wasn't all bad. SAP also reported a 12% increase in net profit, to $641 million, as the Walldorf-based company cut spending on marketing and administration and improved its operating margins by two percentage points compared with a year earlier. The company also benefited from a lower tax rate. In a sign SAP execs don't expect further decline, they said they're not planning any more job cuts.

Investor Hopes Dashed However, investors focused on sagging sales. SAP shares plunged 7.7% in Frankfurt trading and were down 9% in New York by early afternoon, in part because investors had hoped SAP would issue a more optimistic forecast for the rest of the year. Instead, the company warned of slightly worse revenues for 2009 as a whole—down 6% to 8%, vs. an earlier prediction of 4% to 6%—and stuck to a previous outlook that operating margins will be north of 25%. "The set of figures all in all is disappointing," Michael Bahlmann, senior analyst at bank M.M. Warburg, said in a note to investors.

The SAP figures were also a letdown for those who hoped for signs of a broad upturn in the financial performance of European companies. Carmaker Daimler (DAI) reported on Oct. 27 that it returned to profit in the third quarter and expects to be profitable in the fourth quarter, as well. Dutch beermaker Heineken (HEIN.AS) on Oct. 28 raised its profit forecast for 2009 to more than 10% of sales, as higher prices offset declines in volume sales.

But other companies such as Deutsche Bank (DB), and now SAP, have disappointed investors. "We always said 2009 would be a tough year," Apotheker said. While the market for SAP's software and services has stabilized, he said, a recovery in sales is still weak, especially in Japan and emerging markets.

Business ByDesign The downturn comes as SAP is struggling to sell more services in addition to its traditional software business. Its Business ByDesign product, for example, is supposed to allow customers to have access to SAP software via the Internet, freeing them from having to own and operate their own banks of high-powered computers.

SAP didn't release separate figures for Business ByDesign but seems to be having trouble ramping up the service. Stefan Ried, senior analyst at Forrester Research (FORR), estimates that SAP has restricted Business ByDesign to fewer than 100 customers because it can't yet provide the necessary data centers. "SAP has built a strategy around software-as-a-service but has not monetized that so far," Ried says.

"We remain on track with our rollout" of Business ByDesign, Apotheker said.

He rejected suggestions that archrival Oracle (ORCL) has been able to exploit the downturn to gain market share vs. SAP. The U.S. company has spent $30 billion in the past half-decade acquiring almost 60 companies, including PeopleSoft and Siebel Systems. But Oracle has struggled to integrate the acquisitions into a new platform known as Fusion, which CEO Larry Ellison recently confirmed will be available in 2010.

"You're going to have put on your glasses to see Oracle in the rearview mirror," Apotheker said. "I don't think anything has changed."

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