SAP Insists Q2 Earnings Dont Disappoint

The company missed analysts' expectations for software revenue growth in the quarter, but SAP holds to its guidance for the year, pointing to its SMB success and upcoming deals.

A little perspective. Thats what SAP executives tried to provide shareholders and analysts during its July 20 second-quarter and half-year 2006 earnings call.

SAP, the worlds largest business applications developer, announced June 13 that it would miss analysts expectations for software revenue growth for the second quarter.

The company, headquartered in Walldorf, Germany, said July 20 it increased software revenue 8 percent in the second quarter from the same year-ago period, to $776 million—well below analysts expectations.

Second-quarter earnings rose 43 percent to $517.5 million compared to $361.3 million for the same year-ago period, based on higher software sales in the United States.

The overall problems with license revenue, company executives said, were relatively weak performances in China and some European countries, an inability to close some big deals in the quarter, and the fact that Oracle gained more market share in the quarter than SAP.

"I would like to give a little more color on what happened in the quarter and for the first half of the year," said Leo Apotheker, president of Global Field Operations at SAP, and an executive board member. "For the half year we grew our software revenues by 14 percent, and in fact the second quarter marks the 10th consecutive quarter of double-digit growth."

Despite analysts suggestions during the earnings call that now might be a good time for SAP to revise its earnings expectations downwards, SAP reiterated that it maintains its initial guidance for the year: full-year product revenue increases of between 13 and 15 percent, based on expectations for full-year software growth in the range of 15 to 17 percent over the previous year.

Apotheker said the company remains confident in its guidance based on the fact that order entry—a good indicator of future software license revenue—grew much faster than recognized software revenue.

"Some deals will be recognized over a couple of years, and indeed, some transactions we hoped to close by the end of June will now close the second half of the year," Apotheker said. "The good news is we lost none. We have continued a very good win rate against our competitor [Oracle]—a very high win rate—and we have every intention of keeping it that way."

/zimages/4/28571.gifClick here to read more about SAPs competition with Oracle for market share.

SAP said its customer base continues to grow. It added 3,500 enterprise customers globally during the quarter. In the midmarket—an area SAP plans to focus heavily on in the coming year, as does Oracle—the company added 3,400 customers for its All-in-One software suite, a 24 percent increase over the second quarter in 2005, and it also increased All-in-One partners by 24 percent.

SAP had great success with its Business One suite of software geared for smaller companies: It increased its customer base there by 54 percent, adding 10,800 customers for the quarter.

"In SMB [small and midsized businesses] we plan to maintain our excellence. A good 30 percent of our $3.5 billion revenue in last four quarters is in SMB," said Henning Kagermann, SAPs CEO. "Thats almost as much as the No. 2 [vendor] does globally in its entire business."

SAP added 110 customers in the quarter to its Safe Passage program, which provides license credits to Oracle customers converting to a MySAP ERP (enterprise resource planning) implementation. The company expects to announce a second version of Safe Passage in September.

The company also said its ESA (Enterprise Services Architecture) strategy is on target, and the road map will be completed on time in 2007.

/zimages/4/28571.gifSAP fights off Oracle in the CRM (customer relationship management) market. Read more here.

Kagermann said he measures ESAs acceptance in the market in four categories: how NetWeaver is selling, MySAP adoption, co-innovation and partner relationships.

Roughly 20 percent of NetWeaver sales are based on stand-alone implementations—its been installed between 8,000 and 9,000 times as a platform—and the rest are sales as integrated components.

To date, SAP has about 4,600 MySAP 2004 and MySAP 2005 customers combined (it expects nearly a full migration of its 35,000 customers by 2010 or sooner). Five hundred enterprise services are will be available in the third quarter of 2006, and Kagermann said he believes the company can deliver 1,000 by the end of the year.

Kagermann gave a nod to SAPs co-development work with Microsoft on Duet, and with IBM on its Accelerator for BI (business intelligence) that will be shipped in the second half of 2006.

The company has about 1,200 system integration partners.

Overall SAP remains bullish on the future—for SAP and for the technology sector in general.

"What I personally see quite a lot is that growth is definitely back on the agenda," Apotheker said. "But in order to achieve that growth, [companies] need to look at their business model for innovation—at least process innovation. And thats where we engage in conversation."

/zimages/4/28571.gifCheck out eWEEK.coms for the latest news, reviews and analysis about productivity and business solutions.