SAP Reports Disappointing Preliminary Q4 2006 Numbers

Analysts point to lackluster U.S. currency rate rather than competition from Oracle as the culprit.

SAP AG announced late in the afternoon Jan. 11 that it will miss not only analysts consensus estimates of its fourth quarter and full year 2006 revenues—earnings per share came in above estimates—but its own estimates as well.

While the missed numbers for the quarter dont bode well for SAP in the short run, some analysts believe they might be indicative of an overall slowdown of business application sales—particularly in U.S. markets where the dollar is weak compared to the euro, and where SAP slipped two out of four quarters in 2006.

And while SAPs disappointing fourth quarter will surely give Oracle fodder to crow—Oracle spends more time in its earnings call downplaying SAP than it does talking about its own strategy—there are indications that Oracle is seeing a similar slowdown in application sales.

The overall consensus: SAPs woes seem to be more about a lackluster U.S. currency compared to the euro than about encroaching competition from Oracle. The real results, however, remain to be seen.

Charles Di Bona, an analyst with Sanford Bernstein, pointed out in a research note released Jan. 12 that Oracle, in its last earnings announcement in December, also fell short of expectations.

He wrote that excluding revenue from its acquisitions of Siebel and Retek, Oracles applications business grew only 1.9 percent year-over-year in the November 2006 quarter.

"If we include Siebel on a pro forma basis with Oracles historical results, the decline would have been even sharper—14.6 percent year-over-year, despite a strong benefit from currency."

SAPs full-year 2006 product revenues are expected to increase about 13 percent at constant currencies to $8.58 billion, compared to $7.70 billion for the full-year 2005.

The company had targeted 15 to 17 percent growth. License sales for the quarter—a key indicator of future service and maintenance revenues—are about $1.63 billion, missing the lowest analyst forecasts for the quarter of $1.74 billion.

While software revenues in EMEA performed about as expected for the fourth quarter, logging about 13 percent growth, software revenues in the Americas came in flat.

In the U.S. particularly, SAP had predicted about 15 percent growth rate for the quarter; its reporting an actual growth rate of 4 percent.

SAP expects to report full-year 2006 earnings per share of at least $2.05 per share, above consensus of $1.95. Fourth-quarter EPS are expected to be $1.96 per share, beating consensus of $1.91 per share.

Goldman Sachs, in a research note released Jan. 12, removed SAP from its Americas Investment Buy List, based on SAPs negative fourth-quarter license revenue pre-announcement.

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"While EMEA was a bit better than expected, the US business (which has been a primary growth driver during the last several years) grew more slowly in Q4, with constant currency licenses growth of 15 percent, below our 21 percent estimate," wrote Rich Sherlund, an analyst with Goldman Sachs, in New York.

"The U.S. business has now been a bit slower than expected for two of the past four quarters, implying that the premium valuation for SAP will likely come down."

Sanford Bernsteins Di Bona similarly pointed the finger to currency issues as the culprit behind SAPs U.S. woes.

"EMEA performed well in the quarter, while the Americas, including the U.S., saw slowing growth as constant currency weakness was exacerbated by negative currency effects."

Di Bona said Sanford Bernstein is revisiting its Q4-06 estimates to reflect SAPs preannouncement, and trimming its full-year 2007 estimates "to reflect the possibility of a more sustained slowdown in Americas software sales overall."

Despite the second miss by SAP, both Sherlund and Di Bona maintain a positive outlook on the company.

"We believe SAP remains well-positioned to benefit from its emerging service oriented architecture platform and new products," wrote Sherlund.

"The U.S. constant currency license growth of 15 percent, while below expectations, remains healthy, and we continue to view SAP favorably as a growth vehicle."

SAP will report its full guidance for the fourth quarter and year on Jan. 24.

Sherlund said Goldman Sachs will look for further details on why the U.S. business has fallen short for the second time.

"Our presumption is that this is largely the law of large numbers as the base of business has grown in the U.S., and, to a lesser degree, perhaps some greater pricing pressure from Oracle, but we do not believe the competitive landscape has changed that radically."

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