Sunday, April 22, 2007

SAP's Profit Just Misses Views, As Firm Says Market Share Rose

J. Bonasia Fri Apr 20, 7:00 PM ET

Overshadowed of late by some huge acquisitions by archrival Oracle, business software leader SAP on Friday reminded the marketplace that it remains a force.

SAP (NYSE:SAP - News) said earnings, minus one-time charges, rose 9.9% to 310 million euros ($421 million) from 282 million euros in the year-ago quarter. Analysts were expecting 309 million euros.

Per-share profit rose to 0.26 euros (35 cents) from 0.23 euros. U.S. figures use Friday's conversion rates.

It said revenue rose 6% to 2.17 billion euros ($2.99 billion) from 2.04 billion euros, a bit above views.

SAP's American depositary receipts rose 2.5% Friday to a three-month high of 50.39.

"It was a very good start into 2007," SAP Chief Executive Henning Kagermann said in an interview Friday from Walldorf, Germany. "All regions performed well."

SAP said its share of the business applications software market, which it said totaled $34.8 billion in 2006, rose to 25.1% over the past four quarters, from 24.5%.

The German software maker is locked in a pitched battle to sustain market leadership over Oracle (NasdaqGS:ORCL - News). Since January 2005, Oracle has spent more than $20 billion on acquisitions to expand its line of applications software.

For the quarter, SAP said it boosted its total software license revenue -- a key indicator of future growth -- by 10%, to 563 million euros ($766 million).

But Oracle reported license growth of 16% in its quarter ended Feb. 28. It's hard for investors to assess which company actually is taking share from the other, says Brendan Barnicle, a Pacific Crest Securities analyst.

"That's how this debate goes, on and on," said Barnicle, who rates SAP as sector perform, or neutral.

The rivalry took another turn last month, when Oracle filed suit charging that an SAP unit had committed corporate fraud by downloading software and other files from Oracle servers without authorization. SAP has denied any wrongdoing.

SAP said license revenue for North America rose 11% to 249 million euros ($338.6 million).

"This quarter highlights continued strength for SAP in the U.S.," said Ross MacMillan, an analyst with Jefferies & Co. "The question is: What is the sustainability of that strength?"

In a conference call with analysts, SAP Deputy Chief Executive Leo Apotheker said he "didn't see any material change" in the U.S. spending environment. "It was as expected -- not better, not worse," he said. "And we have no reason to believe that that will change."

Last week, IBM, EMC and Seagate all said U.S. tech spending was a bit soft.

Management also reaffirmed its plan to invest 300 million to 400 million euros ($408 million to $544 million) over the next two years to boost sales to midsize companies. SAP has launched a big ad campaign in North America targeting the midmarket.

SAP is investing to build a team for sales and support to serve this market. It's also spending on data centers to host new on-demand software for customers. "The revenue will come later, but we have to pay the cost at the beginning," Kagermann said.

Those investments should shave one or two percentage points off SAP's operating profit margin this year, says Laura Lederman, a William Blair & Co. analyst.

"It is unclear at this point 14 time if SAP's middle-market efforts will be successful," Lederman wrote in a note to investors. She rates the stock as market perform, or neutral.

Some fear midsize companies will need more technical support from SAP than large enterprises. "Serving the midmarket is a dramatically different business," he said.

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