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SAP Signals Weakness

Posted on Thursday, May 1st 2008

Yesterday SAP AG (NYSE: SAP) reported results for a disappointing first quarter affected by the weakening dollar, the Business Objects acquisition and heavy investment in its SaaS initiative, BusinessByDesign.

It is currently trading around at $50 with a market cap of around $60 billion. It picked up well from its 52-week low of $43 on January 23. Earlier coverage is available here and here.

Chart for SAP AG (SAP)

Revenue grew 14% y-o-y but declined 24% q-o-q to €2.46 billion while net income dropped 22% y-o-y and 68% q-o-q to €242 million, missing consensus estimates of €296 million. Operating income was affected negatively by Business Objects acquisition write-down of €47 million and total acquisition-related charges of €130 million. These charges together with accelerated investments of around €40 million in the Business ByDesign solution brought down the operating margin from 20.2% in Q1 2007 to 14.6%. Its headcount increased to 51,274 from 43,861 in the last quarter with Business Objects accounting for 6,224 employees.

Segment-wise, software and software related service revenues were up 15% y-o-y to €1.74 billion. Software revenues increased 11% y-o-y to €622 million. SAP’s worldwide share of Core Enterprise Applications vendors grew to 32.6% compared to 31.9% last quarter and 28.2% last year. Its win-rate over its “largest competitor” was over 80% in the quarter.

As for share repurchases, SAP bought back 8 million shares for about €258 million and for the rest of the year, it expects to invest €250 million more in buying back shares.

Full-year 2008 Non-GAAP software and software related service revenue, excluding €180 million deferred support revenue write-down from Business Objects acquisition, is expected to grow in the range of 24% – 27% at constant currencies.

SAP is now looking at reducing its investment in SAP Business ByDesign to €100 million in 2008 from €175 million to €225 million. It will focus on just six countries (Germany, U.S., France, U.K, China, and India) this year, down from 15 countries earlier. Focusing on these high potential countries would be good enough. In any case, it is never advisable to launch a product in multiple geographies wihout first figuring out what works. It is delaying its roll-out to other countries till 2009. It expects to take a year or more to reach its 2010 target of $1 billion revenue and 10,000 customers. With this reduced investment, it has increased its full year operating margin guidance to 28.5% – 29.0%.

SAP is a robust company that has survived many downturns and market cycles, so none of this is any cause for alarm. At some point, they can also acquire SaaS companies to quicken the growth if they wish to.

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