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SAP Looks Strong

Posted on Tuesday, Aug 5th 2008

SAP released their second quarter earnings last Tuesday. The company’s revenue surged 18%, beating Wall Street expectations and causing the stock to close up nearly 10%. Since the results were released, the stock has been trading in the same price band, which is near its seven-month high. The stock closed at $57.86 yesterday, just two dollars short of its 52-week high.

sap chart

Second quarter US GAAP software and software related services revenue was €2.06 billion, a 21% increase over the second quarter of 2007. Total revenue was €2.86 billion, up 18% from €2.4 billion a year ago. SAP reported second quarter net income of €408 million, down from €449 million a year ago. Software sales were up 25% to €898 million from €716 million a year ago.

SAP is in an ongoing legal battle with Oracle, its biggest competitor, over TomorrowNow, one of SAP’s subsidiaries. Oracle alleges that SAP was aware of TomorrowNow’s illegal strategies to get Oracle’s confidential information when SAP acquired it in 2005. SAP is disappointed with TomorrowNow’s performance and plans to close it by October.

Although net income was down 9% from a year ago, revenue surged and the company predicts it will touch the higher end of its 2008 revenue targets with growth of 24-27% for software and software related services. The company also aims to meet the upper end of its operating margin forecast of an increase to 28.5-29% this year. CEO Henning Kagermann told CNBC he was confident SAP could surpass its target of 100,000 customers by 2010.

The company reported its market share was 33.7% for the last rolling four quarters, up 7.7% for the corresponding period in 2007. Operating margins in the quarter were 20.7%, down from 24% in the second quarter last year. SAP reported its second quarter earnings were hit by a €25 million euro expense to settle litigation and onetime costs to integrate the Business Objects acquisition.

As I had previously mentioned, Citrix could be an acquisition target for SAP, thereby giving the German company a chance to gain a foothold in the collaboration market space, which is fast filling up with giants like Cisco and Microsoft. I am surprised that SAP has not outlined a collaboration strategy yet. In the meantime, a number of smaller players have cropped up, some of which may also be acquisition targets.

SAP’s excellent results are also due to strength in many emerging markets. Strongest growth was seen in the APJ region, especially China and India, which reported high double-digit growth rates. Software and software-related service revenues in the region grew 40% overall, with Japan showing the most disappointing results from all the regions.

In the Americas Q2 performance was very good. Non-GAAP software and software related service revenues increased 37% at constant currencies, with US revenues increasing 39%. Some of the important contracts in this region were H.J. Heinz, Hallmark Cards and Smurfit-Stone Container Corporation. Latin America also boasted strong results this quarter. In EMEA, non-GAAP software and software-related service revenues increased 27% with Germany increasing 11%. Key contracts here were Brenntag Holding GmbH, Micksi Gas Spa and Dansk Supermarked A/S. Other strong areas were the UK, the Nordics and Italy.

It is interesting that SAP is not at all affected by the recessionary climate!

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