SAP Needs To Make Some Significant Moves

On October 28, (NYSE:SAP) SAP, the enterprise software leader with annual revenue of €11.57 billion ($16.3 billion), reported a mixed third quarter and disappointing outlook as it faced “a particularly challenging environment in the emerging markets and Japan.” Let’s take a closer look.

Q3 revenue was down 9% to €2.51 billion or $3.7 billion. Net income increased 12% to €435 million ($641 million) or €0.37 per share as SAP cut expenses and increased its operating margin from 22.2% in 2008 to 24.2%. Analysts expected earnings of €0.35 per share on revenue of €2.47 billion. Q2 analysis is available here.

Non-GAAP operating expenses decreased 12% to €1.83 billion. This includes restructuring charges of €21 million related to the company’s previously announced reduction of positions, which for the nine months totalled €186 million. At the end of the third quarter, headcount was 47,804 full-time employees (FTEs), down 3,732 over last year. SAP now expects headcount to be round 48,000 FTEs by the end of 2009, which is slightly lower than its original projection of 48,500 FTEs.

Software revenue which generates future revenue from maintenance and consulting services fell 31% to €525 million, below analyst expectations of €570 million. Software and software-related service revenues were down 3% to €1.94 billion. Recurring revenue stream accounted for 56% of total revenue.

During the earnings call, SAP said that “while the environment has stabilized, we are still up against some difficult challenges created by the global economy recession that’s hindered our results for the quarter. This was especially hard in Japan and in some of the emerging markets.” However CEO Leo Apotheker said that in emerging markets such as China, India, Brazil and others, “We actually feel that there are the first trends emerging for a return to a better situation.”

In EMEA, non-GAAP software and software related services revenues declined 1% with Germany down 13% mostly due to a tough comparison from Q3 last year. Excluding Germany, software and software related services revenue grew by 6%, driven by strong performances in Southeast Europe, the Mideast and Iberia.

In the Americas, non-GAAP software and software-related services were down 7% and in the United States down 9%. In Asia Pacific-Japan (APJ), Japan non-GAAP software and software-related services revenues were down 12%. Despite good performances in Korea and Australia, the overall performance in APJ was negatively impacted by a 25% decline in Japan’s software and software-related services. The decline in Japan was mainly due to a change in government that resulted in investment policy reviews across the public and private sector, a rising yen, falling exports and low consumer, and enterprise confidence.

For the second time this year, SAP cut its sales forecast. It said that 2009 non-GAAP software and software related revenue will decline 6% to 8%. In July, the company had raised its forecast to a 4% to 6% decline. It continues to expect full-year 2009 non-GAAP operating margin to be in the range of 25.5% to 27.0%.

SAP ended the quarter with liquidity of €3 billion; bank liabilities were €2.1 billion and net liquidity was €920 million. The company had earlier said that it would be ready to spend $7 billion on acquisitions. It has already made some small strategic acquisitions in the year, including on-demand solutions providers Clear Standards and SkyData. Apotheker that “SAP is looking at the entire market and plans acquisitions that fit into our strategy and deliver value to customers, large and small.” The last major acquisition that SAP made was its $6.8 billion acquisition of Business Objects in 2007.

I earlier discussed my take on the possibility of SAP’s takeover of Salesforce.com. With a market cap of $5 billion and annual revenue of $1.1 billion, Salesforce is an interesting possibility for SAP to consider, and Marc Benioff may embrace SAP in a “the enemy of my enemy is my friend” mode. But within SaaS there are many other options, including Citrix and NetSuite .

SAP is currently trading around $45 with market cap of about $53 billion after hitting a 52-week high of $52.73 on October 21.