SAP's Q3 Sales Fall, And Outlook Lowered

• J. Bonasia
• On 5:46 pm EDT, Wednesday October 28, 2009

SAP rattled investors Wednesday by lowering its sales outlook for the year and missing Wall Street's third-quarter revenue target.

But Europe's largest software maker used cost cuts to edge analyst profit views.

SAP (NYSE:SAP - News), the world's No. 1 maker of business software applications, said it earned 0.41 euro, or 59 cents a share, minus one-time items. That edged the 58-cent consensus estimate of analysts polled by Thomson Reuters.

The firm said third-quarter revenue fell 9% to 2.508 billion euros, or $3.58 billion, using the average currency conversion rate for the quarter. Analysts expected $3.8 billion.

With its lowered outlook, SAP now expects software and services revenue to decline 6% to 8% this year. In July, it had forecast a decline of 4% to 6%. In January, SAP guided flat to down 1%.

The company's U.S. stock plummeted 9.9% to 46.11, a more than two-month low. Shares are still up 27% this year.

Companies have been reluctant to spend more on technology during the global economic downturn.

SAP, however, maintained its outlook for a full-year operating profit margin of 25.5% to 27%, excluding a write-down and charges tied to its acquisition of Business Objects last year.

The Walldorf, Germany-based company still has double the business software revenue of archrival Oracle (NasdaqGS:ORCL - News).

But the economy continues to take a toll, SAP Chief Executive Leo Apotheker told analysts on a conference call to discuss the results.

He said SAP remains "a growth company" despite what's been "a very peculiar year."

"While the environment has stabilized, we are still up against some difficult challenges," Apotheker told analysts. He said management is "carefully and cautiously optimistic that the worst is behind us."

SAP is adjusting its strategy, seeking more recurring revenue from multiyear contracts for software licenses and support instead of big upfront license payments. SAP aims to increase sales to midsize companies and other enterprises, while selling more subscription-based software services to smaller clients.

"In the short run, (the change) hurts because there is less revenue recognized upfront, but long term this creates a more stable business model, and who doesn't want that?" Bill McDermott, an SAP executive board member and head of global operations, said in a brief interview Wednesday.

McDermott expects a "temperate environment" for tech spending in 2010, with "things probably stabilizing, but not coming back a lot."

SAP's third-quarter software sales in the U.S. fell 9% from the year-ago period. Executives said sales in the U.S. are taking longer to complete.

The Asia-Pacific region declined 12% at constant currencies, largely due to plummeting sales in Japan. Software sales fell 1% in Europe, led by a 13% decline in Germany.

SAP's results imply that corporate spending for technology "remains soft," Avian Securities analyst Jeff Gaggin wrote in a research note. Late last month, he lowered his opinion on the stock to negative from neutral. Gaggin says competition is on the rise from independent software maintenance firms. The biggest such company is privately held Rimini Street.

In an ironic twist, a federal judge in San Francisco was slated on Wednesday to hear a motion in a lawsuit by Oracle against SAP for alleged fraud by SAP's TomorrowNow unit. It had been an independent software maintenance firm until bought by SAP in 2005. SAP shut it down last year. Oracle's suit says TomorrowNow illegally downloaded some Oracle software and customer data.

SAP's problems have been "compounded by a number of strategic errors the company made over the past several years," Patrick Walravens, a JMP Securities analyst, says in a research report. He said SAP's middleware and on-demand products had problems, and that it charged too much for software maintenance. He rates the stock as market underperform, or sell.

SAP has cut some 2,900 jobs this year. Its goal is to cut another 100 jobs to end the year with 48,500 full-time employees. More cuts could come in early 2010, Gaggin says.

"We think SAP is having a tougher time competing with Oracle," Gaggin wrote. He says SAP should get aggressive with acquisitions and use its cash more effectively.

Buzz up!