SAP Profits Under Pressure in Q2, Software Prices Get Jacked

Published: August 7, 2008

by Timothy Prickett Morgan

German application software giant SAP reported its financial results for its second quarter of 2008, and the company is being hit pretty hard by the dollar-euro exchange rate that has been propping up multinational IT suppliers based in the United States in recent years. That has put profits under pressure, as have expenses related to the roll out of new product lines, and that has forced SAP to do what software companies do in such times: raise prices.

For the second quarter ended June 30, SAP's sales (based on generally accepted accounting principles for the United States) rose strongly at 18 percent to €2.86 billion, with software license sales up 25 percent to €898 million and support sales up 16 percent to just a hair under €1.1 billion. Sales of subscription-based application offerings grew strongly at 45 percent, but still only accounted for €64 million in the quarter. Consulting revenues rose by 13 percent to €628 million, training sales rose by 10 percent to €114 million, other services sales fell by 7 percent to €26 million, for a total of €768 million in services-related sales. Other unspecified revenues accounted to €29 million in Q2. Despite all of that growth, however, net earnings for SAP fell by 9 percent to €408 million. SAP's profits were hit by €118 million in charges relating to its €4.8 billion acquisition of business intelligence software vendor Business Objects.

Despite the profit hits, SAP's Henning Kagermann, the company's chief executive officer, was optimistic because despite the slowdown in IT spending among U.S. companies in various sub-geographies and in various industries, SAP was nonetheless able to boost software and related services sales in the Americas region by 17 percent to €662 million, with 14 percent growth in the U.S., which accounted for €472 million in sales for Q2. SAP's home German market posted €353 million in sales in the quarter, up only 11 percent, by comparison, and all of Europe, the Middle East and Africa had sales of €1.11 billion, up 21 percent. Outside of Germany, EMEA sales rose 27 percent to €758 million; Asia/Pacific sales exploded by 30 percent in the quarter to hit €288 million. For SAP's overall sales, the regional split was more or less the same, with a few points changing here and there.

SAP was able to boost its guidance for the full year when it reported its financial results last week because it is optimistic about the second half of 2008. In late April, SAP gave guidance for software and related services sales, saying it expected them to grow by 24 percent to 27 percent at constant currencies, with Business Objects contributing 12 percent to 14 percent; now, SAP is hinting to Wall Street that it will hit the high end of those targets and will also be able to boost operating margins, too.

Beyond 2008, SAP is probably even more optimistic about profit margins because, according to a report in the Wall Street Journal two weeks ago, the company is boosting software maintenance fees. The Journal report says SAP is raising software maintenance fees from 17 percent of list price per year to 22 percent per year, and that this price increase will be phased in over four years. That doesn't help 2008's profits, but it surely will sweeten those for 2009 though 2012.

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