SAP Profits Despite Sales Slump and Weak Economy

November 2, 2009 Timothy Prickett Morgan

Application software powerhouse SAP didn’t do as badly in the third quarter as some had expected, but the company’s revenue and profit picture and sentiments show just how hard it is to get big IT projects done in this tough–and perhaps improving–economy.

For the third quarter ended in September, the German company booked €2.51 billion in sales, down 9 percent from the year-ago quarter, and software license sales fell a staggering 31 percent to €525 million. Services revenues (including software support and subscription-based software sales) declined only 3 percent for SAP in Q3, to €1.94 billion. Within that broad services category, software subscription sales rose by 23.4 percent, to €79 million. Software support revenues rose by 14.2 percent to €1.33 billion. Consulting revenue was down sharply by 21.6 percent to €484 million, and training revenues plummeted by 42.9 percent to €60 million; other services sales were down 23.1 percent to €20 million.

Through cost cutting (including thousands of layoffs announced earlier this year), SAP was able to keep operating income more or less flat, and net income rose by 12 percent to €435 million in the third quarter.

Leo Apotheker, SAP’s chief executive officer, said in a conference call with Wall Street analysts (and indeed, analysts from the European markets where SAP’s shares are also traded), that SAP was hoping for improvement in 2010, as it has been saying since the second quarter and added that the third quarter was better than the second, so the trends are moving in the right direction.

“However, while the environment has stabilized, we are still up against some difficult challenges created by the global economic recession that has hindered our results for the quarter,” Apotheker admitted, saying that business was particularly tough in Japan and the emerging markets. “One challenge that we face is a very emotional market where quick changes and sentiment good or bad can move the market in either direction rather quickly.”

The approval process for the kinds of large software deals that SAP has been used to closing for the past decade has slowed considerably, said Apotheker, and that is the big difference between the Y2K and ERP booms meeting the last recession and the current SAP software and more sophisticated customers looking at the current recession. Customers are looking for smaller projects and quick return on investment, and if a deal can’t either increase or preserve revenues or cut costs, it doesn’t get done. (That’s my analysis, not SAP’s, but I doubt very much Apotheker would argue with that statement.)

“Customers are beginning to speak more positively about their own businesses, which we assume bodes well for the future as we get into 2010,” said Apotheker, who later called 2009 “a very peculiar year.”

Indeed. Let’s hope 2010 is a lot less strange.

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