SAP Shows Solid Earnings, Firm Stance Against Oracle

SAP on Thursday narrowly topped analyst profit estimates in its third quarter, raking in $579 million on sales of $3.44 billion.

Analysts were looking for sales of $3.46 billion in the quarter, a target the German software giant would surely have met or exceeded if not for currency fluctuations related to the strength of the euro. Most analysts pegged SAP for a third-quarter profit of $575 million.

"Given the current currency situation and the concerns of the market, we would assess the report as a success," DZ Bank analyst Oliver Finger wrote in a research note following SAP's earnings report.

While the story this quarter was the company's 11-percent surge in licensing sales, which rose to $1.02 billion, Chief Financial Officer Werner Brandt cautioned that SAP probably wouldn't hit the upper end of its previous estimates of 15 percent to 17 percent growth for the full fiscal year.

"It appears less likely that product or software revenue growth will reach the upper end of the aforementioned ranges," Brandt said during a conference call with analysts. However, he said, the company expects to still top earnings-per-share estimates for the full year, ranging from $7.32 to $7.54 a share.

During the conference call, CEO Henning Kagermann and Leo Apotheker, SAP's president of customer solutions and operations, spent a considerable amount of time defending the company's performance in head-to-head battles with arch-rival Oracle over large customer accounts.

While Oracle has claimed that it consistently dominated SAP in landing new customer accounts, Apotheker said SAP actually had won in 85 percent of the 247 deals for which the two companies competed during the quarter.

The company also announced Thursday that it beat out Oracle for a large contract with retailing giant Wal-Mart during third quarter. According to SAP executives, Wal-Mart will implement SAP ERP Financials to replace some of its legacy software systems, including its JD Edwards enterprise resource planning (define) applications, and integrate it with other internal systems. The first phase of the installation is planned for completion in 2010.

Reaffirming the company's plan to grow its customer base to more than 100,000 clients by 2010 through aggressively targeting the small- and mid-sized business sector, SAP announced that it would invest more than $560 million in the coming year to market and develop Business By Design, its first software-as-a-service (SaaS) (define) offering, announced last month.

SAP also announced it would be launching a new mid-market product that features a flexible architecture and new deployment models -- and implying it too will be delivered to customers in an on-demand model or both on-demand and on-premise. The company said further details and a specific timeline for the new product's delivery will wait until SAP's annual analyst conference in December.

On Thursday, Kagermann reiterated that SAP would continue to follow its long-time plan of making only small, strategic acquisitions -- rather than follow Oracle's strategy of constant acquisition.

That comment come in spite of SAP's contrary move last week, when it broke from tradition to purchase business intelligence and analytics software vendor Business Objects for $6.8 billion.

Less than a week later, Oracle announced its intention to acquire middleware provider BEA Systems for $6.7 billion. According to some industry insiders, SAP's Business Objects deal inadvertently assisted Oracle's acquisition strategy by ensuring the German company would be unlikely to engage in an expensive bidding war so soon after making a massive purchase of its own.

SAP shares pulled back $1.69 a share, or three percent, to $54.61 in Thursday afternoon trading.

Author: Larry Barrett