Updated from 9:46 a.m. EDT

Robust sales of software licenses drove SAP ( SAP)to a strong third quarter and prompted the company to raise guidance for the rest of the year.

The Frankfurt-based software giant earned a profit of 334 million euros ($399.1 million), or 1.08 euros per share, a year over increase of 15%, the company reported earlier Thursday. The results were roughly in line with estimates, which called for earnings of 34 cents per American Depositary Share. The security represents a quarter-interest in a SAP share.

Total revenue increased by 13% to 2.01 billion euros ($2.4 billion), which was also about equal to Wall Street's expectations. (Dollar figures in this story value the euro at $1.19, although First Call estimates may be based on earlier valuations).

Most impressive, however, was the sharp rise in software license revenue in the U.S., as well as the rest of the world.

Global license revenue, a key indicator of new business, increased by 20% to 590 million euros, or $702 million. U.S. license revenue jumped 34% year over year, to 199 million euros, or $237 million. "The last time SAP grew license 20% year over year was more than four years ago," noted Prudential Securities analyst Brent Thill.

Concern over the modest bottom-line performance shadowed the bravura license results and the stock was up just 27 cents to $43.81 in recent trading.

The big increase in U.S. sales indicates that SAP is gaining ground on Oracle ( ORCL), its biggest rival in the $24 billion market for business software applications.

"SAP's results show ongoing market share gains against Oracle, despite continued pricing pressure and a difficult demand environment. As long as Oracle pursues large acquisitions in its consolidationstrategy, SAP should continue to benefit from the resulting customer uncertainties," Thill wrote in a note to clients. Prudential doesn't have a banking relationship with SAP or Oracle.

In its last reported quarter, Oracle's total software license revenue (including applications and databases) was $629 million. To be fair, the numbers aren't quite comparable since it matches a seasonally weak Oracle quarter, against a seasonally strong SAP quarter, several analysts noted.

SAP was also helped by a strong results in its own backyard; sales in Germany were up 12%, after a second quarter in which sales declined by 13%.

There was some disappointment with SAP's bottom line; several analysts calculated that the company missed by 1 U.S. penny (33 cents vs. 34 cents consensus), although others said that the number was not meaningful because of currency issues. Even so, the bottom line was clearly hit by SAP's heavy spending to gain market share.

Pro forma operating margin was 25.8%, nearly 1 percentage point below the expectations of some analysts. SAP attributed the decrease in operating margin to increased spending in R&D and sales and marketing and a lower-than-expected services margin.

While SAP raised its 2005 pro forma EPS guidance a range of 4.70 euros to 4.80 euros from 4.85 euros to 4.95 euors, the midpoint of this guidance in dollars still implies EPS of $1.47, 8 cents below the current consensus, noted analyst Patrick Walravens of JMP Securities, who rates the stock as underperform.

Looking at another aspect, analyst Stuart Williams of Technology Business Research concludes that "SAP continues to increase its performance lead on Oracle. As measured by return on invested capital, an indicator of overall competitive advantage, SAP increased its lead over Oracle by 250 basis-points in the third quarter to 29.32% return on invested capital.

"These data suggest that SAP's organic growth strategy is currently outperforming Oracle's $18 billion ante into the $25 billion enterprise application market," he concluded.

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