Publish date:

SAP Defends Tough Quarter

The company points to market-share growth.

SAN FRANCISCO - In spite of a tough quarter that forced the company to scale back a product launch, SAP (SAP) - Get Report found silver linings in its first-quarter performance.

The German business software developer said earlier Wednesday

that revenue grew 13.8%

to $3.82 billion. But analysts were expecting revenue of $3.96 billion, according to Thomson Financial.

TST Recommends

On a conference call with analysts, co-CEO Henning Kagermann attributed the shortfall to a difficult macro environment isolated to the U.S. Bill McDermott, CEO of SAP Americas and Asia-Pacific, attributed the drop in U.S. business to fewer large transactions.

The stock was recently off 2.3% to $51.23.

But the company was buoyed by its continued headway on global market share -- 50% of software revenue came from new customers, McDermott said in an interview.

As customers have adopted SAP's business application software, the company "gained share for the quarter and year over year, McDermott said. "Now we are 1.5 times the No. 2 as measured by software sales in the U.S. and two times, globally" on a dollar basis worldwide, he added.

The No. 2 in application software is arch-competitor

Oracle

(ORCL) - Get Report

, which has grown through numerous software acquisitions in recent years. SAP, which has followed an organic-growth strategy, recently completed the $6.8 billion acquisition of Business Objects, a supplier of business intelligence software.

Oracle reported difficulty closing some deals late in its third quarter.

Net income fell by 22% to $376 million, vs. $481.7 million in the year-ago period. EPS was 32.6 cents (0.21 euro), vs. 40 cents (0.26 euro) a year ago.

Excluding items, EPS was 45 cents (0.29 euro). Analysts were looking for 43 cents.

Three major factors reduced the company's profitability during the quarter, McDermott said. The biggest problem was the impact of a weak dollar on U.S. business converted into euros, which "wipes out about 15 points of growth" during the quarter.

The second issue hitting the bottom line was the one-time cost associated with the acquisition of Business Objects, McDermott said.

Third was the accelerated investment in the company's on-demand software system, Business ByDesign. "If you took those three things out of equation, our operating profit in constant currency was up 20% year over year, McDermott said. "Operationally, the company performed very well."

The company invested $62 million (40 million euros) during the quarter on development of BBD, but is scaling it back for the remainder of the year, McDermott said. Instead, the software-as-a-service platform -- created to give the company a foothold among small- to medium-sized businesses -- will be funded out of the ordinary research budget, he said.

SAP announced it would reduce its forecast investment in Business ByDesign by $155 million (100 million euros). On the strength of that change, SAP increased guidance on its operating margin by 100 basis points, McDermott said. The company now projects full-year operating margin in the range of 28.5% to 29%, excluding special items, such as the write-down of deferred revenue from Business Objects.

Operating margin during the first quarter was 14.6%, vs. 20.2% for the same quarter of last year. Excluding special items, operating margin was 19.5%, compared to 20.7% a year ago.

Business ByDesign won't generate revenue for 12 to 18 months, when SAP will roll out the system more broadly. The company had initially projected it would have 1,000 live customers on the system by the end of 2008. Currently, BBD is being tested at a "triple-digit number" of customers, McDermott said.

Customers have asked SAP to enrich the functionality of the system, McDermott said. "We want to be able to deliver the solution at a total cost that is good for SAP and its customers." SAP will fine-tune the system for next 18 months, "and get it right," he added.

At that time, "you will start to see SAP monetize this very important product." The company is also planning to unveil in early May ways in which it will also deploy BBD "side by side with our existing suite" at SAP's core enterprise customers.

For the remainder of 2008, "we're all cautiously optimistic," McDermott said. "Our momentum and market-leading position is undeniable. The pipeline we have is strong. We are anticipating a solid year of double-digit year-over-year growth performance."

SAP and

Microsoft

(MSFT) - Get Report

are both attempting to make headway in the market for on-demand software.

Salesforce.com

(CRM) - Get Report

, whose first quarter ends Wednesday, dominates in that market. Microsoft fully released its Dynamics CRM Online April 22.