The software titan says its '07 sales growth will be the strongest in four years, but despite the good news its stock falls
With software rival Oracle firing on all cylinders, SAP's strongest full-year revenue growth since 2003 and big contract wins from Wal-Mart Stores and Apple weren't enough to impress Wall Street.
SAP, the world's third-largest software maker, reported on Oct. 18 that third-quarter profits rose 10% from year-ago levels, to $579 million, or about 48¢ per share, edging analyst forecasts. But revenues increased 9%, to $3.44 billion, a bit less than expected. A strong euro weighed on the value of the German company's overseas sales: The quarter's sales would have been 13% higher if denominated at last year's currency values. New license sales, a key measure of future revenues, rose 11%, to $1.02 billion.
Quarterly Sales Growth Disappoints
During the quarter, SAP (SAP) says, it won a large contract worth an undisclosed amount to run Wal-Mart's (WMT) accounting system, beating Oracle (ORCL). And in another key deal, Apple (AAPL) will standardize its business applications using SAP's software. "We competed with Oracle for Wal-Mart and we won," says William McDermott, SAP's chief executive officer for the U.S. and Asia.
Investors have been worried SAP may suffer a slowdown in its core business of selling applications that help companies handle back-office tasks such as bookkeeping, managing inventory, and planning manufacturing schedules. Hoping to ease those jitters, the company now says its 2007 sales growth will be the strongest in four years. Despite the encouragement, SAP's stock fell nearly 3% after the quarterly update.
Among the quarter's disappointments: Sales of software and related services, a closely watched measure, grew by 13%, to $2.45 billion. That was less than the 17% growth SAP posted a year ago. Analysts also noted weak spots in certain markets, including SAP's home market.
Acquisitions Game Continues
The third-quarter update came just 11 days after SAP agreed to acquire Business Objects (BOBJ) (BusinessWeek.com, 10/8/07) for $6.8 billion. SAP says it plans to use that company's business intelligence software to gain a foothold in Oracle accounts. That software has the ability to pull data from Oracle systems and analyze it for users. If customers take advantage of that capability, SAP could have the opportunity for further sales to Oracle shops, McDermott says. "They can be a Trojan horse in non-SAP accounts," he says.
Oracle, already the world's top supplier of database software, has spent about $30 billion to acquire more than 30 companies during the last three years in a bid to grab a share of the applications business from SAP. Oracle recently reported a blockbuster quarter (BusinessWeek.com, 9/21/07), with a 26% gain in sales, a 25% jump in profit, and the largest increase in new-order bookings in a decade. Sales of new licenses for applications shot up 65%, albeit from a much smaller revenue base than that of SAP.
Continuing its acquisitive ways, Oracle on Oct. 12 made a $6.7 billion hostile bid for middleware vendor BEA Systems (BEAS). The price tag for BEA could escalate (BusinessWeek.com, 10/12/07) if other suitors emerge or if Oracle tries to win over management with a higher offer. BEA would add $1.4 billion a year to Oracle's top line and help Oracle compete with SAP's NetWeaver product.
But despite its archrival's latest plan for plunder, SAP isn't looking to jump into the bidding. McDermott says SAP has "zero interest" in buying BEA, whose new bookings have been sagging. "I give you a giant red-crayon answer: N-O," he says. "It would be a big waste of shareholders' money. They're not an interesting property at all." (SAP did announce a small acquisition Oct. 17, saying it would buy privately held Indian business software maker Yasu Technologies for an undisclosed amount.)
Betting on ByDesign
UBS (UBS) analyst Heather Bellini said in a research note after the report that SAP's 8% sales growth in North and South America fell short of her estimates, despite an easy comparison with a year ago. Furthermore, even though SAP nudged its growth outlook for this year's software and related consulting sales toward the high end of a previously stated 12%-to-14% range, the shift won't be "a major catalyst" for SAP's stock price, Bellini said.
Bears won't care for 3% growth in Germany either, Citigroup (C) analyst Marc Geall said in a report to his clients. Still, he expects U.S. and German sales to perform better in the current quarter. Geall, who recommends SAP shares, also said margins could improve enough in 2008 to offset SAP's investment in new products.
Chief among those new offerings is an online software package called Business ByDesign that's aimed at companies with 100 to 500 employees and international operations. The cost of developing and marketing ByDesign is holding back profit growth: SAP's nearly 25% third-quarter operating margins were unchanged from year-earlier levels, in part due to spending of nearly $570 million in 2007 and 2008 on the product. At the same time, fourth-quarter sales should get a lift from ByDesign, SAP says, noting 20 companies are now leasing the software.
In a conference call with investors, Executive Board Chairman and CEO Henning Kagermann said it was too early to make a call on 2008 results—SAP doesn't publish specific sales or profit estimates for upcoming quarters—but described economic conditions as healthy. Citigroup expects SAP to book $14.59 billion in 2007 sales and $2.9 billion in profits. By issuing a conservative outlook for the year, the company could have leeway to spend more and still meet expectations.