The German giant maintains profits in the face of slowing business software sales, encouraging analysts to see signs of economic recovery
Such is the state of the world that earnings reports by major companies are being scrutinized as closely as macroeconomic indicators for the messages they contain about the future. On Jan. 28, Germany's SAP (SAP) confirmed that although corporate IT spending is slowing sharply, the market for software that helps companies operate more efficiently may be more resilient than people thought.
SAP, the world's largest maker of software that companies use to manage functions such as finance, personnel, or product development, said that net income rose 13% in the fourth quarter, to $1.1 billion, as sales rose 8%, to $4.6 billion. SAP shares rose some 7% in Frankfurt trading, as investors applauded the company's ability to maintain profit in the face of slowing sales growth. "SAP is making the right steps to address the current environment," analysts at Citigroup Global Markets (CYM) said in a note.
Downturn Forces Cost-Cutting Moves
SAP's report contained plenty of grounds for caution about the year ahead. Sales of software, SAP's core business, fell 7% in the fourth quarter vs. a year earlier, though sales of support and other services still enabled the company to boost overall revenue.
"When you talk to managers, you hear over and over about the suddenness and intensity of the downturn," Co-Chief Executive Officer Henning Kagermann told reporters at a press conference in Frankfurt. He refused to offer a precise prognosis for the coming year, saying there is too much economic uncertainty.
For the first time since its founding in 1972, SAP will cut jobs companywide, reducing its workforce by about 3,000 positions to 48,500 by yearend. For now, SAP managers hope they can achieve the cuts through normal attrition. But the company also said it expects to spend as much as $400 million on the job cuts, suggesting that SAP may resort to buyouts or layoffs. SAP is also freezing salaries of employees worldwide.
As SAP's corporate customers struggle through an unprecedented downturn, many are opting for small-scale projects that offer a quick return on investment. "It would be difficult for a company with cash-flow problems to invest in a multiyear program," co-CEO Léo Apotheker told BusinessWeek. "There are certain industries that are really suffering." Software sales to automakers and other manufacturers grew more slowly than any other category. Apotheke added, however, "Investment [in software] is there, you just need a very strong business case."
Paving the Way for a Gradual Recovery
SAP's results came amid a number of recent indications that corporate earnings and economic growth are not quite as dire as had been feared. On Jan. 27, semiconductor maker Texas Instruments (TXN) reported better-than-expected earnings, while Germany's closely watched IFO survey of German business confidence also surprised on the upside Jan. 27.
Analysts at Swiss bank UBS (UBS) are among those who believe negative sentiment is near its low point. "We expect that leading indicators will show some signs of stabilization later this quarter, which should pave the way for a gradual recovery of the economy," UBS economist Martin Lueck said in a note.
In fact, sales of corporate software probably won't suffer as much as sales of hardware, according to analysts at market watcher Forrester Research (FORR). Software sales globally will be about the same in 2009 as in 2008, while equipment sales will slump 4%, Forrester estimates.
During the uncertain months ahead, SAP will derive some stability from its roster of 82,000 customers, to whom it can sell upgrades of the software they already own. "SAP is in no danger of disappearing," says Stuart Williams, analyst at Technology Business Research in Hampton, N.H., in a note.