SAP first quarter earnings drop 16 per cent

SAP reported first quarter net income down 16 per cent year on year, and revenue down 3 per cent, as customers remain reluctant to spend on new software.

Net income for the first quarter fell to EUR204 million (US$269 million as of March 31, the last day of the period reported) from EUR242 million a year earlier. SAP blamed the fall on a restructuring charge related to previously announced staff lay-offs.

Revenue fell to EUR2.40 billion from EUR2.46 billion a year earlier. Within that, software support revenue rose 18 per cent to EUR1.25 billion, a rise somewhat offset by a fall in professional services revenue, down 9 per cent to EUR649 million.

The biggest fall was in software sales, down 33 per cent to EUR418 million. SAP blamed the decline on a difficult operating environment worldwide due to the global economic downturn.

It is unclear when buyers will regain confidence: "Visibility for software revenues remains limited," SAP said.

However, SAP's customers are continuing to buy software, but in smaller pieces, SAP co-CEO Leo Apotheker said during a conference call with financial analysts.

"It is obvious that in the current climate customers are trying to pinch every dollar, euro and yen before they spend it," he said.

SAP is therefore focusing on growing the overall volume of deals "in every theater and every market segment," said Bill McDermott, an SAP executive board member and president of global field operations.

The company is also looking forward to the upcoming general release of its Business Suite 7 application, as well as new BI (business intelligence) software, which will help drive revenues up, Apotheker said.

But the company declined to comment further on the outlook for the rest of the year, sticking to the same forecast it provided in January. Back then it made no predictions for future revenue, citing uncertainty about the business environment.

SAP may have slightly lower software support revenue in the coming years than it had previously hoped. Following pressure from users, announced Wednesday that it has capped the price of its new Enterprise Support program at 22 per cent of the software license price until at least 2015. For existing users forced to migrate to that service from a cheaper existing service, the price rise will be spread over a longer period, limiting increases to 3.1 per cent a year, rather than the previous 8 percent a year, SAP said.

But Enteprise Support "will become a competitive advantage" for the company, Apotheker predicted.

Along with its earnings report, SAP on Tuesday announced that it had agreed on a set of KPIs (key performance indicators) for Enterprise Support with SUGEN (SAP User Group Executive Network), a group composed of SAP user groups around the world.

No other vendor "comes even close" to providing the level of insight into support costs that the KPIs will afford, Apotheker said.

"I have to tell you that by having [created the KPIs], the discussion with our customers has radically changed. It is not about price anymore. Now people are focused on extracting the value," he said.

Meanwhile, SAP repeated its January prediction that operating margin will remain around 25 per cent - if full-year software and software-related service revenues at constant currency remain flat or decline by 1 per cent from their 2008 level of EUR8.62 billion. While companies tend to hedge their predictions against adverse moves in exchange rates by assuming constant currency, in the first quarter foreign exchange movements acted in SAP's favor. In the first quarter, software and software-related service revenue remained flat, but excluding Business Objects support revenue that Business Objects would have recognized had it remained a stand-alone entity it fell 2 per cent - and would have fallen 4 per cent at constant currency, SAP said.

The company stated its results according to U.S. generally accepted accounting principles (GAAP), but said that from the end of this year, it will only use International Financial Reporting Standards (IFRS) for external communications. It will also use IFRS figures for internal reporting, forecasting and incentive-based compensation plans for staff, it said. SAP began preparing financial reports according to both GAAP and IFRS in 2007, to comply with German and European law.

The only difference in reported revenue between the two accounting standards concerns SAP's now-closed third-party software maintenance subsidiary, TomorrowNow. SAP's U.S. GAAP income statement shows TomorrowNow's revenue and income separately because it is a discontinued operation, but IFRS does not allow this separation because TomorrowNow is not a material operation, SAP said.