Ongoing economic uncertainty undermined SAP AG’s third-quarter financial results, leading to a 31% reduction in software license revenue and prompting the enterprise application market leader to lower its projections for the rest of 2009.
Despite the slump in SAP’s software revenue, however, increases in support and subscription revenue as well as reduced operating expenses allowed the company to improve operating margins and increase net earnings by 12% in the period ended Sept. 30, 2009, the company reported today.
SAP said it now expects 2009 non-GAAP software and software-related service revenue to decline 6% to 8%. (The non-GAAP figures exclude expenses related to SAP’s acquisition of Business Objects.) As recently as July, SAP said it expected 2009 software and software-related service revenue to decline 4% to 6% from 2008 figures.
In response to the revised outlook and third-quarter results, SAP’s shares slipped approximately 10% in trading late today.
“While the environment has stabilized, we are still up against some difficult challenges created by the global economic recession that hindered our results for the quarter,” said SAP CEO Leo Apotheker in remarks today to financial analysts.
Third-quarter software revenue totaled € 525 million, down 31% from the same period last year. Support revenue rose 14% to € 1.33 billion, while revenue from subscription and other software-related services rose 23% to € 79 million. The company’s total revenue of € 2.5 billion for the period was down 9% from the year-earlier period.
Apotheker told financial analysts that although SAP believes the worst of the recession is over, the company’s customers continue to take a cautious approach to investing in enterprise applications. The number of large enterprise deals in which customers license and pay for software up front — the kind of transactions on which SAP has built its business — continues to decline, he said. Instead, customers are more interested in signing long-term deals to implement software incrementally, more often paying for it through subscriptions rather than traditional licenses.
Large, up-front deals, he told financial analysts, “won’t come back anytime soon.”
But, Apotheker said, SAP is embracing this transition because it will ultimately lead to a more stable, sustainable business model that is not subject to big-deal-generated revenue peaks and valleys. To that end, SAP plans to extend to 580 additional customers versions of the company’s long-term Global Enterprise agreements, which, until now, were available only to the company’s largest customers, Apotheker said.
SAP’s third-quarter results were pulled down by a poor showing in emerging market geographies and the Asia/Pacific region, particularly Japan, where the company ran into what Bill McDermott, president of global field operations, described to financial analysts as a “perfect storm.” A rising yen, reduced customer confidence, and government investment policy changes combined to cut SAP’s software and software-related service revenue in Japan by 9% in the third quarter. Software and software-related service revenue fell 1% in the company’s Europe/Middle East/Africa region, and 3% in the Americas.