For the second time in six months, enterprise software market leader SAP yesterday surprised analysts by predicting that some of its 2006 financial results will fall short of expectations.
In a preliminary financial statement, SAP said its revenues from software for the fourth quarter ended December 31 will be about €1.26 billion, an increase of about 7% compared to software revenue from the year-earlier period (or about 12% in constant currencies).
The projected fourth-quarter software revenue gain was far below the 17.1% increase that SAP reported in the third quarter ended September 30. Consequently, the company said in a statement issued yesterday, its software revenues for the full year 2006 will lag expectations.
SAP said 2006 software revenues will be about €3.1 billion, an increase of about 11% over 2005 software revenues (13.5% in constant currencies. Previously, SAP had predicted 2006 software revenue gains of between 15% and 17% in constant currencies.
Other 2006 results -- with the exception of earnings per share -- are projected to come in at the lower end of previously projected ranges, the company said. Product revenue for 2006 is now expected to rise about 13% over 2005 levels in constant currencies. Previously, SAP had predicted product revenues to rise between 13% and 15%.
And, the company said, its adjusted operating margin for the year will increase by 0.6% or 0.7%. Previously, the company had predicted an operating margin improvement for the year of between 0.5% and 1.0%.
Despite the disappointing projected software and product revenue results, SAP said adjusted earnings per share for the year will show a greater increase than previously expected. Adjusted earnings for 2006 will be at least €1.59 per share. Previously, SAP had predicted adjusted earnings of between €1.45 and €1.50 per share. SAP said the more favorable projection was the result of one-time financial effects that reduced the company's tax rate.
SAP, in its official statement of preliminary fourth-quarter and year-end results, gave no reasons for the shortfalls. Those are expected later this month when the company releases its official fourth-quarter and full-year 2006 results.
The information released by SAP yesterday, however, did indicate a significant slowing of the company's growth in the Americas and in the Asia-Pacific region. SAP said it expects a 15% increase in software revenues in the Americas in 2006. Last year, the company's software revenues from the Americas grew by 32%. In Asia-Pacific, SAP said it expects software revenues to rise in 2006 by 8%. Last year, software revenues in the Asia-Pacific region were up 25%.
SAP is projecting a slightly higher software revenue growth rate in the Europe/Middle East/Africa region, where the figure is expected to rise by 10%. Last year, SAP's software revenue in that region grew 8%.
Although SAP officials in October said that the company's fourth-quarter results were not expected to hit the upper end of previously projected ranges, analysts yesterday said the latest SAP financial warning was a surprise.
"It was a bit of a surprise in light of some of the indicators we?ve been seeing of increased software spending overall," said Ray Wang, an analyst with Forrester Research. Forrester and other analyst firms have been predicting increased spending on enterprise and manufacturing software. Forrester recently predicted that enterprise spending on software will rise by a fairly robust 10% in 2007, with 18% of enterprises planning major ERP upgrades during the year, and 16% planning major upgrades to customer service and support software.
Wang speculated that SAP's disappointing results may indicate that the company is meeting with greater-than-expected competition for small and mid-size manufacturing customer wins. "Competitors like Microsoft and Epicor may be having an impact there," Wang said.
SAP has pinned a good deal of its growth strategy on the mid-market. SAP Chairman and CEO Henning Kagermann has said the company's goal is to have between 40% and 45% of its revenue coming from the mid-market by 2010. Currently that figure is about 33%.
Wang noted that, particularly in the U.S., SAP may also be suffering from increased competition from arch-rival Oracle Corp. Oracle, for its most recent quarter ended August 31, reported applications software revenue of $931 million, up 57% compared to the same period last year. Revenue from new application licenses was up 79.5% during the quarter.
SAP's latest warning follows a similar preliminary statement of results in July prior to the official statement of its second quarter 2006 results. At that time, SAP said much of the second-quarter revenue shortfall was due to a higher-than-usual number of booked orders during the quarter that could not be finalized and translated into revenues. For the second quarter, SAP reported that overall revenues were up 9% on software revenue that grew by 8% over the year-earlier period.
SAP's results rebounded in the third quarter, as the company reported strong growth for its service-enabled platform as well as its CRM, HR, and financial applications. In the third quarter, SAP reported an 11% increase in revenues and a 10% rise in product revenue. At the time, SAP officials also took issue with Oracle's claims that, during the quarter, it had won several competitive customer battles over SAP.
Separately this week, SAP Supervisory Board Chairman Hasso Plattner was quoted as saying that he expects CEO Kagermann to extend his current contract with SAP for at least the next year. Kagermann, who will be 60 in July, would then continue with SAP at least through the end of 2008.