Rebounding from a disappointing second quarter, SAP AG today posted a 16% increase in net income on a 17% gain in software revenues, with double-digit growth rates reported in each of its three major geographic regions.
SAP said that software revenue rose to €691 million from €590 million posted in the comparable period last year. In the second quarter of this year ended June 30, SAP had surprised the market with an anemic 8% increase in software revenues, although SAP executives said at the time that the shortfall was due to booked orders that were not finalized.
The numbers reported today appeared to put SAP back on its recent strong growth track, which, prior to the second quarter, showed a dozen quarters of double-digit performance.
"In a nutshell, our organic growth strategy has enabled us to win," said Henning Kagermann, SAP chairman and CEO, during a conference call with financial analysts.
Total revenues for the third quarter ended September 30 rose 11% to €2.2 billion, from €2 billion in the like period last year. Total product revenue, which includes the €691 million in software license revenue as well as €884 million in maintenance revenue -- up 10% from last year's third quarter -- grew 13% to €1.5 billion. Consulting, service, and training revenues each climbed 8% from the comparable quarter.
Net income jumped 16% to €388 million, from €344 million. Earnings per share rose more than 17% to €1.27.
Software revenues in SAP's Americas region grew 19% to €292 million, with the U.S. market reporting a 15% increase in license revenue to €228 million. In its Europe, Middle East, and Africa region, SAP's software revenues rose 14% to €301 million, while in the Asia-Pacific region the numbers climbed 22% to €98 million.
During the conference call, Leo Apotheker, president of SAP Field Operations, said that SAP won 85% of the 247 deals it competed for during the quarter. He made a point of challenging a statement last month by SAP's chief rival, Oracle Corp., that it had bested SAP in 88 deals.
Apotheker said that Oracle's claim was incorrect. He said that SAP only lost four of those deals. Moreover, he said that of the 88, Oracle only identified 13 companies by name. In a number of those 88 deals, he said, either SAP did not compete, or they were simply non-competitive.
Apotheker also said SAP has garnered 400 companies so far under its Safe Passage program, which offers Oracle users a way to come into the SAP fold. He said 90 had opted for SAP during the third quarter.
William R. McDermott, president and CEO of SAP America, went even further than Apotheker in criticizing Oracle for its win-rate claim. "The 88 is pure fabrication," McDermott said in an interview with Managing Automation. "Give Oracle high marks for deception and low marks for results."
Oracle spokesman Bob Wynne said the company stood by its figure. "We have a very detailed process for tracking our competitive wins and our data revealed that in Q1, we were successful in beating SAP in 88 deals," he said.
Discussing the results in SAP's Americas region, McDermott said that SAP's performance enabled it to "dramatically increase" market share there. "This was the sixteenth consecutive double-digit quarter for the Americas [in constant currencies]," he said. "The third quarter was really a home run."
McDermott said that growth drivers for the quarter came from across the company's entire portfolio. He cited SAP's service-enabled platform as providing a "huge product advantage" for SAP, and also noted strong growth in such functional areas as CRM, HR, and financial applications. He said that retail, telecommunications, media, and utilities sectors were also contributing to SAP's growth.
And McDermott also cited what he called "co-invention" activities, such as the Duet product jointly developed with Microsoft, as providing a significant opportunity for SAP. "It's really a machine here," he said of SAP. In the Americas region, SAP announced seven major contracts. They are with: Au Bon Pain, Beall's, Century Casinos Inc., Michigan Department of Treasury, Pennsylvania Turnpike Commission, Philadelphia Newspapers LLC, and the State of North Carolina.
Reaction to SAP's quarterly results from market analysts was positive. Ray Wang, an analyst with Forrester Research, said he was "impressed" with SAP's overall results but was still waiting to get specifics on license revenue from new customers. He also said the results indicated that the overall enterprise applications market is too big to characterize as a two-horse race.
"The market is still too big to narrow it down to Oracle and SAP," he said. "Competition is intense in the larger deals. In the mid-market, it's another story." Wang noted that SAP's success in the mid-market will be dependant on its ability to build out its partner ecosystem.
SAP's efforts in the mid-market were addressed specifically by Kagermann during the conference call today. He said that the number of channel partners grew by 22% during the quarter. SAP's strategy for 2010, he noted, is to have 40%-45% of its revenue derived from the mid-market, which SAP defines a companies with revenue of $1 billion and below. Currently, that percentage is around 33%. The company's 2010 plan calls for more than 100,000 customers by that time, €70 billion in revenue, and a goal to double its addressable market from $30 billion to $70 billion. SAP currently has about 36,000 customers.
SAP made these other points during the conference call:
- Kagermann said that by the end of this year, SAP will pilot-test with customers an "enhanced mid-market solution" based on the company's All-in-One product. All-in-One is considered a good candidate for service-enablement, added an SAP spokesman, as well as for "alternate delivery" models. Asked during the question and answer session during the call about a so-called on-demand offering , Kagermann wouldn't directly say that SAP would introduce such a model for All-in-One, but he did say, "We will not stay on CRM only," referring to SAP's on-demand CRM product.
- Kagermann said the overall business environment has "remained stable" but that software pricing remains "tough."
- SAP's market share of what it calls Core Enterprise Applications Vendors, which account for about $16.4 billion in software revenue as defined by SAP based on industry analyst research, grew 0.9% to 22.6% at the end of the third quarter, more than twice the share of the next-largest vendor.
- Financial guidance of a 13%-15% increase in product revenue for all of 2006, and software revenue growth in the range of 15-17%, was reaffirmed, but with a caveat. "From today's perspective, it appears less likely that product or software revenue growth will reach the upper end of the aforementioned ranges," SAP said.