As expected, SAP AG today reported, that for its second fiscal quarter, software and product sales grew slower than the company and financial analysts had expected.
For the quarter ending June 30, SAP said that total revenues grew to €2.2 billion, up 9% from the corresponding period last year. Software revenue for the quarter was €621 million, up 8% year over year.
Revenue growth fell significantly short of SAP's recent financial track record, which, over the past 12 quarters, has seemed to defy slow-growth industry trends. In the first quarter of this year, for example, the company reported that software revenues grew 22%, while total revenues were up 18%.
SAP Field Operations President Leo Apotheker blamed much of the revenue shortfall on a higher-than-usual number of booked orders during the quarter that could not be finalized and translated into revenue. Competitive pressures, however, also appeared to have tripped up SAP's second-quarter performance.
While SAP reported that it had increased its share of the enterprise application market from 21.4% in the first quarter to 21.7% in the second quarter, arch-rival Oracle raised its share of the market faster, growing from 8.8% in the first calendar quarter to 10% in the second quarter, according to SAP's figures. (Read about Oracle's strong fiscal fourth-quarter results.)
"We have gained, but the competition has gained more, so we lost peer share," said SAP CEO Henning Kagermann.
Despite the slower revenue growth, SAP reported healthy earnings figures for the quarter -- though they failed to meet analysts' expectations. The company's net income, €414 million Euros, was up 43% compared to the like period last year. Company officials attributed the jump in part to a lower tax rate. Expenses --particularly hiring expenses -- fell somewhat in the second quarter compared to the first period of 2006, officials said.
Disappointing results aside, SAP said it is not scaling back previously-announced financial guidance for the rest of its fiscal 2006. SAP has said it expects software revenue for 2006 to grow by between 15% and 17% compared to 2005. The company said it expects pro forma earnings per share (excluding stock-based compensation and acquisition-related charges) to be between €5.80 and €6 per share.
Despite the slower growth, SAP officials said they see no significant shift in customer spending habits. "The business environment hasn't changed," Kagermann said. "Customers make decisions the same way. They want to avoid risk."
Analysts, however, said they've recently seen a higher percentage of enterprise application buyers deferring decisions out of concern over the health of the global economy.
"The stock markets are down, and that's influencing people to delay buying decisions," said Jim Shepherd, a senior vice president at AMR Research (Boston). "We've been hearing from vendors that they couldn't get any business closed in Europe."
SAP said its Europe and Asia/Pacific regions showed revenue weakness during the quarter. Software revenues in its Asia/Pacific region, for example, were flat compared with the like quarter of 2005. SAP's software revenue in Europe was up just 3%.
In the Americas, meanwhile, software revenue was up 18% for the quarter compared to the same period last year.
Growth in revenue from software maintenance also slowed in the second quarter. Maintenance revenue grew by 10% to €856 million, a slower rate than in recent quarters. Kagermann attributed the slower maintenance revenue gains to two factors: mergers among SAP's customers and decisions by some customers, particularly in the U.S., to pay for maintenance on unused or underused software.
SAP's bookings during the quarter actually grew at a healthy clip during the quarter. The number of booked deals was up 18% to 2,321. Much of that gain, Apotheker said, came from SAP's Business One and All-in-One products which are aimed at medium- and small-size customers. Overall, SAP added 3,500 new customers globally this year, Apotheker said.
In many cases during the quarter, however, bookings did not translate into recognized revenue. CFO Werner Brandt said between 30% and 35% of bookings during the quarter translated into revenue, a lower-than-usual figure. SAP officials attributed the shortfall in converting booked deals to recognized revenue to a preference among larger customers to defer payment to match deliverables.
More customers, Brandt said, are negotiating phased deployment deals, while others are deferring payment on future software functionality.
At the same time, Apotheker said, SAP has been striking deals with some of its largest customers that spread out revenue over five years. SAP began to roll out these Global Enterprise Agreements a year ago, Apotheker noted.
Kagermann said SAP expects to see the trend toward deferred revenue continue.
Despite the disappointing revenue figures, Kagermann said SAP will not alter its strategy of investing in the business for future growth and growing organically rather than through acquisition. He noted that SAP hired 1,800 employees in the second quarter, many of them in R&D, to work on initiatives such as the company's on-demand CRM offering, the new Microsoft co-developed Duet user interface, improvements to SAP's analytics offering, and the migration of mySAP ERP to what the company calls a business process platform.
Analyst Shepherd agreed that SAP is unlikely to shift its strategy in reaction to one bad quarter. "They don't tend to manage quarter to quarter," he said. "Don't expect to see heavier discounting or management changes. They are not going to panic over a quarter like this."