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Asia woes hit SAP profits

While profit loss in Asia drags down fourth-quarter results, SAP boasts strong sales in the United States and Europe, a new business strategy in Japan, and expects a rosier 1999.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
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Kim Girard
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Asian economic woes are weakening SAP's ride on the financial wave.

While profit loss in Asia dragged down fourth-quarter results, SAP, boasting strong sales in the U.S and Europe and a new business strategy in Japan, is expecting a rosier 1999.

The German business software giant reported 1998 earnings of 50 cents per share, meeting Wall Street estimates, according to First Call. However, analysts revised their estimates earlier this month after the company warned of lower-than-expected earnings. The company said it expected pretax profit would be 15 percent, well below its target of 30 to 35 percent.

SAP's net profit for the year rose 14 percent to $627 million, while sales for the fourth quarter increased 18 percent to $1.54 billion.

Pretax profit for the fourth quarter fell 15 percent to $421 million, mainly due to a larger-than-expected 22 percent slip in fourth-quarter sales to Asia. Quarterly sales to Japan were hit by a $119 million shortfall.

"We're very pleased with our results," said John Milana, SAP's chief financial officer. "Absent the isolated situation in Japan our business is very strong."

For the year, the company reported revenues rose 41 percent to $5 billion. Currency fluctuations shaved 4 percent off revenue growth, the company said.

Earlier this month, SAP's shares plunged nearly 20 percent after it warned that quarterly results would be well below expectations.

"In general the ERP market is going through some difficult times," said Andrew Roskill, analyst at Warburg Dillon Read. "There's a fair amount of saturation in the market. In general, a lot of ERP upgrades were accelerated in 1997 and in 1998 there was a general slowdown."

In response to its recent troubles, SAP said it is restructuring its Japanese operations and "the board is confident that the accuracy and quality of sales forecasts will improve substantially." The company also spent $28.3 million to improve its accounting systems in Russia.

While ERP rival Baan has faced layoffs and restructuring in recent months due to financial woes, SAP added 6,500 employees worldwide in 1998, primarily in the areas of research and development to fit the company's new product strategy.

SAP said it expects to double revenue during the next three years and says sales this year should rise between 20 to 25 percent. It expects its profit margin to increase by 1 percent.

"I think 1999 will be a tough year for ERP sales," Roskill said. "But I think [SAP] is taking steps in the right direction to get their costs in line to return to normal profit levels."

Additionally, new initiatives in the growing areas of supply chain management and sales force automation should help the company as well, he said. Milana said about 30 percent of the company's revenue in the coming year should come from New Dimensions, stand-alone applications--from front office sales force and customer service software to advanced planning supply chain software-- that compliment R/3 installations or can be sold separately.

With its new offerings, the company also plans to step up sales to the lucrative and untapped midtier market.

SAP's stock was up $1.62 to $34.37 in trading this morning.