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SAP on target with quarterly earnings

For the first time, the German software giant reveals how much of its revenue comes from deals with small businesses.

Enterprise software maker SAP on Thursday reported second-quarter earnings that met its earlier projections, as the company increased sales in the United States and worked harder on closing deals with smaller companies.

SAP said that net income for the quarter, which ended on June 30, reached $305 million, or roughly 98 cents per share. Those results represent a 14 percent increase over the $269 million, or 87 cents per share, the company reported for the same period last year.

The Walldorf, Germany-based company, which specializes in tools that help businesses with enterprise resource planning (ERP) and customer relationship management (CRM), said its revenue grew to $2.2 billion for the quarter, a 9 percent increase compared with the second quarter of 2003. Wall Street had predicted that SAP would generate $2.16 billion in revenue, according to First Call.

SAP said its quarterly software license revenue rose to $609 million, meeting previously reported estimates and representing an increase of about 15 percent compared with the year-earlier period.

The software maker also broke out its performance in the small and medium-size business (SMB) segment for the first time, revealing that deals in that market are responsible for 28 percent of its quarterly revenue. The company defines small and medium-size businesses as those with less than $1 billion in revenue or fewer than 2,500 employees.

The figure seems to confirm many industry experts' beliefs that the company is increasingly interested in courting small customers as the enterprise sector slows.

When asked why SAP is finally choosing to put a number on the size of its non-enterprise business after keeping those figures under wraps in the past, Gary Fromer, senior vice president for SMB at SAP America, said it's a matter of dispelling the idea that his company is weak in the market segment.

"We've spent a lot of time trying to match perceptions with the reality that we've had success in SMB," Fromer said. "We decided we needed to allow people to compare this segment of the business against pure-play competitors in the space."

He added that roughly half of all people using business software work at small and medium-size businesses.

Overall, the company's strong results are not a major surprise. SAP had reaffirmed its earnings guidance and detailed its preliminary second-quarter numbers two weeks ago, after rivals Siebel Systems and PeopleSoft released disappointing results for the same time frame.

In a conference call with analysts and reporters, Chief Executive Henning Kagermann noted that the positive quarter was driven largely by an increased number of deals in the United States, where the company's license revenue grew to roughly $171 million. Among the customers SAP added in the region during the period was beverage giant PepsiCo, a former reference client for rival Oracle. In contrast, SAP indicated that it saw a decline in the number of deals it closed in Europe, the Middle East and Africa, compared with the second quarter of last year.

Kagermann also referenced SAP's relative stability in comparison with its competitors, specifically PeopleSoft and Oracle, which remain tied up in deliberations over the database giant's hostile takeover bid for PeopleSoft.

"We know our market," Kagermann said. "It's based on word-of-mouth confidence. We've seen weakness worldwide in some of our competitors, and we could argue that this has less to do with the market than with the strength of SAP."

Kagermann also confirmed during the conference call that SAP has not been trying to court other companies in hopes of being acquired. Rumors that the software maker was being put up for sale proliferated after SAP admitted earlier this year that it had engaged in preliminary merger negotiations with Microsoft.

"The topic you mentioned was discussed only with Microsoft," Kagermann said, when asked by a reporter if other suitors had been identified.