SAP profit falls 64 percent

The world's largest business management software maker says its third-quarter profit fell more than previously warned on lower licensing fees.

Feb. 6, 2002 8:23 a.m. PT

3 min read

MUNICH, Germany--SAP, the world's largest business management software maker, said third-quarter profit fell a greater-than-expected 64 percent on lower licensing fees in the United States and Japan and falling revenue from the United Kingdom.

The shares fell as much as 6 percent after the company said profit in the period dropped to $48.6 million from $134.74 million a year earlier.

SAP warned last week full-year sales would fall short of targets as clients in the United States and other important markets reduced orders. Though that prompted analysts to reduce their profit forecasts, few expected a 64 percent decline.

"This undermines the company's credibility," said Coleen Kaiser, an analyst at Merrill Lynch in London, who rates the stock "long-term buy." "They should have come out with some of this a long time ago."

Businesses have postponed spending on software this year as they prepare their computers for the switch to the year 2000, cutting into the sales of many software makers. The company said last week it sees sales rising 15 to 20 percent this year, below a July forecast of 20 to 25 percent.

That was SAP's third warning this year that earnings would be lower. In January and March, the Walldorf, Germany-based company also said it wouldn't meet its targets.

SAP was expected to report a 3.6 percent drop to $129.88 million, according to the median estimate of eight analysts polled by Bloomberg News.

The company also reversed an earlier forecast for a slight increase in its 1999 pretax profit margin, saying it will now be "a couple of percentage points" below last year's level.

The shares have fallen more than 10 percent since the company's warning on sales last week.

In the third quarter, pretax profit declined 64 percent to $85.14 million, while operating profit fell 59 percent to $8.37 million. Costs rose 23 percent to $1.12 billion in the period and will rise further in the fourth quarter because of personnel costs and investments in new products, SAP said.

Third-quarter sales rose 7 percent to $1.21 billion from last year's $1.13 billion, after a 43 percent rise in the comparable period last year.

"Even though we are in a difficult market environment, we are still disappointed by these results," co-chief executive Hasso Plattner said in a statement.

Slowing sales growth
SAP's sales growth has slowed this year from 22 percent in the first three months and 13 percent in the second quarter.

Sales in North and South America, SAP's biggest market, dropped 5 percent to $529.86 million. In Europe, the Middle East, and Africa, sales climbed 13 percent to $544.87 million. Sales in Asia posted the strongest growth, rising 51 percent to $134.6 million.

"The U.S. sales slowdown is not a very good sign," said Michael Krinner, who is with Bank Fuer Handel & Effekten in Zurich. "They have to show that this was the bottom."

SAP said it expects its new mySAP.com product, which allows customers to integrate its applications with Internet services, as well as a "strong order pipeline" for the fourth quarter, to help it reach its 1999 sales target.

"With the overwhelmingly positive reception of mySAP.com as well as our overall Internet strategy, we are moving quickly to seize the leadership in business-to-business e-commerce," SAP's Plattner said.

Fourth-quarter software sales are expected to beat last year's level for the period, the company said, though Plattner cautioned that "much depends" on the effect of the year 2000 changeover on consumer confidence.