German software darling SAP saw its growth slow the second quarter ended June 30 as personnel costs, an employee stock appreciation program, and the Asian economic crisis took a toll on the company's bottom line.
Pretax profits for the quarter rose 30 percent from last year's like period to $288 million. Revenue increased to $1.2 billion, a 59 percent increase from last year's second quarter. For the first half of 1998, sales climbed 61 percent to $2.1 billion from last year's first half while profits grew 43 percent to $460 million.
But the Waldorf, Germany-based software vendor added nearly 5,892 new employees from the same period last year bringing the corporate head count to almost 17,000 people worldwide. This resulted in a 70 percent jump in operating costs from the same period last year to $954.5 billion. Many of the people were added to the research and development department which grew 57 percent.
The company also set aside $19.4 million to cover the costs of its new stock appreciation program for the months of May and June. Unveiled in March, the program will pay employees' bonuses based on this year's increase in SAP's share price above the starting level of $434.30.
SAP is also feeling the ripple effect of Asia's economic troubles as the "situation in Asia had a larger-than-anticipated impact on SAP's second quarter," SAP executives said in a prepared statement.
"SAP's performance in Asia/Pacific is increasingly being affected by a trend evident in Japan: Customers and prospects are postponing and, in some cases, reducing software investment and implementation projects as the uncertain business climate continues to damper investments or spread them over longer periods of time," the release stated.
SAP Chairman and CEO Hasso Plattner said his company is "monitoring the current situation in Asia closely and has figured it into our projections for the current fiscal year. SAP's position in Asia remains strong and seizing the long-term growth opportunities in the region remains a core commitment for us."
The words are being followed by action. SAP has added staff to many of its Asian offices including 70 people to its Singapore staff of 199 and boosting, by 45 percent, staff in Southeast Asia and India from last year's head count of 420 people.
"You have to take a long-term view of the region," said Les Hayman, president and chief executive of SAP South Asia Pacific, in a recent interview. "The next two to three years will be a rebuilding process and then I believe that you will return to decent growth numbers. I don't believe you can take a one-year economic snapshot and have any meaning. You have to take a 10-year economic snapshot."
Paul Wahl, SAP board member and CEO of SAP America, said the firm was expecting some of the Asian Tiger markets, like Korea, to be affected but it is now experiencing slowdown in more stable Asian countries like Japan as the economic problems ripple through the region. Still, Wahl said the Asian market makes up only 10 percent of SAP's market and the slight slowdown should not have a lasting effect.
Wahl also said both United States and European customers of SAP have yet to be affected by the Asian crisis and are not slowing implementations or canceling orders. Revenue growth in North and South America combined grew 72 percent the first half of 1998 to $954.4 million compared to $561.4 million in the first half of 1997. Europe grew 72 percent to $524 million.
Analysts are also not expecting the Asian flu to be more than a sniffle for SAP or any other enterprise resource planning software maker because the market is such a small portion of the overall ERP arena.
But in the meantime, Asia's economic problems, the new employee bonus program, and added staff are affecting SAP's growth rate for the year. The company is predicting growth for the year will slow to 40 percent from 62 percent last year. SAP launched a preemptive strike on July 10, telling the investment community that its growth for the year would likely be 30 to 35 percent for the year, slower than Wall Street was predicting, but right on target with SAP's predictions.
The news sent SAP's stock prices into a tailspin dropping as much as 10 percent as analysts, caught of guard by the news, reacted. Analysts were predicting a rosier year for SAP after the firm reported 72 percent growth in profits its first quarter. Investors are now accepting SAP's predictions of 30 to 35 percent growth for the year.
But the stock has since rebounded. After its earnings news was released, SAP's stock advanced $2.80 today to trade at $662.80 on the German market..
Reuters contributed to this report.