SAP tops forecast, faces weak sales
Europe's biggest software maker posts earnings above forecast and raises its profit margin target but also says the sluggish economy and weak dollar had depressed sales.
SAP said it continued to take market share away from rivals like U.S.-based Oracle, PeopleSoft, and J.D. Edwards, a trio tied up in a messy shouting match over who should merge with whom.
SAP offset falling sales in the second quarter with rigid cost controls.
"Of course, it is a strong performance to hike profits as sales fall,'' said Friedrich Diel, fund manager at Frankfurt Trust. "But without a clear sign of growth, the share has exhausted its upside potential. Do you really want to pay 30 times earnings for a company that is actually not growing?''
SAP reiterated its guidance for 2003 earnings per share of $3.86 (3.45 euros) to $4.02.
Software license sales, a key measure of underlying growth, fell 13 percent to $482.2 million from $554.9 million in the same quarter a year ago, versus a consensus forecast of $516.9 million.
Adjusted for the weak dollar, whose average exchange rate against the euro was almost 20 percent lower in the second quarter than a year ago, license sales fell only 5 percent, SAP said.
Total sales were down 8 percent to $1.79 billion, up 2 percent if adjusted for currency effects, but far below consensus forecasts of $1.89 billion. Analysts said the trend could continue during the year.
"Management has raised its operating margin guidance and maintained its EPS guidance...implying that full-year revenues are expected to be weaker than management had thought at the start of the year,'' Citigroup analysts said in a research note.
SAP said second-quarter operating profit excluding stock-based compensation charges and acquisition costs rose to $433.8 million, more than last year's $362.4 million, and well above analysts' average estimate of $393.7 million.
Operating profit margin excluding costs was 24 percent, up 6 percentage points from a year ago. SAP also said it now expected the 2003 full-year margin to be 1 percentage point to 1.5 percentage points above last year's.
SAP said it built up market share at the expense of smaller rivals during the downturn, saying it had 55 percent of the global market for business planning software on a rolling four-quarter basis, up 1 percentage point on the quarter.
It said sales in the Americas, where its hold is weaker than in Europe, were down 15 percent, but up 6 percent if adjusted for currency effects.
"The business environment remains tough, but we executed better than most of our competitors and, more importantly, we once again achieved our goals of improved operating margins and continued market share gains,'' Chief Executive Henning Kagermann said in a statement.
SAP said it won 1 percentage point in market share to 31 percent in the United States on a rolling four-quarter basis.
Analysts expect it to steal business from U.S. rivals as the takeover battle between PeopleSoft and Oracle drags on, hoping customers would be loath to buy software from a provider that may not be around in a year.
"It is clear that SAP will benefit from the struggle around PeopleSoft, and we could see the effects of that in maybe three or six months,'' Frankfurt Trust's Diel said.
With more than 20,000 corporate customers worldwide, SAP boasts the industry's largest user base.
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