SAP Tightening Up

SAP’s results reveal that compared with the last quarter, when it seemed to be going strong, the company has become yet another giant to be affected by the global economic crisis. Its shares fell almost 50% in a month as the crisis worsened. Yesterday, SAP reported third quarter results and lowered its profit margin target for fiscal 2008, which led to a 16% slump in the stock. Its shares had slid 16% earlier in the month when the company reported preliminary results that missed estimates. 

Third quarter GAAP software and software-related services revenue was €1.99 billion, up 15% y-o-y but down about 3% q-o-q. Total revenue was €2.76 billion, up 14% y-o-y but down 3% q-o-q. Net income was €388 million, down from €408 million last year and quarter. EPS was €0.35 which was flat y-o-y while non-GAAP EPS increased 14% y-o-y to €0.41.Software revenue was €763 million, versus €714 million a year ago and €898 million last quarter. During the quarter, SAP bought back shares worth €104.2 million and in the first nine months of 2008, it invested €486.8 million in share repurchase.

SAP reported that its worldwide share of the Core Enterprise Applications market was 33.4%, up 6.5 percentage points over last year. The y-o-y market share increase can be attributed to organic growth and the acquisition of Business Objects, which is the top vendor for BI tools, with 14.2% market share as per IDC.

As the credit crisis worsened and recession became a certainty at the end of the third quarter, SAP’s SME revenue was hit hard. As a result, SAP has decided to go for a more controlled roll-out of its BusinessByDesign products, its SaaS venture targeting the SME market.

In light of the economic uncertainty, SAP has withheld its 2008 revenue forecast and revised its profit margin outlook to 28%. It had earlier forecast an operating margin of 28.5%–29.0%. To achieve the 28% target, SAP needs to achieve at least 20% to 22% growth in software and software-related revenue and watch its expenses. It plans to save €200 million by freezing hiring and minimizing travel expenses. I think, in general, this economic downturn is a great opportunity for all companies to take a close look at gratuitous business travel.

The stock hit a 52-week low of $29.31 yesterday after the earnings release. It was trading around $58 last month and is currently trading around $32. In contrast, SAP’s biggest rival, Oracle, had a good quarter. Perhaps it would be reasonable to expect that next quarter, Oracle will be mirroring the cautious signals being provided by its compatriots, SAP, Microsoft, and others.