SAP Profits Up, Sales Down

SAP AG today announced a mixed bag of financial results for the first quarter of 2003, ended March 31. Revenue was down, but earnings were up in the quarter. Net profit came in at 186 million euros ($203 million), up from 65 million euros a year earlier. The company cites cost cutting measures as key drivers of the earnings rise, since license sales were down significantly. Total sales for the quarter were 1.52 billion euros ($1.66 billion), an 8 percent drop from last year's revenue of 1.66 euros. Software license sales were down 12 percent in addition to a 15 percent drop in service revenue. First Call analysts predicted profits to come in at around $150 million, but cost-cutting measures became effective sooner than expected, which accounted for most of the gains. "We are working hard to increase efficiencies and will invest in critical areas of our business as needed to continue to drive innovation in our sector," Henning Kagermann, co-chairman and CEO, said in a company statement. The company increased its operating margin to 20 percent throughout the quarter, a few points higher than expected, says John Tseng, equity analyst with J.P. Morgan. Tseng also says that SAP is gaining on its competition. "At the bottom line, SAP's license sales are only off about four percent," Tseng says. "Compare that with Siebel Systems, which is off fifty-five percent, PeopleSoft which is off thirty-eight percent, or Oracle which is off five percent. I call that competitive gain." Tseng adds that SAP has performed extremely well in the United States over the quarter, with license fees in the region actually increasing by 24 percent. "They are definitely taking share from their competition in the U.S.," he says. Hasso Plattner, co-chairman and CEO of SAP commented on the U.S. gains in a statement: "Our continuing market share gains, specifically in our competitors' home markets, tell me that the market favors SAP's style of business: being a leader through actions; delivering products customers really need; and offering trust and integrity. Our results this quarter demonstrate that our strategy is working and we are well positioned to capitalize on an economic recovery." One more point Tseng says is important to consider is that the first quarter has been seasonably the weakest quarter for SAP over the past several years. "So the rest of the year bodes well for them," he explains.