SAP reports revenue up 12 percent, earnings up 15 percent

SAP expects that full-year revenue growth will accelerate if currency exchange rates remain unchanged

SAP reported a 15 percent year-on-year rise in earnings for the second quarter, on revenue up 12 percent. It forecast that underlying revenue growth in its core business of software and software-related services will accelerate following completion of its acquisition of Sybase.

Revenue totalled €2.89 billion (US$3.53 billion as of June 30, the last day of the period reported), up 12 percent from €2.58 billion a year earlier. Most of the growth was driven by favorable exchange rate movements: at constant currency rates, SAP said, revenue growth would only have been 5 percent.

SAP reported net income for the quarter of €491 million, up 15 percent from €426 million a year earlier.

Revenue from consulting, training and other professional services remained flat at €617 million.

However, the company continues to derive most of its revenue from software and from software-related services, including support and subscriptions.

Support revenue grew 14 percent to €1.53 billion; software sales grew 17 percent to €637 million, and subscription and other software-related service revenue rose 30 percent to €95 million.

Overall, second-quarter revenue from SAP's core software and software-related services activities grew at 16 percent, or 8 percent excluding the effects of currency fluctuations.

SAP forecast that full-year revenue from software and software-related services will grow at between 6 percent and 8 percent at constant currency rates. But SAP expects revenue growth of between 9 percent and 11 percent at constant currency rates once it includes revenue from Sybase, for which it announced the conclusion of its tender offer Tuesday. With approval for the merger granted by the European Union last week, completion of the merger is now a mere formality.

Around the world, software revenue for the second quarter was up 64 percent in the Americas, SAP's biggest market, and up 11 percent in Asia, but down 9 percent in Europe, the Middle East and Africa.

All activities combined, SAP's second-quarter revenue rose just 3 percent in Europe, the Middle East and Africa, to €1.39 billion. Almost all that growth came from Germany, where revenue rose 9 percent to €506 million, from €463 million a year earlier. U.S. revenue rose 21 percent to €802 million.

"We continue to see improvement in customer spending in most regions, as customers are returning to investing for growth," co-CEO Bill McDermott said in a conference call with journalists.

The company is signing an increasing number of large deals, McDermott said. Contracts worth over €5 million made up 20 percent of the company's order book in the second quarter, compared to just 12 percent a year earlier. Businesses in Europe have been the most cautious, showing a reluctance to sign such large deals, he said.

That said, ongoing sales leads in Europe did not dry up, and SAP is "cautiously optimistic" about the region's performance the remainder of the year, McDermott said during a call with analysts.

Overall, the company has seen a 15 percent increase in its average selling price, he said.

SAP's other co-CEO, Jim Hagemann Snabe, put the emphasis on the company's smaller customers, saying that the key to success with small and medium-size enterprises (SMEs) is making software easier to purchase and cutting installation and integration times from months to weeks.

Back in 2005, the company set the goal of having 100,000 customers by 2010 -- a goal the company reached during the second quarter, Snabe said.

"The release of the newest version of SAP Business ByDesign will further enhance our relevance and broaden our reach in the SME segment," he said.

In contrast to its traditional on-premise software, ByDesign is an on-demand product. Version 2.5 of ByDesign will go on sale in six countries on Friday, with a true "multi-tenancy" model and an interface based on Microsoft's Silverlight, he said.

SAP had to scale back its marketing efforts for the suite while working to ensure it could make enough money delivering it at scale. With multi-tenancy, a number of customers share the same instance of an application, cutting down on management overhead and enabling vendors to roll out upgrades and fixes to many companies at once.

"We have worked hard over the last year. We decided not to go to market before we had a perfect infrastructure. We have that now," Snabe said.

Business ByDesign will compete with the likes of NetSuite in the SaaS ERP (enterprise resource planning) arena. Some observers also believe SAP will have a tricky time selling ByDesign without cannibalizing the user bases of its on-premises software suites for smaller companies.

Snabe ducked questions about the number of ByDesign customers SAP has signed up so far, saying only that there were thousands "in the sales pipeline."

SAP's acquisition of Sybase will allow it to strengthen the third pillar of its business, on-device applications, alongside its traditional on-premise and the more recent on-demand activities, Snabe said.

With the completion of SAP's tender offer for Sybase on Tuesday, the company is now working on integrating the two companies' portfolios and will outline its plans for the combined company on Aug. 19, he said.

SAP is focused on those plans for now, and does not have another large acquisition in the works, Snabe said in an interview.

During the analyst call, McDermott noted the strength of Sybase's recent earnings results. They not only reflect the health of Sybase's business, but "confidence in SAP, as customers continued to purchase Sybase products after the deal was announced," he said.

When the deal was first reported, SAP said no major cuts were planned for Sybase's operations. That remains the case, Snabe said in the interview.

SAP's acquisition strategy "is very, very different" from its main competitors, he added in an apparent allusion to companies like Oracle. " If you acquire for market share and installed base, you have to get the cost savings and lay off a lot of people. We acquire for innovation. [With Sybase] we will leverage the obvious administrative benefits, but the true benefits come from the top line."

Beyond SAP's sales figures, there is one other sign that the economy is picking up: its customers are paying faster. SAP's days sales outstanding, a measure of how long it takes customers to pay their bills, declined from 79 days on Dec. 31, 2009, to 73 days on June 30, 2010.

SAP's results were also helped by customers' embrace of Enterprise Support. In 2008, the vendor announced that all customers would be moved to the richer-featured but pricier support option, sparking a prolonged outcry from many users. SAP ultimately restored a standard support option earlier this year.

"Customers like choice. When we were bullish about not giving them choice, there was a strong reaction to the market," Snabe said in the interview. Globally, about 80 percent of customers and in some regions, 90 percent, are choosing Enterprise Support, he added.

Peter Sayer covers open source software, European intellectual property legislation and general technology breaking news for IDG News Service. Send comments and news tips to Peter at peter_sayer@idg.com.

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