SAP: rough waters ahead

SAP recently posted impressive financial results for both the fiscal year and the quarter that ended 31 December 2008.
##CONTINUE##
The company deserves credit for the management skill it took to deliver double-digit revenue growth for the full year and double-digit profit growth in the final quarter even as the economy was crashing around it. But within the numbers are warning signs that even the best management can't work magic in an economy as bad as this one is becoming. The coming year looks tough enough that SAP declined to provide its usual guidance on key revenue targets - and announced it would lay off more than 6 per cent of its workforce.

For the fiscal year, SAP posted total revenues of €11.6 billion, up 13 per cent from the prior year. Revenues from software and software-related services grew nearly 14 per cent, to €8.5 billion, while software revenues grew 5.8 per cent to €3.6 billion. Net income fell 2 per cent to €1.9 billion, but the firm managed to post earnings per share from operations of €1.62, a slight increase from last year's €1.60.

The quarterly results also contained some impressive figures. Total revenues and revenues from software and software-related services each grew 8 per cent, to €3.5 billion and €2.7 billion respectively. Operating income reached €1.3 billion, up 15 per cent, while net income rose 13 per cent to €850 million. Operating margin grew 2.4 percentage points, to 36.6 per cent, and earnings per share from continuing operations rose 16 per cent, to €0.72.

Those are indeed impressive results, especially given the backdrop of bank failures, mortgage foreclosures and general economic gloom in which they were achieved. In particular, the fact that SAP could squeeze costs enough to turn an 8 per cent gain in total revenues into a 13 per cent gain in net income testifies to the management's firm hand on the tiller.

However, the numbers weren't completely rosy. Growth in operating income has slowed for the past couple of years, from 10.3 per cent in 2006 to 6 per cent in 2007 and 4 per cent in 2008. Earnings-per-share growth has trended sharply downward from 26 per cent in 2006 to 4.6 per cent the following year and just 1 per cent in 2008.

The most alarming number, however, is software revenues - mainly new license sales - which fell 7 per cent in the fourth quarter, to €1.3 billion. Software isn't the largest revenue category; it constitutes only about one-third of the company's total. Unlike Microsoft, whose revenues derive mainly from product sales, SAP draws the largest share of its revenues from services, or maintenance fees. These generate roughly twice as much revenue as software license sales and grew 8 per cent in the fourth quarter over the year before. But, despite this dependence on services, SAP is still fundamentally a software company; its products are what drive its services business. So when software revenues decline, it spells trouble ahead.

SAP describes the coming year as "challenging" - so much so that it declined to give its usual revenue guidance. Even more telling, it decided to lay off 3300 of its workforce, reducing total staff from 51,800 at present to 48,500 by the end of the year - a cut of more than 6.3 per cent. It didn't specify where the cuts will occur, saying only that it will look at "each region and each line of business at all levels". It said it will rely as much as possible on attrition rather than forced layoffs and expects the moves to reduce annual personnel costs by €300-350 million.

SAP is only the latest tech company to be forced to cut staff. Microsoft, Intel and Google are among those that have announced similar moves, and Oracle is reported to have done so as well, though it hasn't said so publicly. SAP's cutbacks are similar in size (though larger as a share of total workforce) to those announced by Microsoft, which said it will cut 5000 jobs over the next 18 months, but offset that by hiring "a few thousand" employees in strategically important areas in the same period.

-----------------------------
BY Warren Wilson/Ovum
Source：IT BRIEF

© Copyright Action Media Ltd . You must have written permission before reproducing any content. All rights reserved. E. & O. E.