SAP Q3 profits soar on reduction of TomorrowNow provision

The company saw revenue grow by 14 percent in the quarter

SAP reported Wednesday a 14 percent increase in revenue in the third quarter ended Sept. 30, and said its business pipeline continues to remain very strong and companies continue to invest in IT. The business software vendor did not however revise its outlook for the full year 2011, citing the ongoing uncertain macroeconomic environment.

Total revenue in accordance with IFRS (International Financial Reporting Standards) was €3.41 billion ($4.6 billion at the exchange rate on the last day of the quarter), while software revenue at €841 million grew by 28 percent from the same quarter last year. IFRS software and software-related service revenue was €2.69 billion, an increase of 16 percent.

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SAP's third quarter software revenue grew at its fastest rate in a decade because customers are shifting their investments to software that helps them grow and innovate, the company said in a statement.

Revenue growth for the quarter was also helped by last year's acquisition of Sybase. For the year-over-year comparison, SAP included Sybase revenue, profits and cash flows starting from the July 26, 2010, acquisition date.

SAP's profits soared by 150 percent, in accordance with IFRS, after the company lowered its provision for settlement of the TomorrowNow litigation with Oracle by €723 million, and reflected that sum in the operating profit. U.S. federal judge Phyllis Hamilton reduced the damages in September from $1.3 billion, while giving Oracle the choice of accepting $272 million or seeking a new trial.

The company forecasts full-year 2011 non-IFRS software and software-related service revenue to increase in a range of 10 percent to 14 percent at constant currencies, but expects to reach the high end of the range.

SAP plans to evaluate buying back shares in view of its strong free cash flow generation over the first nine months of 2011. During this period, the company has already bought back 3.6 million shares at an average price of €43.84, mainly in connection with SAP's share-based compensation plans, SAP said.

The quarter's results suggest that IT shops are feeling more comfortable about ERP (enterprise resource planning) software upgrades. Sales for SAP's core Business Suite grew 26 percent year-over-year, co-CEO Bill McDermott said in an interview.

ERP sales were also helped by deals made in emerging markets as companies there look to modernize systems, co-CEO Jim Hagemann Snabe said during a conference call.

Beyond ERP, SAP has placed major bets on newer products such as the HANA in-memory computing engine, which became generally available in June, as well as mobile software. HANA is "on fire" and mobile "has taken off," McDermott said. "We're kind of firing on all cylinders."

HANA sales stand at €63 million for the year, with €36 million of that coming in the quarter, he said. HANA's "pipeline," or backlog of sales leads, is worth about €600 million, he said. Not all of those will turn into real business, at least right away, however. SAP expects HANA to generate €100 million in business next year, McDermott said.

The HANA software is available in a variety of appliance sizes, on hardware from a variety of vendors. The average HANA deal has been worth in the "million kind of range," McDermott said.

HANA is beating rivals Oracle's Exadata database machine "in every deal where we compete," he claimed.

SAP has won HANA deals in every part of the world, co-CEO Jim Hagemann Snabe said during a conference call with analysts.

The Sybase acquisition gave SAP a variety of technologies for mobile application development. Sales for mobility were "a little bit less" than HANA, according to McDermott.

McDermott was also bullish on SAP's on-demand software strategy, which is underpinned by the Business ByDesign ERP suite as well as applications like Sales on Demand.

Business ByDesign remains on track to gain 1,000 customers by the end of the year, he said. On average, Business ByDesign implementations are in the 20-seat range, but that will change soon as SAP starts aggressively pushing the suite as an option for the subsidiaries of large enterprises, he said. "You're going to see thousands of seats at a time. We're running that play now."

ByDesign had about 650 customers at the end of the quarter, according to Snabe. "We're seeing good traction in the partner channel," he said. "Almost 80 percent of the ByDesign business came through the channel."

SAP's rivalry with Oracle in the business applications market is about to heat up even more with the recent arrival of Oracle's long-awaited Fusion Applications, but McDermott expressed little worry.

"What we're hearing is that it does not have the industry-specific functionality the customer is looking for, and [customers] do have to re-platform from their existing base applications," he said.

SAP is also hoping to snare Oracle customers who are looking for alternatives rather than upgrade to Fusion. However, SAP is not the only option for such users, as SaaS (software as a service) vendors like Workday have begun aiming their sights on the world's largest enterprises.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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