Update: SAP predicts brighter future as Q2 profits rise

Revenue fell compared to the company's bumper second quarter in 2008, but cost cutting helped boost profits

SAP reported a 4 percent year-on-year increase in net income for the second quarter, even as revenue dropped 10 percent. The company is now more optimistic about its prospects for the full year, but despite the improved profitability, will continue to keep a tight rein on costs, it said Wednesday.

Net income for the quarter totaled €423 million ($602 million), up 4 percent from €408 million a year earlier. Revenue dropped to €2.58 billion, down 10 percent from €2.86 billion a year earlier. Of that, €1.95 billion came from software and software-related services, down 5 percent from €2.06 billion a year earlier.

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Software sales contributed €543 million to that total, 40 percent less than a year earlier. SAP blamed the decline on the tough comparison with a record second quarter in 2008, and on the difficult economic environment.

The company is, however, more optimistic about the outlook for the rest of this year than when it presented its first-quarter results in April.

"I am cautiously optimistic that the worst might be behind us," said CEO Léo Apotheker in a conference call with analysts. "Things are still tough but I think it's safe to say we are seeing more stability."

While the company has more deals in the pipeline, however, "Closure rates are more volatile," he said, warning that "Customers are more optimistic but their buying behavior hasn't changed."

SAP raised its operating margin forecast for the full year to between 25.5 percent and 27 percent, compared to its earlier forecast of 24.5 percent to 25.5 percent, despite predicting a decline in software and software-related service revenue for the year of between 4 percent and 6 percent, where it had previously predicted a decline of less than 1 percent.

The company now expects restructuring charges this year to total €200 million; it had previously predicted that the charges could rise as high as €300 million as it set out to shed around 3,000 employees. So far this year, it has taken a charge of €165 million to shed 2,800 staff.

All of SAP's markets were affected by the decline in revenue, but not all will bounce back at the same speed, said Bill McDermott, a member of the company's executive board responsible for global field operations.

"We see the fastest uptick in the Asia-Pacific region, in India and China, obviously, but also have more mature markets like Australia that are doing OK, mainly because the liquidity situation in Asia has gotten better," he said in an interview following the conference call. More deals are in the pipeline in the U.S., too.

One factor behind the company's optimism is the 30 percent improvement in software revenue between the first and second quarters this year, one of the largest sequential increases the company has seen, McDermott said.

Growth in software sales now will drive future recurring revenue from software-related services such as Enterprise Support, the company's new software maintenance program.

SAP has recently agreed with user groups to a set of KPIs (key performance indicators) to measure the business value of Enterprise Support. The user groups had protested when SAP introduced Enterprise Support at a higher price than the maintenance program it replaced, forcing customers to switch to the new and more expensive service.

The KPIs "are a major competitive advantage for SAP," said McDermott. "Customers appreciate the candor and clarity," he said.

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