Update: SAP revenue and income rise on software sales

Sales of ERP software drive SAP's 16 percent rise in worldwide software revenue

SAP reported a rise in net income and revenue for the second quarter, driven by increased sales of its ERP (enterprise resource planning) software in the Americas and Asia.

Revenue for the quarter rose 13 percent to €2.02 billion ($2.43 billion as of June 30, the last day of the period reported), up from €1.78 billion a year earlier. Net income rose 16 percent to €289 million, up from €249 million.

The company saw worldwide software revenue rise 16 percent. Software revenue rose 25 percent year-on-year in the Americas, 23 percent in Asia and 9 percent in Europe, the Middle East, and Africa, the company announced Thursday, reporting unaudited results.

Europe, the Middle East, and Africa accounted for half of SAP's €576 million in software sales in the second quarter.

SAP, based in Walldorf, Germany, stood by a prediction it made in April that software revenue for the full year will grow by between 10 percent and 12 percent compared to 2004.

That growth rate is lower than one seen, in local currency, in the first half, but SAP is wary of the effect of changes in exchange rates, particularly between the euro and the U.S. dollar. The company is basing its full-year predictions on an exchange rate of $1.30 to €1.

The company is moving to the mid-market, and increasingly relying on partners to deliver.

"We fuelled the growth through volume business. We increased the number of deals by 23 percent, driven more and more by the indirect sales force," said Léo Apotheker, SAP's President of Customer Solutions and Operations, speaking in a conference call with journalists on Thursday.

Indirect sales grew 38 percent in the first quarter, and 49 percent in the second quarter, while direct sales grew by 13 percent and 14 percent, he said.

The move to the mid-market is important because there are not many big deals around, Apotheker said. Of those that are happening, "I am confident we are gaining a very high share of them," he said.

Demand for SAP's Safe Passage program is increasing exponentially, according to Apotheker. Safe Passage is SAP's attempt to win over customers of the former PeopleSoft, JD Edwards, and Retek, worried about continued support for their products following Oracle's acquisition of those vendors. The company signed up 21 customers for the Safe Passage package of maintenance and migration support in the first half of 2005, Apotheker said.

The pricing environment remains challenging, he said. "We have a competitor who believes pricing is the only weapon left, but we know how to deal with that," he said.

SAP is not likely to change its pricing to take account of increased adoption of multicore processors in servers, Chief Executive Officer Henning Kagermann said during the same call.

"We will never have pricing based on consumption of process power. That would be like asking for money for nonperforming applications, and we don't think that's right," he said. "Our direction is more to have packages with one price for end to end business processes. It's not something that will change fundamentally."

The work force is also growing at SAP. The company made nearly 2,000 new hires in the first half of the year, Chief Financial Officer Werner Brandt said. Research and development accounted for 772 of them, of which 63 percent were in low-cost locations, he said. Service and support accounted for a further 541, but only 30 percent of those hires were in low-cost locations.

In April the company predicted it would hire 3,000 over the full the year. Now, however, it expects employee numbers will increase by as many as 4,500 this year, Brandt said.

Kagermann said it's impossible to predict exactly where those hires will be made, as it depends on what products are in greatest demand, and where the company has the greatest competency for developing those products. Demand for business process platforms will bring jobs to Germany, while work on user interfaces will be done in the U.S. and on business suites for the mid-market in India, he said.

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