Update: SAP earnings rise as revenue continues to slip

SAP's revenue fell in the third quarter, but earnings rose — although neither figure was as high as analysts had hoped. The company said it expected the decline in software and software-related service revenue to continue.

Revenue totalled €2.51 billion ($3.66 billion) for the third quarter, down 9% on the year-earlier figure, the company reported Wednesday.

Net income rose 12%, to €435 million, yielding earnings per share of €0.37 ($0.54 as of Sept. 30, the last day of the period reported).

Analysts had expected earnings per share of $0.58 and revenue of $3.84 billion.

Software revenue saw the sharpest decline, slipping 31% to €525 million, while support revenue rose 14% to €1.33 billion. The company's increase in enterprise support charges has been a sore point with customers over the last year.

Overall, software and software-related service revenue fell 3% to €1.94 billion. At constant currency rates, the fall would have been 5%, SAP said.

The decline in revenue from software and software-related services will continue, and may accelerate, for the rest of the year, SAP said. At constant currency rates, it expects such revenue to decline by between 6% and 8%an increase from the 4% to 6% it forecast in July.

Consulting revenue fell 22% to €484 million, and training revenue dropped 43% to €60 million.

Software and software-related service revenue fell 13% in Germany, but rose 6% in the rest of SAP's Europe, Middle East and Africa region, the only area to see a growth in such revenue. Performance was particularly disappointing in emerging markets and Japan, SAP said.

The nature of deals is changing: SAP saw a trend towards more smaller deals, but is also signing longer-term contracts, it said.

The company's cost-cutting program is proceeding apace, and it has shed staff faster than planned. It originally announced its intention to reduce headcount to 48,500 by the end of 2009, a reduction of around 3,000 posts over the course of the year, but by the end of September the company had only 47,804 staff, it said.

SAP has cut around 539 jobs in Germany since the start of the year, or 8.4% of its workforce there, and 3,732 jobs worldwide, or 7.2% of the workforce. The company cut just over 4% of research and development staff, but slashed professional services and sales and marketing staff by around 11%.

Despite the challenges it has faced, SAP has added 10,000 customers so far this year, executive board member Bill McDermott said in an interview.

SAP is not yet providing any revenue predictions for 2010, but it is “unlikely there's going to be this huge recovery,” McDermott said.

SAP had been “carefully optimistic” the worst was behind it and continues to believe that, but the company still faces difficult challenges, CEO Leo Apotheker said during a conference call.

This has been “a very peculiar year” business-wise, he said. While SAP's pipeline of potential deals is strong, “on the other hand, the slightest change in [customer] mood has an impact on closure rates,” he said.

In its fourth quarter, SAP plans to continue segmenting its sales force into specialized teams focused on particular market segments, McDermott said during the conference call. It is also using its own BI (business intelligence) tools to track sales opportunities and the progress of deals, he said.

SAP is trying to move away from large up-front deals with big customers in favor of multiyear arrangements in order to develop a more predictable, “medium-term” business model, Apotheker said. The approach is being welcomed by customers, he added.

Product-wise, SAP is off to “a strong start” with BusinessObjects Explorer, a BI tool it showcased during May's Sapphire conference, Apotheker said.

In addition, SAP is “on track” with rollout plans for Business ByDesign, its SaaS (software as a service) ERP suite for midmarket customers. SAP originally planned a quicker ramp-up for the application, which is now with charter customers, but subsequently scaled back plans to ensure it could make enough of a profit at scale. More details will come early next year, Apotheker said.

Without referring to any specific targets, Apotheker indicated that SAP is open to making further acquisitions. Earlier this year, it bought Clear Standards, maker of an SaaS application for tracking emissions, and in September executed a friendly takeover of SAF, which develops analytics software for retailers and wholesalers. “The wider your portfolio, the more interesting opportunities you create,” he said.

Meanwhile, SAP will also within weeks release initial data on a set of KPIs (key performance indicators) it has been developing with user group leaders to prove the value of its Enterprise Support service, according to Apotheker. The vendor rankled many users last year when it announced plans to migrate customers to the fuller-featured but more expensive service.