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The Asia-Pacific region replaced the Americas as SAP’s engine of growth during the second quarter, and that combined with strong performance from Europe, helped the company as a whole increase both revenue and its profitability.

By Angela Eager

For the quarter ended June 30, SAP reported total revenue of 2.42bn euros ($3.34bn), up 10% (14% at constant currencies) on the year-ago quarter. Net income rose 8% to 449m euros ($621m), aided by a lower tax rate, against consensus expectations of 395m euros ($546m). License revenue was also up on the year, by 18% (or 21% constant currencies), to 715m euros ($988m), beating the external consensus forecast of 676m euros (934m). Software and software-related service revenues came in at 1.71bn euros ($2.36bn), a 16% (19% constant currencies) increase compared the year-ago quarter. Software and software-related service revenue comprises software revenue, plus support revenue, plus subscriptions and other software related services revenue.

CEO Henning Kagermann said he was more comfortable about the level of performance at the mid-point of this year than he had been at the same point last year. However, he cautioned that it will be the fourth quarter that decides what the year would look like, so despite the positive results, he did not increase full-year guidance. SAP still expects annual sales growth of 12% to 14% at constant currencies.

News that performance had stabilized in the US alleviated concerns about SAP’s performance there as software and software-related service revenue grew 4% (11% constant currencies), although it was still the poorer performer within the overall America’s region which was up by 12% (18% constant currencies). EMEA took second place in the league of top-performing regions, delivering 916m euros ($1.27bn) in software and software-related service revenue, up 16% (17% constant currency) due to strong performance in Russia, UK, France, and the Nordic countries, but Asia Pacific, including Japan, soared 24% (29% constant currencies), although it only delivered 222m euros ($302m). SAP is also seeing strong growth in emerging economies including China, India, and Russia.

“Success was based on a balanced global performance. We were extremely pleased, especially about [the] European [performance], which was higher than expected,” said Kagermann. “Asia Pacific was growth engine number one. America’s came in as expected.”

Mid-market business was also up by 2% year-on-year in terms of order entry, to 32% and representing 28,000 customers. Deputy CEO Leo Apotheker said that it is achieving SMB growth with its current set of products and the company is not reliant on the forthcoming A1S product for success. “It shows that with our current products we can cover a substantial part of the market,” he said.

As far as A1S is concerned, it will undergo a phased release, but will remain under wraps until September. Kagermann revealed some details however. Initially, the suite will be available only as a hosted deployment, as previously announced, but once the company has proved everything is working well, it will offer customers the option of running it on site, but on an appliance rather than as a traditional licensed on-premise system. “It is close to the on-demand model,” said Kagermann.

The appliance should enable SAP to maintain the simplicity of on-demand deployment while addressing customers’ wishes to keep their data on site. It could also be useful in addressing performance issues when bridging LANs and WANs. SAP will host the A1S service initially because it wants to keep close tabs on feedback, but will hand it over to a third party in time. It uses IBM for its existing hosted CRM service.

Concerning the lawsuit Oracle has launched against SAP and its subsidiary TomorrowNow, Kagermann said Mark White is now in position as chairman, some TomorrowNow employee’s have been dismissed, and the manager in charge of the operation had been suspended. He confirmed that CEO Andrew Nelson was not the suspended manager. There are signs that SAP does not believe the lawsuit will be costly because although it did not say how much had been allocated to deal with the case, it said there was no single lawsuit-related accrual of greater than 10m euros ($13.8m). This could be an indication that it is preparing to settle out of court.

Our View

With virtually every metric up, and double-digit growth in all regions, not to mention the 7% jump in its share price shortly after the news hit, SAP has plenty to celebrate with these results but maintained a cautious demeanor throughout its presentation and Q&A session, aware that there is still half a year to go. It is well positioned but is in the uncomfortable situation of having to wait to see the fruit of its labors in areas like enterprise SOA and SAP ERP 6.0 (also known as mySAP ERP 2005) upgrades. While users are indicating that they plan to upgrade (75% of Americas’ SAP Users’ Group members have indicated they will upgrade in mid-2008) nothing is confirmed until the contract is signed.

The high-profile A1S initiative is also a high-risk project because everything will be new, from the technology, to the sales, partner, and business model. SAP said it can reach its SMB goals without A1S, but it will be a lot harder without the hosted and appliance-based offering. It is not as if the market is standing still, with all of SAP’s competitors also focusing on the SMB market with new options, technology, and deployment models. SAP may think its current mid-market products are sufficient to meet its goals, but the SMB market is undergoing rapid change which means the situation may not look so comfortable in a year or so. A lot is riding on A1S.

Nevertheless, SAP is in a very good position. Its second-quarter results indicate it has the trust and the wherewithal to derive revenue from both existing and new customers.