SAP returns to growth and profits in the first quarter

SAP AG said Wednesday that its first-quarter software and software-related service revenue rose 12 per cent over the previous year, to €1.95 billion (US$2.62 billion). 
Software revenue for the quarter was €464 million, up by 11 per cent from the same quarter last year, the company said.
The company saw strong results from rapidly expanding demand for SAP BusinessObjects products, as well as in its small and mid-size enterprise business, it said.
SAP reported its results in accordance with International Financial Reporting Standards (IFRS). The company switched to IFRS reporting this year from U.S. GAAP (Generally Accepted Accounting Principles).
The preliminary financial results indicate a turnaround for SAP which saw software and software-related service revenues, and net income drop in the fourth quarter of last year.
A number of research firm have forecast a growth in IT spending this year, which is expected to benefit software companies. Gartner said this month that worldwide IT spending is forecast to reach $3.4 trillion in 2010, a 5.3 per cent increase from IT spending of $3.2 trillion in 2009. 
Worldwide software spending is expected to reach $232 billion in 2010, up by 5.1 per cent increase from last year, Gartner added.
SAP’s non-IFRS software and software-related service revenue was €1.95 billion in the quarter, an increase of 11 per cent over last year. 
Many observers will be closely watching this particular line item. In 2008, SAP rankled many customers when it announced they would be transitioned to a fuller-featured but more expensive Enterprise Support service. After a protracted outcry, SAP restored a standard support option earlier this year.
Currently, “nine out of 10” SAP customers have chosen to go with Enterprise Support because they see the value it provides, co-CEO Bill McDermott said in an interview. 
“By providing choice, it’s calmed down the [controversy]. Now that’s very far behind us,” he added.
The company’s profit under IFRS was €387 million, an increase of 97 per cent, while non-IFRS profit was €435 million, an increase of 65 per cent over the same quarter last year.
SAP expects non-IFRS software and software-related service revenue for 2010 to increase in a range of 4 per cent to 8 per cent at constant currencies. 
Overall, McDermott attributed the results to “cautious optimism” about the economy and the SAP’s close attention to customers’ concerns. “Customers understand we’re going to be focused on them,” he said.
In addition, “once growth comes back on the agenda again for CEOs and boards of directors, SAP tends to do very well in that environment,” he said.
The biggest deal in the quarter was a pact with Russian energy utility Gazprom, McDermott said. “They’re going to standardize their business on SAP.”
SAP is also preparing for a broader rollout later this year of Business ByDesign, its SaaS (software as a service) business application suite for the midmarket. The company had scaled back those plans, releasing the application in only a handful of markets, in order to make sure it could turn a profit at scale.
It is expected that SAP will showcase the application heavily at its upcoming Sapphire conference in May.
Business ByDesign will compete with the likes of NetSuite and Microsoft’s Dynamics ERP (enterprise resource planning) applications, as well as a wide range of specialized SaaS offerings.
SAP’s product “clearly offers the potential to consolidate the software as a service space,” thanks to its tight integration of many components, McDermott said. “If I was an executive, why would I want a bunch of point solutions? It’s the same thing we saw in the late 1990s going into the 2000s. The suite always wins.”

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