SAP Software Sales Drop, Warns of Q2 Pain

German software giant SAP reported worse-than-expected first-quarter results today, joining the ranks of major IT vendors stung by the protracted economic downturn.

The company said first-quarter earnings totaled about 24 cents per share (€0.18) while non-GAAP earnings came to 29 cents per share (€0.22), well below analyst expectations of $0.38 cents per share.

SAP’s (NYSE: SAP) software revenues of €418 million were 33 percent down from Q1 2008, but total revenues were down only 3 percent due to increased revenue for support services. Since software revenues are an indication of the market for future services, this was bad news.

The company — best known for its enterprise resource planning (ERP) software — isn’t not alone in experiencing difficulties as IT spending remains sluggish. During its most recent quarter, VMware’s revenues fell a steep 12.6 percent to $257 million, and company executives said next quarter’s sales may even be down further. Likewise for Sun Microsystems, which is being purchased by SAP rival Oracle, and which yesterday reported a sharp drop in revenue and wide losses.

While VMware has an ambitious product line and Sun will be acquired by Oracle, SAP’s plans for the future focus on cost-cutting, and the cost of layoffs cut into earnings.

“The cost containment measures that we initiated in October of last year and carried into the first quarter of 2009 have really taken hold, and we are pleased with the resulting margin performance,” SAP Co-CEO Léo Apotheker said.

The company said that the total cost of terminating 48,500 positions worldwide will be between €200 million and €300 million during 2009, even taking full advantage of attrition.

Furthermore, the company said, Q2 2009 won’t be any better than Q2 2008 because the economic crisis did not truly bite until the second half of 2008.

“Like the first quarter of 2009, the second quarter of 2009 will be a difficult comparison to the strong results reported in the second quarter of 2008, which was prior to the economic crisis that disrupted the global markets beginning in the third quarter of 2008,” the company said in a statement.

In spite of the pessimistic projections, the company is still a major money earner. It reported an impressive positive cash flow and asset growth. It ended Q1 2009 with assets of €15.217 billion, up from €13.9 billion a year ago. It reported free cash flow of €1.337 billion, up from €1.011 billion a year ago, a 32 percent increase.

Earnings would be up if it weren’t for the costs of restructuring. Net operating income of €332 million was 8 percent less than net income of €359 million a year ago but net income in Q1 2009 was reduced by restructuring charges of €160 million.

Given economic uncertainty, SAP refused to forecast sales for the rest of 2009.

At press time, SAP was trading at $38.98, down $1.36 or 3.37 percent on the previous day’s close of $40.34 but up from the $38.55 price at the start of the day.

In contrast to its pessimism about current conditions, the company is hopeful about its long-term future, one that involves its acquisition of Business Objects last year. The company has already integrated the acquisition into its product line and expects to add SaaS services this year.

Apotheker sounded an optimistic note. “In this difficult environment, we have maintained our market leadership because we have the industry’s broadest and deepest product portfolio for large, midsized and small companies, and we have the ability to continue to innovate.”

“SAP is a strong company with a robust business model, a highly skilled workforce and a great customer base,” he added. “We expect to exit this recession even stronger, just like we did after the downturn earlier in the decade.”

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