SAP Reports 17 Percent Growth in Software Revenues

Feature Article | October 19, 2006 by admin

HIGHLIGHTS – Third Quarter 2006

Revenues

  • Software revenues for the third quarter of 2006 were €691 million (2005: €590 million), representing an increase of 17 percent (20 percent at constant currencies) compared to the third quarter of 2005.
  • Product revenues for the 2006 third quarter were €1.6 billion (2005: €1.4 billion), which is an increase of 13 percent (16 percent at constant currencies1) compared to the same period in 2005.
  • Total revenues were €2.2 billion for the third quarter of 2006 (2005: €2.0 billion), which represented an increase of 11 percent (14 percent at constant currencies1) compared to the third quarter of 2005.

Core Enterprise Applications Vendor Share

  • Based on software revenues on a rolling four quarter basis, SAP’s worldwide share of Core Enterprise Applications vendors, which account for approximately $16.4 billion in software revenues as defined by the Company based on industry analyst research, continued to grow by 0.9 percentage points to 22.6 percent at the end of the third quarter of 2006. This represents more than twice the share of the next largest vendor.

Regional Performance

The Company reported double digit growth rates in software revenues in each of its three regions for the third quarter of 2006. Software revenues in the Americas region grew 19 percent (23 percent at constant currencies1) to €292 million for the third quarter of 2006 with the U.S. reporting an increase of 15 percent (20 percent at constant currencies1) to €228 million. In the EMEA (Europe, Middle East and Africa) region, software revenues increased 14 percent (15 percent at constant currencies1) to €301 million with Germany reporting a 3 percent increase to €117 million for the third quarter of 2006. Software revenues in the Asia-Pacific region for the third quarter of 2006 increased 22 percent (28 percent at constant currencies) to €98 million, with Japan reporting a 51 percent increase (65 percent at constant currencies) to €39 million.

Income

  • Operating income for the third quarter of 2006 was €583 million (2005: €517 million), which was an increase of 13 percent compared to the third quarter of 2005. Pro forma operating income was €606 million (2005: €520 million) for the 2006 third quarter, representing an increase of 17 percent compared to the same period last year.
  • The operating margin for the third quarter of 2006 was 26.0 percent, which was an increase of 0.3 percentage points compared to the third quarter of 2005. The pro forma operating margin for the 2006 third quarter was 27.0 percent, which was an increase of 1.2 percentage points compared to the 2005 third quarter.
  • Net income for the 2006 third quarter was €388 million (2005: €334 million), or €1.27 per share (2005: €1.08 per share), representing an increase of 16 percent compared to the third quarter of 2005. Third quarter 2006 pro forma net income was €405 million (2005: €337 million), or pro forma €1.32 earnings per share (2005: €1.09 per share), representing an increase of 20 percent compared to the third quarter of 2005.

“We reported a strong third quarter with an impressive win rate and double digit software revenue growth in all regions,” said Henning Kagermann, CEO of SAP. “At constant currencies, we have now reported 11 consecutive quarters of double digit software revenue growth. This long track record of outstanding performance can be largely attributed to our successful strategy of growing SAP organically. This disproves our major competitor’s claim. SAP’s strategy has worked very well for our customers and our company, resulting in an exceptional customer satisfaction rate and a considerable gain in SAP’s worldwide share among Core Enterprise Applications vendors, which increased from 16.5 percent to 22.6 percent over the past three years.”
Mr. Kagermann continued, “We provided a roadmap describing a planned 2007 completion of our enterprise service-oriented architecture. I am pleased to say that we remain on target and on schedule with all deliverables to complete this roadmap. Moreover, with the delivery of mySAP ERP 2005, we have provided our customers and partners the first services enabled suite in the industry, well ahead of the competition. Due to the flexible nature of an enterprise services-oriented architecture, mySAP ERP 2005 gives us the unique position to offer our customers accelerated continuous innovation without upgrades by providing optional Enhancement Packages for many years.”

HIGHLIGHTS – Nine Months 2006

Revenues

  • Software revenues increased 15 percent (15 percent at constant currencies) to €1.8 billion (2005: €1.6 billion) for the first nine months of 2006 compared to the same period last year.
  • Product revenues increased to €4.4 billion (2005: €3.9 billion) for the first nine months of 2006, representing an increase of 13 percent (13 percent at constant currencies) compared to the first nine months of 2005.
  • Total revenues were €6.5 billion (2005: €5.8 billion) for the 2006 first nine months, which was an increase of 13 percent (12 percent at constant currencies) compared to the same period last year.

Income

  • Operating income for the first nine months of 2006 was €1.5 billion (2005: €1.4 billion), which was an increase of 13 percent compared to the same period last year. Pro forma operating income for the 2006 nine month period was €1.6 billion (2005: €1.4 billion), representing an increase of 16 percent compared to the 2005 nine month period.
  • The operating margin for the first nine months of 2006 was 23.5 percent, which was flat compared to the 2005 nine month period. The pro forma operating margin was 25.0 percent for the first nine months of 2006, which was an increase of 0.7 percentage points compared to the same period in 2005.
  • Net income for the first nine months of 2006 was €1.1 billion (2005: €877 million), or €3.53 per share (2005: €2.83 per share), representing an increase of 24 percent compared to the same period in 2005. Pro forma net income for the 2006 nine month period was €1.2 billion (2005: €910 million), or pro forma €3.75 per share (2005: €2.94 per share), representing an increase of 27 percent compared to the same period in 2005. Nine months 2006 net income, earnings per share, pro forma net income and pro forma earnings per share were positively impacted by approximately €30 million, or €0.10 per share, from a reduced second quarter effective tax rate of 25 percent mainly due to a settlement with the fiscal authorities on one specific item.

Cash Flow

  • Operating cash flow for the first nine months of 2006 was €1.3 billion (2005: €1.1 billion). Free cash flow for the 2006 nine month period was €1.0 billion (2005: €901 million), which was 16 percent of total revenues for the first nine months of 2006 (2005: 16 percent). At September 30, 2006, the Company had €2.8 billion in liquid assets, including short term marketable securities (September 30, 2005: €3.1 billion). The year-over-year decrease in liquid assets is primarily the result of an increase in share buybacks in 2006, expenditures on acquisitions and increased dividend payments.

Share Buy-Back Program

  • In the first nine months of 2006, the Company bought back 5.81 million shares at an average price of €165.25 (total amount: €960 million). This compares to 2.75 million shares bought back in the first nine months of 2005. At September 30, 2006, treasury stock stood at 11.35 million shares at an average price of €139.89. SAP’s current share buy-back program allows the Company to purchase up to 30 million shares. Given the Company’s strong free cash flow generation, SAP plans to further evaluate opportunities to buy back shares in the future.

BUSINESS OUTLOOK

The Company also announced an update to its outlook for the full-year 2006.

  • The Company increased its expected full-year 2006 pro forma earnings per share, which excludes stock-based compensation, acquisition-related charges and impairment-related charges. The Company now expects pro forma earnings per share to be slightly above the previously communicated range of €5.80 to €6.00 per share.
  • The Company reaffirmed that it expects full-year 2006 product revenues to increase in a range of 13 percent – 15 percent compared to 2005. This growth rate is based on the Company’s expectation for full-year 2006 software revenue growth in a range of 15 percent – 17 percent compared to 2005. From today’s perspective, it appears less likely that product or software revenue growth will reach the upper end of the aforementioned ranges.
  • The Company reaffirmed that it expects the full-year 2006 pro forma operating margin, which excludes stock-based compensation and acquisition-related charges, to increase in a range of 0.5 – 1.0 percentage points compared to 2005. From today’s perspective it appears less likely that the pro forma operating margin increase will be at the upper end of the aforementioned range.
  • The outlook continues to be based on a U.S. Dollar to Euro exchange rate of $1.23 per €1.00.

KEY EVENTS – Third Quarter 2006

  • In the third quarter of 2006, SAP demonstrated strong momentum, announcing major contracts in all key regions: Au Bon Pain (ABP), Beall’s, Century Casinos Inc., Michigan Department of Treasury, Pennsylvania Turnpike Commission (PTC), Philadelphia Newspapers LLC., and the State of North Carolina in the Americas; ABN AMRO, Belarus Bank, BMW, City of Nuremberg and Fujitsu Siemens Computers in EMEA; China National Offshore Oil Corp.. Kyocera Mita Corporation and Wumart in Asia Pacific.
  • SAP announced that it is evolving its product release road map for mySAP ERP. Moving forward, all new functional enhancements to mySAP ERP through 2010 will be made available as extensions to mySAP ERP 2005 in a series of optional enhancement packages.
  • On September 29, 2006, SAP announced it has achieved Java Platform, Enterprise Edition (Java EE) 5 compatibility. Achieving compatibility means SAP customers and partners can develop robust Java applications on the SAP NetWeaver platform using the latest mature technology standards—simplifying and accelerating application development projects.
  • Validating its strategy of organic growth combined with strategic, “tuck-in” acquisitions to add valuable software functionality that fulfills customer demands worldwide, SAP announced on September 28, 2006 that more than 300 installations of the SAP xApp Manufacturing Integration and Intelligence (SAP xMII) composite application are in place. The milestone is reached just one year following SAP’s 2005 acquisition of Lighthammer Software Development Corporation.
  • On September 26, 2006, SAP announced the availability of the third wave of SAP CRM on-demand solutions, successfully meeting its quarterly product road map laid out in February of this year. SAP also unveiled additional capabilities for the existing SAP CRM on-demand solutions.
  • On September 20, 2006, Accenture and SAP announced a global agreement to co-develop a collaborative health network (CHN) solution, which is designed to help healthcare organizations improve patient care by streamlining the way they access, integrate and share information.
  • SAP launched the industry’s first community for business process experts. The objective of this Business Process Experts Community is to facilitate the exchange between IT and business processes.
  • SAP unveiled SAP Enterprise Search, an application that allows information workers to easily locate and leverage critical business data from internal and external sources to save time and increase productivity. The application is available for developers to download today; commercial availability is planned for 2007.
  • SAP announced the availability of SAP Discovery System software for enterprise SOA. With SAP Discovery System, developers and enterprise architects have a clear risk-free first step in experimenting with enterprise SOA.
  • Furthering its ongoing commitment to compliance market, SAP announced on September 6, 2006 the expansion of its portfolio of solutions designed to help large and small enterprises manage governance, risk and compliance (GRC). SAP also announced a strategic relationship in North America with Cisco Systems Inc. to enhance the effectiveness of SAP solutions for GRC through access and identity intelligence.
  • On August 15, 2006, SAP announced it has made an investment in Questra Corporation, a leader in intelligent device management (IDM). The announcement marks the first investment for SAP’s $125 million global SAP NetWeaver Fund and underscores SAP’s commitment to fuel the development of innovative solutions built on the SAP NetWeaver platform.
  • On July 26, 2006, SAP announced that the Pennsylvania Turnpike Commission (PTC) will deploy Duet software, the first product jointly developed and supported by industry leaders SAP and Microsoft, to drive new business efficiencies and further extend the value of its technology systems by enabling its employees to access SAP business data and processes via the familiar Microsoft Office environment.
  • On July 10, 2006, SAP announced that it will introduce new e-commerce and web-based capabilities to SAP Business One. The new capabilities enable companies to set up online stores easily and to deploy customer relationship management (CRM) software quickly and simply via the Internet, extending the reach and accessibility of SAP Business One to a new set of users.

Webcast/Supplementary Financial Information

SAP senior management will host a conference call today at 3:00 PM (CET) / 2:00 PM (GMT) / 9:00 AM (Eastern) / 6:00 AM (Pacific). The conference call will be web cast live on the Company’s website at http://www.sap.com/investor and will be available for replay purposes as well. Supplementary financial information pertaining to the quarterly results can also be found there.

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