SAP Profit Falls More than Expected, Shares Sink

Business software company SAP reported quarterly results that fell shy of expectations Wednesday and also said it will delaying the launch of new subscription software for small and medium businesses.

SAP said it would now take longer to generate $1 billion in revenue from 10,000 Business ByDesign customers, which it had aimed to achieve by 2010.

SAP CEO Henning Kagermann told CNBC Europe that he did not expect an overall slowdown in IT spending this year, but acknowledged that business in North America is slowing.

Shares of SAP fell more than 6 percent in midday trading in Germany.

The company, which is making its first foray into Web-hosted software for the midmarket with Business ByDesign, said it would reduce planned investments in the product by about 100 million euros ($156 million) this year.

The delay is necessary to ensure profitability of the product, Kagermann told "Squawk Box Europe."

As a result, its non U.S.-GAAP operating margin will be 28.5-29 percent this year at constant currencies, higher than its previously targeted 27.5-28 percent and last year's 27.3 percent, excluding a one-off revenue writedown, SAP said.

For the first quarter, SAP reported a 15 percent increase in software and software-related service revenues to 1.736 billion euros thanks to its acquisition of Business Objects, lower than the average 1.829 billion forecast in a Reuters poll.

"(In) North America, it's not a secret the market is tougher," Kagermann said. "Customers are more cautions and the deal size is lower than in past quarters."

In the United States, where SAP makes a quarter of its sales, software and software-related service revenues slipped 1 percent, while in Europe, which accounts for half of SAP's business, they rose by 22 percent.

Total operating income fell 18 percent to 359 million euros, less than the lowest estimate in the Reuters poll, and net income fell 22 percent to 242 million, missing the poll average. Total sales rose 14 percent to 2.46 billion.

The company said its income was impacted by 40 million euros in accelerated investments in Business ByDesign and "a significant increase in acquisition-related charges" as a result of its 4.8 billion-euro acquisition of Business Objects.

"SAP has provided a disappointing set of numbers. All figures for Q108 were below expectations," DZ Bank analyst Oliver Finger wrote. He said he would likely reduce the bank's fair value of 44 euros on the stock, which it rates "Buy".

"In particular we are disappointed about the negative outlook for the new midmarket product Business ByDesign. Although we do not assume that this will have a major impact on the projected figures, it creates a very bad sentiment for this important product," he added.

The poor results from SAP, whose software helps large companies automate and manage functions such as supply-chain management, human resources or compliance, confirm a dismal trend in software earnings reported this quarter.

Arch-rival Oracle posted weaker-than-expected software sales last month, saying customers had become more cautious, and a clutch of smaller software makers including Software AG, Lawson and Epicor also reported disappointing quarterly results.

But Kagermann said he was confident that it IT spending won't suffer a big downturn this year.

"We can say we have a solid in place and we have good demand," he said.

-- Reuters contributed to this report

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