David Mitchell, an analyst at London-based Ovum who follows the business software market, said SAP’s results highlight the consolidation going on in the industry, from giants like Oracle to smaller companies. “It is intensified competition that has had an impact on SAP, in our view, rather than any fundamental flaws in the product or services portfolio,” he said.

Business software maker SAP AG said Wednesday that its fourth-quarter net profit rose 29 percent, but disappointing software sales growth sent its shares tumbling.

The company also cautioned that profitability will fall as it invests up to EU400 million (US$519 million) over two years to develop the business “in new, untapped segments in the midmarket.”

As a result the company expects its full-year operating margin for 2007 to be between 26 percent and 27 percent, compared with last year’s 27.3 percent.

“This spending plan is a total surprise and highlights the fact that SAP has been late with its midmarket product,” John Segrich, an analyst at JP Morgan in London, told Dow Jones Newswires. “It will be the first time in seven years that SAP’s operating margin will drop.”

Software for the so-called midmarket, or companies with a mid-sized work force, is a main growth area for the industry now after the major players in the market equipped their back offices with all the applications they needed over the last decade.

SAP earned EU799 million (US$1.04 billion) in the three months through Dec. 31, up from EU619 in the same period a year earlier, the company said in a statement. Full-year net profit was EU1.87 billion (US$2.4 billion), up 25 percent from the previous year’s EU1.5 billion.

But markets and analysts were focused on software sales, which are a key benchmark for companies like SAP and rival Oracle Corp., which use them to generate revenue from maintenance and consulting.

Software sales rose 7 percent to EU1.26 billion (US$1.64 billion). While they increased 13 percent in Europe and the Middle East, they were static in the Americas and rose by only 2 percent in the Asia-Pacific region.

For the full year, SAP said software sales increased 10 percent to EU3.07 billion (US$3.99 billion). The company already had warned on Jan. 11 that software sales would come in around that level, missing previous guidance of 15 percent to 17 percent growth.

SAP said it cut EU30 million (US$39 million) from its third-quarter software revenue sales after it amended a contract with a U.S. customer, which it did not identify.

Those figures sent shares in Walldorf, Germany-based SAP down 5.8 percent to EU36.16 (US$46.94) in Frankfurt trading.

SAP said it expects full-year software and software-related services sales to increase by between 12 percent and 14 percent in constant currency terms, compared with 12 percent last year.

“While we did not achieve all of our targets in 2006, we ended with solid growth at constant currencies for both product revenues and software revenues,” Chief Executive Henning Kagermann said in a statement.

David Mitchell, an analyst at London-based Ovum who follows the business software market, said the results highlight the consolidation going on in the industry, from giants like Oracle to smaller companies.

“It is intensified competition that has had an impact on SAP, in our view, rather than any fundamental flaws in the product or services portfolio,” he said.

Over the next year, Mitchell said, SAP will have to take advantage of its opportunities without wasting resources in areas that offer lower gains.

“A market heavyweight like SAP can and probably will continue to grow, but growth in today’s market will need more effort than growth in previous years,” he said.

© 2007 Associated Press. All rights reserved.
© 2007 CRM Daily. All rights reserved.