SAP Q3 results miss expectations, hits out at Oracle strategy

SAP misses Q3 expectations, now comes the explaining along with the inevitable comparisons with Oracle.

SAP has reported its Q3 numbers for the period ended 30th September, 2010. At first glance the results look impressive as SAP reported total revenue up 20% (including Sybase numbers) to €3 billion ($4.2 billion) from €2.5 billion ($3.5 billion) year over year and net income up to €501 million ($699 million) from €447 million ($624 million) an increase of 12%. However, analysts had been expecting net income at around €553 million ($771 million.)

In a prepared statement, Werner Brandt, SAP's CFO said:

“All of the regions reported growth in the third quarter, with particular strength in the U.S. and the emerging markets of Asia, Europe and Latin America. We saw a good mix of revenues among small, midsized and large enterprises, and we had an increase in deal volume. On the product side, Business Analytics remains a top priority among our customers and continues to be a principal growth driver.”

Be that as it may, in early trading, the company was punished with the shares falling 3.34%.  Also in the statement and in a clear reference to arch rival Oracle:

“The experience we have gained with our more than 100,000 customers over many years tells us that they want choice, openness and innovation from their technology partners,” said Jim Hagemann Snabe, Co-CEO of SAP. “The opposite seems to be happening as more technology companies want to lock in their customers to a single vendor on one proprietary technology stack. This has made our business even more important to our customers because at SAP we provide choice, innovation, co-innovation, a completely open platform and the resources of a vast ecosystem of partners, with whom we continue to forge even stronger relationships. Our in-memory High-Performance Analytic Appliance called SAP HANA is a prime example of cutting edge technology delivered through co-innovation with partners.”

Critics are bound to scoff at such statements, arguing that SAP's strategy is not winning in its war with Oracle, noting a slippage in operating margin from 24.8% to 23.7%. It is perhaps an indication of the company's need to keep financial analysts onside that according to Bill Wohl, head of field communications, Bill McDermott, co-CEO is fielding 18 appointments in 12 hours today. How much that will do to restore confidence remains to be seen but recent actions suggest SAP is preparing for yet another period of belt tightening. Of particular concern was a fall in free cashflow of 15% to €1.86 billion ($2.59 billion.) The company attributes this to a 'significant increase' in delayed payments from 2008 into 2009. What the company means is that despite the recession, it was committed to shelling out hefty bonuses to staff.

By the numbers:

SAP will be holding a a conference call at 9am ET. If calls I've been fielding are an indicator, analysts are bound to press SAP on its HP partnering strategy with HANA which I am led to believe is expected to rapidly create a $100 million pipeline. Other questions regarding traction with Business ByDesign will also likely feature along with details around pipeline visibility in territories that didn't flourish as well as the Americas.

Side note: According to Reuters, SAP has increased its provision for damages in the TomorrowNow case to $160 million, still well below the $2 billion Oracle is claiming in a trial set to start next Monday.

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