SAP's sales loss larger than expected

FRANKFURT, April 18 (Reuters) - Germany's SAP AG posted a bigger-than-expected fall in first-quarter software licence sales on Thursday and said market conditions remained challenging, particularly in the United States.

Europe's biggest software maker said licence revenues fell 12 percent to 402 million euros ($358.3 million), but overall sales rose nine percent to 1.66 billion euros, thanks to a strong rise in consulting revenues.

Headline sales and earnings matched market forecasts as a cost-cutting programme bore fruit but the drop in licence sales showed SAP was unable to escape the spending slowdown by corporate customers which has hit all of its main rivals.

"Relatively speaking they've been delivering great numbers. The issue is there's something much greater than SAP's specific performance. The point is what's happening to the software market generally," Lehman Bros analyst Coleen Kaiser said.

SAP said it expected a much stronger second half and reiterated a forecast made in January of around 15 percent sales growth in 2002 and operating margins of at least 21 percent.

SAP shares, which had fallen over 10 percent since the end of March, opened over three percent weaker but trimmed their losses to trade 1.4 percent down at 152.50 euros by 1124 GMT, outperforming the Eurostoxx euro zone tech index which sank 4.6 percent after cellphone maker Nokia cut its sales outlook.

"Most people look at licence fee revenues and that's come in clearly weaker and so that's hurting the shares, but looking at the numbers overall, they have matched analysts' expectations and look fairly OK compared to U.S. peers," said Matthias Maus, a fund manager specialising in technology stocks at Frankfurt Trust.

License sales down
Licence sales, the basic measure of how much software the group sold, were well below a consensus estimate of 451 million euros from a Reuters poll, reflecting the reluctance of firms to splash out on big new IT systems in current conditions.

Software sales were up slightly in Europe but down roughly 30 percent in both the Americas and Asia, amid a corporate spending slowdown which has hit U.S. rivals such as Oracle Corp, Siebel Systems and i2 Technologies.

Consulting revenues took up much of the slack, climbing 18 percent to 539 million euros, but the picture conveyed by SAP did little to alter the gloom hanging across the sector.

"Conditions for software purchases are challenging, and while Europe remains relatively strong, businesses in the Americas are taking a more deliberate and measured approach to new software investments," SAP said in a statement.

Hopes for recovery
The question now facing the industry is whether the recovery anticipated for the middle of the year will take place.

"The thing I'm concerned about for the sector as whole is that there's no real reason to believe that the second half is going to be any better than the first," Kaiser said.

"They all want to believe it's going to be better but it's really only three months away. At the end of Q4 it was still a long way away but it's coming into the range of visibility now."

Operating profit before charges for stock-based compensation and acquisition charges rose two percent to 237 million euros.

Net profit, adjusted for SAP's loss-making U.S. affiliate Commerce One and acquisition charges, rose 3.4 percent to 121 million euros from 117 million a year earlier.

SAP had mixed fortunes with the web-based inventory control and customer service software it has been focusing on, but continued to make gains against its main rivals.

Sales of supply chain management software fell 23 percent but sales of customer relationship management software rose 10 percent to 74 million euros as SAP continued to cut Siebel's lead in the sector.

Overall revenues in the European region rose 11 percent to 886 million euros, while revenues in the Americas were up just five percent in currency adjusted terms at 587 million euros. Asian revenues rose four percent to 185 million euros.

As well as looking to gain market share, SAP is banking on a major switch to the web-based mySAP.com platform by users of its R/3 enterprise software to ensure a steady revenue stream over the next two years and cushion it against any major downturn.

With an installed base of some 17,500 customers worldwide, analysts say SAP should raise billions of euros in revenues from the change over the coming two to three years.

"There's nothing there in these results that's knocked confidence in this," said JP Morgan analyst Gary Rollo. "The secular story of licence buying over the two year view is what's holding the stock together today and probably will hold the stock together over the next 12 months."

(Additional reporting by Marius Bosch and Jess Smee)