SAP reports Q1 software revenue up 26% but misses earnings target

SAP has reported its Q1 2011 results. The good news for the company is that software sales wer up 26% year over year to €583 million ($866 million) while software related services which includes maintenance was up 19.5% to €2,327 million ($3,456 million.)

The bad news is that operating margin fell back from 22.2% to 19.7%. In absolute terms that translates to €597 million ($887 million) compared €557 million ($827 million) under IFRS accounting rules. Using the alternative constant currency method of assessment which attempts to remove the impact of currency fluctuations, SAP's operating margin came in at 25.6% compared to 24.6% in Q1 2010.

As always, the devil is in the detail so for example despite the fact SAP has started to push Business ByDesign and other subscription based services, the subscription revenue line item result was flat year over year at €89 million ($132 million.)

What happened on the expense side? The cost of professional services accelerated by 28%. That was not matched by increases on the income side which were up 19%. R&D expense wasn't far behind with a 27% increase year over year. We will need to hear the analyst conference call later today to get a better understanding around what those figures mean and the extent to which they represent investments in product development.

In the regions, EMEA was comparatively weak, with software sales advancing 15%. The Americas and AsiaPac saw software sales rise by 35% and 36% respectively. In recent times, SAP has reported that South America and Brazil in particular are strong markets for the company. However, South America was relatively weak on both software sales and software related services with an overall increase of 18%. On total revenue, SAP's home market of Germany was relatively weak showing an increase of 9% overall compared to 16% in the rest of EMEA.

Operating cash flow for the first quarter 2011 was €1.59 billion ($2.36 billion), the highest recorded for a Q1 reporting period.

The company is reiterating its full year guidance of total revenue rising 10-14%.

I will supplement this post with any fresh color coming from the analyst call and a later call I have scheduled with Bill McDermott, co-CEO, SAP.