SAP points to record Q4 results

In a carefully worded statement, SAP has pre-announced Q4 2010 results. Software revenue increased around 34% to approximately €1.5 billion ($2 billion)  compared to €1.12 billion ($1.5 billion) in the same period 2009.

• Software and software related service revenue jumped to €3.26 billion ($4.36 billion) compared to €2.57 billion ($3.43 billion), an increase of around 27%.
• Total revenue for the quarter is reported at €4.04 billion ($5.04 billion) compared to €3.19 billion ($4.26 billion) while operating margin climbed from 35% to 39%.
• SAP expects full year non-IFRS operating income to €3.9 billion ($5.21 billion.)

I was interested in seeing how SAP is parsing the Oracle $1.3 billion jury award following the TomorrowNow case. It says:

The company has not yet completed its preliminary review of the appropriate re-measurement of the provision recorded for the TomorrowNow litigation following the jury verdict of USD 1.3 billion released in November 2010.

The expense resulting from this re-measurement impacts SAP's IFRS operating margin but does not have an effect on SAP's Non-IFRS operating margin. Therefore, the company does not yet have available and cannot yet disclose preliminary fourth quarter and full year 2010 IFRS profit and IFRS operating margin numbers or reconciliations from the disclosed Non-IFRS operating margin to the IFRS operating margin.

The company expects that the re-measurement of the provision recorded for the TomorrowNow litigation will have significant negative impact on SAP's preliminary fourth quarter and full year 2010 IFRS operating profit and IFRS operating margin. The company also expects, as a consequence, that the fourth quarter and full year 2010 IFRS tax rate will be lower than the Company's previous expectations of 27.5 - 28.5%.

In US English:

We've been dinged for $1.3 billion but:

1. We haven't yet figured out how the jury verdict impacts the figures that auditors and those who assess risk are most interested in.
2. It is likely we'll make full provision even though we have not officially stated our forward position on the jury outcome
3. Despite taking a hard slap from the jury, we expect to mitigate the full financial impact via a significant tax benefit. That could mean a $360 million reduction in cash flow and profit impact.

Analyst first take and forward look:

• Subject to all the usual reporting caveats surrounding pre-announcements, SAP has turned in a solid quarter. Financial analysts will be relieved though they will likely want insight into the forward pipeline. The court case will not have impacted Q4 since the case was being heard at a time when SAP was in the final stages of closing out deals that have been ongoing for 3-9 months.
• It is not yet clear to me whether this quarter represents the first fruits of co-CEO Jim Snabe and Bill McDermott's near year long customer charm offensive. Again, when the earnings call is made, I expect analysts to be testing the customer temperature.
• At the beginning of 2011 we have seen a number of what analysts will consider high profile departures. Notable among those were Doug Merritt and Bill Wohl but there were plenty of others passing through the exit door. Quite frankly, most of the names I have been given will not be missed but represent relics of the past that were not delivering. They will not be missed.
• Business ByDesign is doing better than SAP expected or wants. In some senses it is still trying to keep the solution in controlled release. Fact is I am fielding questions from VARs and SIs wanting to know more. If SAP plays its cards well, then 2011 will be a surprise to them on this front.
• HANA has been well received and SAP expects to see this as a short term $100 million pipeline line of value driven business. It will ram home that message at an upcoming BI event but SAP needs to exercise care that it does not spoil the HANA promise with a kludged reinvention of old technology in the BusinessObjects line of business.

Update: some links added