SAP executives talk optimistically about 2004

DÜSSELDORF, GERMANY – Senior executives of German business software vendor SAP offered a relatively optimistic business outlook for software sales in 2004 despite difficult conditions in Asia and intensive pressure on pricing, in a conference call with analysts on Thursday.

“We are seeing a renewed interest in purchasing software, especially in the U.S.,” said SAP Chief Financial Officer Werner Brandt.

Earlier in the day, SAP released its first-quarter results, posting a 23 percent increase in net income on software revenue that rose 5 percent from a year earlier.

The U.S., in particular, helped fuel this growth, with software revenue up 45 percent to $162 million, as of Thursday, or 65 percent at constant currency rates. Constant currency rates exclude the impact of fluctuations in currency exchange rates.

“We expect the U.S. to be the growth driver for SAP in 2004,” said SAP Chairman and Chief Executive Officer (CEO) Henning Kagermann.

Over the past two years, SAP has replaced its management team in the U.S., reorganized its sales force and made a concerted effort to target mid-size enterprises, in addition to big corporations, which traditionally have been the primary focus of the Walldorf, Germany, software company.

Outside the U.S., SAP underperformed in the first three months of this year. Revenue in Europe, the Middle East and Africa (EMEA) was generally flat, slipping 4 percent to €197 million. In Germany, SAP’s home market, revenue was down 1 percent to €85 million.

The company has already made some management and sales strategy changes in its French operation, said Léo Apotheker, president of global field operations. “The changes are already producing some results,” he said. “The French business actually grew in the first quarter. In general, we expect business in Europe to improve in the second half of the year.”

In Asia-Pacific, Australia and New Zealand, by comparison, software revenue dropped 22 percent to €46 million. Revenue in Japan plummeted 37 percent to €22 million.

SAP is taking steps to realign its sales to local market conditions in Japan, where companies are placing smaller orders because of the economy, according to Apotheker. The realignment, he said, should be completed by the end of the year.

For the first time in three years, one third of all orders placed in the first quarter came from new customers, according to Kagermann. While existing customers are generally placing smaller orders and adding on functionality, “new customer seem to be willing to spend more,” he said.

But customers, both big and small, remained fixated on prices, according to Kagermann. “Pricing pressure is stronger now than a year ago,” he said.

Kagermann said that while SAP isn’t “immune to discounts,” the company would rather walk away from a deal than discount too aggressively.

The new NetWeaver integration platform will help drive software revenue this year, according to Kagermann. “2004 will be an important year for SAP,” he said. “We see growth coming back.”

SAP expects its software revenue this year to increase by around 10 percent compared to 2003, Kagermann said.