SAP shares fall despite record quarter

Despite recording a record third quarter, enterprise software vendor SAP saw its share price plummet just short of nine per cent on Thursday, against a market that edged up 3.7 per cent.

Analysts were not enthusiastic, leaving SAP with a lot to do to impress in the final, critical quarter.

SAP's overall revenue for the three months to 30 September was up 27 per cent on last year to 1.4bn euros (£810m), but net income only just met analyst expectations at 88m euros.

Significantly, the new mySAP.com line generated 294m euros in revenue from zero last year. SAP co-chairman Henning Kagermann said: "The third quarter was a breakthrough for mySAP.com. It accounted for 70 per cent of all new software sales."

Overall, this was a much better performance than last year. But direct comparisons with 1999 have to be taken with care, because last year was extremely difficult for SAP.

Licence revenue, a key indicator of health, was up 53 per cent but service revenue was flat. Kagermann stressed that the company is in a period of transition and asserted: "We have stabilised the [US] sales force." This had been a cause for analyst concern last year as SAP haemorrhaged key staff, losing more than 200 top executives over the previous two years.

SAP took the opportunity to defend itself against recent criticism and lost deals, during a conference call to analysts. Commenting on the $142m Siemens deal that SAP missed out on to supply chain vendor i2, SAP co-chairman Hasso Plattner said: "We didn't compete. It was a decision for Siemens on a new project." However, Plattner said SAP had won contracts from i2 at Sony, Compaq and Palm.

Another recent question mark has been whether the joint work for SAP Markets undertaken with partner CommerceOne had really been completed in the two months claimed by SAP. Plattner confirmed there was joint engineering but the coding was undertaken by SAP. He said SAP Markets was able to complete coding in around 60 days because "there is no overlap in functionality".

Finally, there had been rumours that SAP's leading US customer Lucent was abandoning SAP in favour of Oracle. SAP denied this, saying that as Lucent acquires businesses that use Oracle applications, Lucent is sticking with them rather than transitioning to SAP. However, the question about whether Lucent is moving to mySAP.com was not clarified. Lucent said it hoped to extend its relationship with SAP.

Analyst reaction was muted. Kevin Ashton of Deutsche Bank queried SAP's gross profit strength. "There's no evidence of a dramatic change," he said. Brian Skiba of Lehman Brothers described the results as "mixed", saying that: "Guidance on the fourth quarter will be key. Growth is not as good as for some of their US competitors."

But Kagermann played down fourth quarter expectations: "You must remember that last year's fourth quarter was exceptional. We expect [that quarter] trend to revert to normal."