SAP's Profit Beats Estimates,
Sending Its Stock Price Surging
By MATTHEW ROSE
Staff Reporter of THE WALL STREET JOURNAL
April 22, 1999
Shares in SAP AG rocketed 18% after a series of one-time technical factors and strong European demand combined to produce better-than-expected first-quarter results.
While analysts expected a pretax-profit drop of up to 30%, the German software giant reported that pretax profit slipped 1%, to 172 million euros ($182.9 million), while sales jumped 22% to 1.08 billion euros. In the year-earlier quarter, SAP reported pretax profit of 173 million euros on sales of 882 million.
Net income was unchanged, at 98 million euros.
The company warned in March that its pretax profit would "fall significantly short" of last year's figure. In electronic trading in Frankfurt Wednesday, SAP's widely traded preference shares gained 48 euros to 321 euros, although this level is still less than half the stock's 52-week high of 680.91 euros.
A number of one-time boosters flattered SAP's results. The company counted an extra 40 million euros in sales as a result of changing its accounting policy to U.S. standards following last year's New York Stock Exchange listing. SAP also had a one-time gain of 15.5 million euros, which previously had been taken as an expense to cover the cost of its employee stock program but wound up not used.
David Clayton, an analyst at Credit Suisse First Boston in London, estimates that discounting the exceptional gains, SAP's pretax profit fell around 29% in the quarter -- closer to analysts' original fears. "There are some smoke and mirrors here," he says.
Coming after six months of tough trading conditions for the business software industry -- which has been battered by market saturation and a slowdown in corporate spending associated with the year-2000 glitch -- some analysts nevertheless saw the results as the first sign of a pickup in growth. Although SAP businesses in Asia and the U.S. were soft, European sales rose 36% to 529 million euros, boosted by some large contracts signed late in the quarter, the company said. It added that overall sales growth would have been six percentage points higher if calculated at 1998 first-quarter exchange rates.
"It's not like the good old days, but relative to their peer group, they have performed well," said Brian Skiba, an analyst at Lehman Bros. in London, noting poor first-quarter performances from rivals such as PeopleSoft Inc. He said European companies haven't been as spooked by Y2K as their U.S. counterparts and have continued to invest in corporate software.
SAP said the differences caused by switching from German to U.S. accounting standards should be negligible by the end of the year, and the company stuck to its earlier forecasts of 20% to 25% growth in sales for 1999. Henning Kagermann, the company's co-chairman, said that cutting internal costs had also helped the results.
The company also noted that the first shipments of a range of new products take SAP into new markets, such as supply-chain management and electronic commerce. Despite some skepticism from analysts, SAP says 5% of sales this year and 30% of sales within three to five years will come from these products.
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