SAP bullish on market share gain

Georgina Prodhan

FRANKFURT: Margins at Germany's SAP could stagnate this year as the software maker hires 3,000 staff for a sales push aimed at lifting licensing revenue 10-12 percent, it said.

SAP sees opportunity to snatch market share in the coming year from arch-rival Oracle, betting customers may want to switch if the Silicon Valley database leader has trouble digesting its recent $10.3 billion PeopleSoft merger.

The new software license target for 2005 is at or above the average of 10 percent growth which 21 analysts polled by Reuters had predicted ahead of its year-end financial results.

Market share gains could mean sacrificing profit margin growth, as SAP predicted that operating margin growth would be flat to up a half percentage point during 2005.

"The U.S. seems to be the clear battleground," Bill McDermott, chief executive of SAP Americas, said in an interview following the report. SAP is looking to take a 50 percent share of the market for business planning software over the next 12-18 months, up from 40 percent now, he said.

"In this 12-18 month time-frame I do see a window of opportunity that will force customers to take a harder look at SAP," he said, referring to current PeopleSoft customers.

In Frankfurt trading, SAP's shares closed down 2.5 percent at 121.22 euros, the biggest loser on Germany's blue-chip DAX index, and underperforming a flat European technology index. On the New York Stock Exchange, SAP ended down 2.3 percent.

The muted profit outlook contrasted with rival Oracle's forecast on Wednesday that its earnings would beat Wall Street estimates next year, growing 24 percent for its fiscal year ending in May, 2005 and between 22 and 28 percent in 2006.

Chief Executive Henning Kagermann denied SAP was giving up on profit margins for the sake of growth. "I expect margins to rise by a percentage point or more in 2006, and by 2007 you will see the results of our investments," he said.

"We will come back to our mid-term goal of over 30 percent in 2007," he told in an interview.

SAP had been targeting an annual one percentage-point rise in its pro-forma operating margin -- excluding employee stock option and acquisition-related costs -- but had already signaled that goal could be delayed.

2005 earnings per share, excluding options and merger costs, are expected to be in the range of 4.70 to 4.80 euros, SAP said -- roughly at or below the consensus of about 4.78 euros among analysts surveyed by Reuters Estimates.

SAP added 9 percent, or 2,595 staff, to its workforce last year, and staff numbers will rise by 9 percent again this year. Some 600 of the 3,000 new staff will be hired in Germany, executives told a news conference in Frankfurt. As many as 1,000 new hires will take place in the Americas, McDermott said.

In the fourth quarter, operating income rose by 11 percent year-on-year to 851 million euros ($1.11 billion), in line with the poll average, while net profit came in at the high end of expectations, rising 29 percent to 542 million euros.

Fourth-quarter license sales rose 8 percent to 1 billion euros while total sales increased 8 percent to 2.4 billion, as it said in preliminary figures two weeks ago.

SAP's global market share in business software -- which it sells mainly to large firms to help them manage functions from payroll to supply-chain management to customer relations -- increased to 57 from 56 percent.

Kagermann scorned claims by rival CEO Larry Ellison that Oracle could succeed in its bid to oust SAP from its market-leading position by launching a new product that merges its own software with PeopleSoft's within two to three years.

"It would be the first time so few people with so few resources and so little time had achieved so much," he said. "I can only say: Good luck!"

The German company trades at 30 times earnings, more expensive that the 21 times for Oracle and software giant Microsoft, but cheaper than Siebel Systems, at 42 times.

(Additional reporting by Anshuman Daga in London and Eric Auchard in San Francisco)