SAP: Strong Sales and Earnings Despite Currency Headwind

From William Trent, CFA of Stock Market Beat

We have been complaining lately about U.S. companies reporting sales gains that were fairly weak even with the benefit of favorable currency movements. As might be expected, SAP (SAP – Annual Report) has the opposite problem: the strong Euro is masking the strength of its underlying business.

SAP Announces Preliminary 2007 First Quarter Results:

Total revenues were EUR2.2 billion for the first quarter of 2007 (2006: EUR2.0 billion), which represented an increase of 6% (11% at constant currencies(1)) compared to the first quarter of 2006. Income* Operating income for the first quarter of 2007 was EUR433 million (2006: EUR409 million), which was an increase of 6% compared to the first quarter of 2006.

* Net income for the 2007 first quarter was EUR310 million (2006: EUR282 million), or EUR0.26 per share (2006: EUR0.23 per share), representing an increase of 10% compared to the first quarter of 2006.

When we previewed the report, we said “consensus expects $0.36 on $2.93 billion this quarter and $0.44 on $3.17 billion next. Both seem on the high side.” According to Yahoo’s currency converter, they did $2.99 billion in revenue and $0.35 in EPS.

SAP continued to gain share for the first quarter of 2007. Based on software and software related service revenues on a rolling four quarter basis, SAP’s worldwide share of Core Enterprise Applications vendors(3), which account for approximately $34.8 billion in software and software related service revenues as defined by the Company based on industry analyst research, increased to 25.1% for the four quarter period ended March 31, 2007 compared to 24.5% for the four quarter period ended December 31, 2006. Compared to the four quarter period ended March 31, 2006, the year-over-year share gain was 2.4 percentage points.

We believe it. Sales growth at other major vendors of software and services has not been nearly so strong. IBM (IBM – Annual Report), for example, grew 4% constant-currency and 7% as reported. Acquisitions make it difficult to ascertain Oracle’s (ORCL – Annual Report) underlying growth. Guidance was also strong:

The Company expects full-year 2007 software and software related service revenues to increase in a range of 12% – 14% at constant currencies compared to 2006 growth of 12% at constant currencies.

* In order to address additional growth opportunities in new, untapped segments in the midmarket, the Company will invest an additional EUR300 million – EUR400 million over eight quarters to build up a new business. Depending on the exact timing of these accelerated investments, this is equivalent to the Company reinvesting approximately one to two percentage points of margin in 2007 into additional future growth
opportunities. Therefore, the Company expects the full-year 2007 operating margin to be in the range of 26.0% to 27.0% compared to the 2006 operating margin of 27.3%.

The investment is easily covered through the company’s cash flow. Speaking of which:

In the first quarter of 2007, the Company bought back 9.6 million shares at an average price of EUR35.16 (total amount: EUR339 million). This compares to 10.1 million shares (total amount: EUR423 million) bought
back in the first quarter of 2006.

If anything, we think the company should be more aggressive with buybacks. It has strong cash flow, no debt and nearly $2.6 billion in cash lying around. A Linear (LLTC) style buyback program could work wonders.

http://stockmarketbeat.com/blog1/