SAP Q3 profits soar on reduction of TomorrowNow provision

IDG News Service - SAP reported Wednesday a 14% increase in revenue in the third quarter ending Sept. 30, and said its business pipeline continues to remain very strong and companies continue to invest in IT. The business software vendor did not, however, revise its outlook for the full year 2011, citing the ongoing uncertain macroeconomic environment.

Total revenue in accordance with International Financial Reporting Standards (IFRS) was €3.41 billion (US$4.6 billion at the exchange rate on the last day of the quarter), while software revenue at €841 million grew by 28% from the same quarter last year. IFRS software and software-related service revenue was €2.69 billion, an increase of 16%.

SAP's third quarter software revenue grew at its fastest rate in a decade because customers are shifting their investments to software that helps them grow and innovate, the company said in a statement.

Revenue growth for the quarter was also helped by last year's acquisition of Sybase. For the year-over-year comparison, SAP included Sybase revenue, profits and cash flows starting from the July 26, 2010, acquisition date.

SAP's profits soared by 150%, in accordance with IFRS, after the company lowered its provision for settlement of the TomorrowNow litigation with Oracle by €723 million, and reflected that sum in the operating profit. U.S. federal judge Phyllis Hamilton reduced the damages in September from $1.3 billion, while giving Oracle the choice of accepting $272 million or seeking a new trial.

The company forecasts full-year 2011 non-IFRS software and software-related service revenue to increase in a range of 10% to 14% at constant currencies, but expects to reach the high end of the range.

SAP plans to evaluate buying back shares in view of its strong free cash flow generation over the first nine months of 2011. During this period, the company has already bought back 3.6 million shares at an average price of €43.84, mainly in connection with SAP's share-based compensation plans, SAP said.

The quarter's results suggest that IT shops are feeling more comfortable about ERP (enterprise resource planning) software upgrades. Sales for SAP's core Business Suite grew 26% year-over-year, co-CEO Bill McDermott said in an interview.

ERP sales were also helped by deals made in emerging markets as companies there look to modernize systems, co-CEO Jim Hagemann Snabe said during a conference call.

Beyond ERP, SAP has placed major bets on newer products such as the HANA in-memory computing engine, which became generally available in June, as well as mobile software. HANA is "on fire" and mobile "has taken off," McDermott said. "We're kind of firing on all cylinders."

HANA sales stand at €63 million for the year, with €36 million of that coming in the quarter, he said. HANA's "pipeline," or backlog of sales leads, is worth about €600 million, he said. Not all of those will turn into real business, at least right away, however. SAP expects HANA to generate €100 million in business next year, McDermott said.