FRANKFURT, Germany – SAP failed to give a 2007 outlook for closely watched licence sales on Wednesday but said margins would fall as it invests in software for smaller firms, sending its shares down more than 5 percent.
The German software giant, which shocked investors by announcing earlier this month it had missed its 2006 licence-sales target, said it would no longer forecast licence revenues due to changing sales models.
Instead of giving an outlook for software licence sales — the money companies pay upfront for new software, which hooks them in to maintenance and service contracts — SAP gave a forecast for software and software-related services.
These revenues, previously known as product revenues, should rise by 12-14 percent at constant currencies from 6.605 billion euros ($8.60 billion) in 2006, when they rose 12 percent, the world’s biggest maker of business software said in a statement.
The operating margin is expected to fall to 26-27 percent from 27.3 percent in 2006 as it invests 300 million-400 million euros over eight quarters in building up its software offering for the mid-market, a crucial focus for SAP’s future growth.
“All in all, we fear that the market won’t like the softer-than-expected margin outlook from SAP,” HVB analyst Knut Woller wrote in a note. “Nevertheless, the investment case does not change. We would be buyers in phases of weakness. Maximum downside is euro 35 (per share) in our view.”
Woller has a “buy” rating on the stock.
SAP shares, which plunged 10 percent after the January 11 preliminary 2006 results statement, were down 5.1 percent at 36.43 euros by 0842 GMT, the leading losers on the blue-chip DAX index, which was up 0.3 percent. Earlier, SAP fell to 36.25 euros.
Software analyst John Segrich, of J.P. Morgan, said SAP’s failure to provide a licence-sales outlook was disconcerting.
“The easy part to figure out is margins are going to be down year-on-year. The tricky part is to figure out what they’re saying in terms of growth. I think it’s definitely going to be slower than people thought,” he said.
“The lack of disclosure on licence growth may spook people after they missed their forecasts for the year and then failed to provide guidance on that basis.”
Chief Financial Officer Werner Brandt told journalists on a conference call the change was to take account of future subscription revenues as the company gradually sells more software on demand instead of in a single transaction.
SAP said in a statement it was introducing the new reporting line “to provide additional transparency for reporting potential new product revenue streams.”
It also said it was now giving its operating-margin outlook on the basis of U.S. GAAP accounting rules. It had previously given a pro-forma operating margin forecast, excluding charges related to acquisitions and stock options.
On a pro-forma basis, SAP had said in the past it wanted to increase its operating margin to 30 percent this year but more recently Chief Executive Henning Kagermann said he would prefer to take opportunities to invest in future growth than be tied to that target.
SAP’s fourth-quarter operating income rose 10 percent to 1.1 billion euros, the company added on Wednesday. Net income rose 29 percent to 799 million euros, boosted by a gain of 55 million euros from reduced taxes during the quarter.
SAP also said it planned to evaluate opportunities to buy back shares in the future after repurchasing 27.9 million shares worth 1.1 billion euros last year.
Since SAP’s January 11 announcement, investors have questioned whether SAP shares deserve their premium over rival Oracle, the U.S. database software specialist.
The stock now trades at a premium of 42 percent to Oracle in terms of expected 2007 earnings, compared with 50 percent before the pre-announcement.