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SAP Sales Growth Slows While Profits Jump In 2Q

CEO Kagermann says some big contracts slipped to the third quarter and competition with Oracle remains fierce.

Despite being in the midst of a critical product-line transition and facing increasing competition from rival Oracle, SAP on Thursday said revenue increased 9% year-over-year to 2.2 billion Euros ($2.8 billion) in its second quarter ended June 30. Net income for the quarter jumped 43% from the same period last year to 414 million Euros ($520 million).

But software revenue was up only 8% to 621 million Euros ($780 million) in the quarter, far below the torrid 22% growth recorded in the first quarter. Part of the slowdown was attributed to a number of deals that were expected to close in the period but were delayed into the second half of the year, said Leo Apotheker, president of customer solutions and operations, at a press conference Thursday. But he still expects SAP to post software revenue growth of 15% to 17% for all of 2006.

The growth is significant because SAP just began shipping in May mySAP ERP 2005, a new release of its flagship enterprise resource planning applications. That software is built on SAP's Enterprise Services Architecture, the vendor's service-oriented architecture. Transitions between product-line generations can be dicey for vendors. Apotheker said SAP signed two "global enterprise agreement" contracts during the first half of the year worth in the "high double-digit" millions of Euros that were driven by the ESA roadmap, although he did not identify the customers.

Some 310 customers—110 in this year's first half—have taken advantage of SAP's Safe Passage program to migrate to SAP software from Oracle applications, according to SAP. Oracle, nevertheless, has been picking up market share, even according to SAP's own calculations. While SAP's share of the enterprise application market increased from 21.4% to 21.7% between its first and second quarters, SAP CEO Henning Kagermann acknowledged that Oracle increased its share of the market from 8.8% to 10% during the same time.

Kagermann said ERP software vendors have been engaging in aggressive price competition and discounting in an effort to gain market share, although he declined to say how deep those discounts run.

Enterprise applications aren't the only battlefield between SAP and Oracle. Earlier this week Oracle president Charles Phillips told industry analysts that sales of its Fusion middleware products exceeded $1 billion in its fiscal 2006. Thursday Kagermann said SAP's NetWeaver middleware, a key component of its ESA blueprint, is winning market acceptance with some 31,000-plus NetWeaver components installed at customer sites. He added that NetWeaver accounted for 21% of SAP's revenue in the first half of 2006.

Kagermann also reiterated SAP's strategy of making only targeted acquisitions to fill gaps in its product line, rather than to gain market share as Oracle did with its 2005 buyout of PeopleSoft. "There's no reason for us to make acquisitions to take market share away from Oracle," he said. Earlier this month SAP acquired Praxis to add e-commerce and Web-based CRM technology to its Business One apps for small businesses.

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