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SAP Reports Strong Growth, Completes Sybase Deal

U.S. market leads revenue gains and growth in large deployments.

Sharing mostly positive news in an earnings call with financial analysts on Tuesday, SAP reported double-digit gains in revenue and earnings, the imminent release of the Business ByDesign on-demand suite, and the completion of the company's tender offer for Sybase Inc.

SAP faced headwinds on two fronts. First, currency exchange-rate fluctuations put a dent in SAP's financial performance. In addition, SAP's second-quarter operating margins of 27.8% came in about a point below Wall Street expectations. Despite pressure to contain costs, SAP added 400 positions in sales and channel areas to drive growth.

"Our intention was to invest in the first half of the year -- putting people in place to target line-of-business buyers and fast-growing geographies -- so we get the benefit in the second half of the year," said SAP co-CEO Bill McDermott.

SAP's software and services revenue for the quarter were 2.25 billion Euros ($2.92 billion), up 16% from the same quarter last year (all figures are non-International Financial Reporting Standards). In constant currencies the increase was 8%.

Total revenues were 2.89 billion Euros ($3.57 billion), up 12% from the same quarter last year (and 5% in constant currencies). Operating profits increased 21% to 774 million Euros ($1 billion). Currency fluctuations lifted U.S. results but also resulted in a $74 million Euro ($96 million) non-operating loss, two-thirds of which was suffered in Switzerland and Venezeula.

SAP's strongest results were seen in the Americas, where software and service revenues increased 16%. Results lagged in Europe, where conditions have been more challenging.

"Companies in Europe were hesitant to invest in larger software deals," McDermott said, "but the good news is that volume is picking up." SAP closed 4,000 deals in the EMEA region. McDermott said he's optimistic about third-quarter prospects for Western Europe, but he noted tougher conditions in Eastern Europe.

Deals larger than 5 million Euros accounted for 20% of quarterly revenue, up from 12% in the same quarter last year. The U.S. led large-deal growth with major new contracts with American Water Works, the U.S. Department of Agriculture and Delta Air Lines, among others.

The completion of the $5.8 billion acquisition of Sybase will add that company's revenue to SAP results through the remainder of the year. On July 19 Sybase reported an 8.7% increase in second quarter revenue to $302 million and a 20% increase in profits to $45.3 million.

SAP raised its guidance accordingly, expecting full-year 2010 software and service revenues to increase 9% to 11% at constant currencies, up from 6% to 8% excluding the contribution from Sybase. The database and mobility software vendor, which will remain a separate company managed by its current CEO John Chen, and SAP stressed that it has retained the company's core management team.

SAP co-CEO Jim Hagemann Snabe noted Friday's planned general release of Business ByDesign in six countries: China, France, Germany, India, the United Kingdom and the United States. He was cautious about forecasting customer adoption of the service.

"It's hard to predict customer numbers because the challenge will be to teach the market that you can run a whole business on demand," said Hagemann-Snabe, contrasting the Business ByDesign suite, which addresses ERP, CRM, HR, supply chain and other applications, with single-application offerings.

Hagemann-Snabe also highlighted the fact that SAP's customer count surpassed 100,000 in the second quarter. That fulfills a years-old objective of increasing SAP's presence in the small- and midsize-enterprise market, a market addressed by SAP Business One, an on-premise application for small businesses, SAP All-In-One, on-premise software for midsize businesses, and Business ByDesign, the new SaaS solution that will span the SME ranks and possibly extend SAP deployments among large companies.

Business ByDesign will now see updates on a six-month cycle, Hagemann Snabe said, with new countries added to the service with each upgrade.

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