2nd UPDATE: SAP Shares Fall After '09 Product Revenue Guidance Cut

Business software company SAP AG (SAP) Wednesday said software and software-related services revenues will be lower than previously expected in 2009 because demand in emerging markets and Japan has fallen sharply.

The company said it now expects software and software-related services revenue to drop between 6% and 8% from EUR8.62 billion in 2008. In July, SAP had forecast a 4%-6% decline.

At 1026 GMT, SAP shares were trading down 7.3% in Frankfurt at EUR31.91, the biggest decline in the German blue-chip DAX index, which was down 1.9%. SAP shares had risen about 33% since the beginning of the year to close at EUR34.41 Tuesday.

"Third-quarter software and software-related service revenues came in lower than we expected mainly because of a particularly challenging environment in the emerging markets and Japan," Chief Financial Officer Werner Brandt said.

He said the company is "seeing signs of stabilization in the general environment" but "the market remains difficult."

SAP, like rivals Microsoft Corp. (MSFT) and Oracle Corp. (ORCL), has faced falling demand for its business software products as companies have cut investments and IT spending due to the credit crunch and economic downturn. Oracle last month reported weaker-than-expected sales of new licenses during its fiscal first quarter. It blamed this on SAP's weakness as a reseller.

In response to the downturn, SAP started a company-wide cost-cutting program in fall 2008 aimed at saving EUR300 million to EUR350 million annually from 2010 onward.

The Walldorf, Germany-based company said net profit rose 12% to EUR435 million in the third quarter, from EUR388 million a year earlier, even though overall revenue fell 9% to EUR2.51 billion. Both figures were below analysts' expectations.

SAP said profits rose because its tax rate fell to 21% in the third quarter, from 31.9% a year earlier, due to an impact from acquisitions it has made.

SAP also said it had kept profits up because cost-cutting had protected its margins. The company confirmed that its expects an operating margin of between 25.5% and 27% at constant currency rates in the full year. For the third quarter, SAP's operating margin was 26.9%, compared with 27.7% in the second quarter and 28.4% in 2008.

SAP guides on a currency neutral basis and excluding charges related to the acquisition of France's Business Objects last year. The guidance includes around EUR200 million in restructuring charges, of which EUR21 million were booked in the third-quarter.

SAP said it would now benefit from a lower tax rate for the whole of 2009, and analysts said that could be enough to offset the decline in revenues and prevent downward revisions to earnings estimates.

The company said it now expects a tax rate of between 27% and 28% in 2009, from a previous forecast of 29.5% to 30.5%. In 2008, SAP had a tax rate of 30%.

SAP's software revenue, a closely-watched indicator as it generates future revenue from maintenance and consulting services, dropped to EUR525 million from EUR763 million, below analysts' expectations of EUR570 million. Software and software-related service revenue for the period fell 3% to EUR1.94 billion, in line with analyst expectations.

Landesbank Baden-Wuerttemberg analyst Stephan Wittwer thinks "many companies are looking for new software projects," but "there is a difference between what IT departments want and what the operating situation of many customers allows."

He maintained his sell rating with a EUR28 target price on SAP.

-By Hilde Arends, Dow Jones Newswires; [phone]; [e-mail]

(Philipp Grontzki in Frankfurt contributed to this article.)