SAP failed to give a 2007 outlook for closely watched license sales on Wednesday and said margins would fall as it invests in software for smaller firms, sending its shares down more than 5 percent.
The German software group, which shocked investors by announcing earlier this month that it had missed its 2006 license sales target, said it would no longer forecast license revenues due to changing sales models.
Instead of giving an outlook for software license sales--the money companies pay up front 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 percent to 14 percent at constant currencies from 6.61 billion euros ($8.6 billion) in 2006, when they rose 12 percent, the world's biggest maker of business software said.
The operating margin is expected to fall to between 26 percent and 27 percent from 27.3 percent in 2006, as it invests $388.74 million to $518.32 million over eight quarters in building its midmarket offerings, a crucial focus for future growth.
SAP also cut its reported 2006 license sales by 30 million euros ($38.87 million), meaning that license sales grew by only 12 percent instead of the reported 13.5 percent at constant currencies, far short of SAP's targeted 15 percent to 17 percent growth.
It said it had had to adjust its booking of a large contract and that the 30 million euros would now likely be booked in the first half of this year.
"2006 was not an easy year for us," Chief Financial Officer Werner Brandt said during a news conference.
SAP shares, which plunged 10 percent after the January 11 statement for preliminary 2006 results, fell as much as 5 percent, wiping another $3.5 billion off the company's market value.
Software analyst John Segrich at JPMorgan Chase said SAP's failure to provide a license 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 license growth may spook people after they missed their forecasts for the year and then failed to provide guidance on that basis."
Brandt said 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 that it would introduce the new reporting line "to provide additional transparency for reporting potential new product revenue streams."
It also said it is 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 said in the past that it wanted to increase its operating margin to 30 percent this year, but more recently, Chief Executive Henning Kagermann said he would prefer to invest in future growth than to be tied to that target.
SAP's fourth-quarter operating income rose 10 percent to $1.43 billion, the company added Wednesday. Net income rose 29 percent to $1.04 billion dollars, boosted by a gain of $71.27 million from reduced taxes during the quarter.
The company's sales chief, Léo Apotheker told a news conference that no additional revenue should be expected this year as a result of the new investments in the middle market.
But Kagermann said that by 2010, the new business had the potential to bring in about $1 billion in extra sales.
SAP also said it would evaluate opportunities to buy back shares after repurchasing 1.1 billion euros of stock last year.
Since SAP's January 11 announcement, investors have questioned whether SAP shares deserve their premium over rival Oracle. SAP stock now trades at a premium of about 45 percent to Oracle, in terms of expected 2007 earnings, compared with 50 percent before the preannouncement.
