SAP Reports Q3 Profit Despite Falling Software Sales

SAP Wednesday reported a 9 percent drop in revenue in its third quarter, including a precipitous 31 percent plunge in software sales. But the application giant reported increased earnings thanks to the company's cost-cutting efforts.

SAP also said it sees a continued shift away from big contracts in favor of smaller deals, a development that may bode well for the company's channel partners.

SAP reported total revenue of $3.71 billion, down 9 percent from $4.08 billion from the same period one year ago. That included $776.6 million in software revenue, down 31 percent from $1.13 billion one year earlier.

Support revenue, however, grew 14 percent to $1.97 billion from $1.73 billion in the same period last year. Subscription and other software-related service revenue increased 23 percent to $116.8 million from $94.6 million one year ago.

Net income for the third quarter was $643.2 million, up 12 percent from $575.1 million in the third quarter last year.

SAP managed to report a profit for the quarter because of its cost-cutting efforts that resulted in an 11-percent decline in its operating expenses. The company's employee headcount stood at 47,804 at the end of the quarter, down 3,732 or 7 percent from the end of 2008.

"Despite the continued tough spending environment, we are pleased to see further progress in the evolution of our volume business as a result of smaller deals," CEO Leo Apotheker said in a statement.

During a conference call with financial analysts Apotheker said he believes the worst of the recession has passed and that business has stabilized. "But we are still up against significant challenges," he said. "The slightest change in mood has an impact on (contract) closure rates."

Apotheker said customers today are buying software in smaller increments compared to the big contracts of the past. "We don't expect to see those come back any time soon," he said on the call.

Revenue from software sales and software-related services came in lower than expected mainly because of the "challenging environment" in Japan and emerging markets," CFO Werner Brandt said in a statement.