Business software-maker SAP AG said yesterday that its fourth-quarter net profit rose 29 percent, but software sales missed forecasts. The company's dim outlook sent shares tumbling.
The company cautioned that profitability would fall as it invested up to $519 million over two years to develop the business.
American Depository Receipts of SAP fell $3.52, or 7.04 percent, to $48.70 in the New York Stock Exchange yesterday.
Walldorf, Germany-based SAP earned $1.04 billion in the three months through Dec. 31, a 20 percent increase from the same period a year earlier. The company's North and South American headquarters are in Newtown Square.
Bill McDermott, chief executive officer of SAP America Inc., said the new investment would allow his company to target businesses that employ 100 to 500 people, a market he estimated was worth $19 billion.
Software sales rose 7 percent to $1.64 billion. While they increased 13 percent in Europe and the Middle East, they were static in the Americas and rose by only 2 percent in the Asia-Pacific region.
Over the whole year, SAP said software sales increased 10 percent, to $3.99 billion. The company already had warned Jan. 12 that software sales would come in about that level, missing previous guidance of 15 percent to 17 percent growth.
SAP said it cut $39 million from its third-quarter software revenue sales after it amended a contract with a U.S. customer, which it did not identify.
Full-year net profit was $2.4 billion, up 25 percent from the previous year.
"While we did not achieve all of our targets in 2006, we ended with solid growth at constant currencies for both product revenues and software revenues," chief executive Henning Kagermann said in a statement.
SAP said it would invest as much as $519 million over eight quarters in a push for new business. As a result, the company expects full-year operating margin for 2007 to be between 26 percent and 27 percent, compared with last year's 27.3 percent.
"This spending plan is a total surprise and highlights the fact that SAP has been late with its midmarket product," John Segrich, an analyst at JPMorgan Chase & Co. in London, told Dow Jones Newswires. "It will be the first time in seven years that SAP's operating margin will drop."
SAP said it expected full-year software and software-related services sales to increase 12 percent to 14 percent, compared with 12 percent a year earlier.