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November 13, 2005

SAP prioritizes R&D

Competition from Oracle Corp appears to be having an effect on SAP AG, which might have to reduce its margin expectations for 2006.

By CBR Staff Writer

At an analyst day, CEO Henning Kagermann said: It could be that we, next year, invest a little bit more in R&D than we originally thought. He also said Oracle’s planned purchase of Siebel Systems Inc is posing challenges. We have to understand what the priorities are. Now it’s about the market, capturing the market is priority number one, later on we have to expand the margin. If it does increase R&D spend, it will be the second year SAP has prioritized investment over margin. Last year the imperative was to pull development of the Enterprise Services Architecture forward to beat Oracle’s Fusion to market.

The decision could result in tighter margins and slightly reduced earnings next year. The view from Goldman Sachs is that there is a risk of the company potentially guiding to 2006 margins below Street expectations of 29%. JMP notes that under its model, a 1% drop in the non-GAAP operating margin would reduce its 2006 non-GAAP EPS estimate by about $0.06, from $1.66 to $1.60. The current 2006 consensus is $1.74.

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