Europe's largest software firm, SAP, has reported a 40% drop in its profits during the first three months of the year.

But its sales rose 9%, providing some hopes that the battered tech industry is starting to pick-up.

The German company reported net profits of 65m euros (�40m; $57.9m) during the first quarter, compared to 109m the previous year.

Its revenues rose to 1.66bn euros, in line with analyst expectations.

Whilst the firm warned that conditions in the software industry still remain challenging, it reiterated its forecast from January of a 15% rise in 2002 sales.

Slow to upgrade

The driving force behind sales growth so far has come from the consulting side of SAP's business rather than from software licences.

And the real test of a revival will be when companies begin to invest in technology again.

Despite some signs of economic recovery in both the US and Europe, firms have been reluctant to splash out on big new IT systems.

"Businesses in the Americas are taking a more deliberate and measured approach to new software investments," SAP said in a statement.

Recovery spotting

Investors and analysts have been anxious to gauge the temperature of the ailing technology sector and assess when it will recover.

SAP's latest results, together with an upbeat outlook from the semiconductor industry, has raised the hopes that the tide has already turned in favour of the tech firms.

But losses at its US internet firm, Commerce One, continue to weigh heavily on the firm.

Commerce One, a fallen star of the dot.com world, makes marketplace software to bring buyers and sellers together online.

On Wednesday, the firm cut its rapidly shrinking workforce by 30% to 1,100 employees and announced a first quarter loss of $220.6m.

SAP shares have dropped sharply amid a spate of profit warnings from rivals in recent weeks, falling more than 10% since the end of March.

The stock was trading down 3.2% at 149.70 euros by 0727 GMT, primarily because of fears over weak license sales.