Warren Wilson
SAP: Strong Q1 results overall, but slow ramp for Business ByDesign
SAP reported double-digit revenue growth for the first quarter of 2008, with healthy contributions from all three “pillars” of its business - its core enterprise applications business, its mid-market portfolio and its business user solutions group. But the vendor acknowledged that its new Software-as-a-Service (SaaS) offering, Business ByDesign, has not met early expectations and will take 12-18 months longer than planned to meet its 2010 goals of 10,000 customers and $1bn in revenues.Comment: SAP also claimed another quarter of market-share gains, its ninth in a row, and held 32.6% of the core enterprise applications market in the year that ended March 31, 2008, up from 28.2% a year ago. We suspect that the underlying numbers aren't firm enough to justify specifying share figures in tenths of a percentage point. But we don't quarrel with the overall trend, or with the overall strength of SAP's financial results, especially given the “headwind” of a falling US dollar and economic slowdown.Besides the enterprise market, the results also reflect growth in SAP's small and mid-sized enterprise business. Its Business All-in-One product for the upper mid-market posted an 18% growth in customers, to 11,700, while Business One, its small-business offering, grew 38% in customers, to 18,690. The overall SME result would have been stronger, however, but for the slower-than-expected sales of Business ByDesign since it was launched last fall.In response, SAP has modified its rollout strategy in certain respects. First, it will focus for the remainder of 2008 on Germany, the US, France, the UK and China, where most of its existing customers are located, and its Europe/Middle East/Africa region, where it will launch later in the year. Additional country launches that had been expected this year will be postponed until 2009.In addition, SAP will reduce its “accelerated investments” in Business ByDesign this year by about €100m - a decision prompted by the slow uptake, of course, but one that will nonetheless have a positive effect on operating margins for the year. SAP said it will make no further accelerated investments in Business ByDesign after this year, but will fund the product out of its normal operations.Business ByDesign's early results are disappointing, but perhaps not surprising given the scale of the undertaking in both technical and business-model terms. SAP well understands the market for on-premise enterprise management software - indeed, it pioneered and defined the market - but the mid-market, and especially the SaaS mid-market, are entirely different propositions. But Business ByDesign is a long-term, strategic bet, and SAP can afford to take some time to get it right - especially given the market's early stage of development, the absence of a strong head-to-head competitor and the strength of its core business. The slow launch isn't good news, but it's way too soon to worry.A bit more on the financial results: The company posted overall revenues of €2.51bn, 22% higher than in the year-earlier quarter on a constant-currency, non-GAAP basis. US GAAP rules required SAP to exclude a non-recurring write-down of €47m in deferred support revenues from its acquisition of Business Objects; on that basis, overall revenues totalled €2.46bn, an increase of 14% year-on-year. Software revenues were €622m, an increase of 18% non-GAAP (11% GAAP). Non-GAAP revenues from software and software-related services were €1.78bn, up 24% year-on-year on a constant-currency basis (GAAP: €1.74bn, up 15%). Excluding the Business Objects contribution, SAP posted an increase of 12 percentage points in currency-adjusted, non-GAAP revenues from software and software-related service - the 17th consecutive quarter in which that category grew 10% or more.Non-GAAP operating margin fell 1.2 percentage points, from 20.7% to 19.5% (GAAP: down 5.6 percentage points, from 20.2% to 14.6%.) Both non-GAAP and GAAP operating margins reflect about €40m in spending for Business ByDesign, while the GAAP figure also reflects charges related to the Business Objects acquisition, which was completed in January.
