Thursday, May 01, 2008 / Lex / Technology, media & telecoms - Slowdown at SAP / Lex / Technology, media & telecoms - Slowdown at SAP

Slowdown at SAP
Published: April 30 2008 09:38 | Last updated: April 30 2008 19:22

The prospect of implementing an SAP program for the first time tends to bring managers out in a sweat. Investors anticipating the software company’s results have learnt to feel the same way. On Wednesday SAP shares dropped 3 per cent after its first-quarter numbers missed expectations.

Sales of new licences, which contribute about half of sales, were weak. Because these should generate follow-up maintenance contracts, they are a good signal about future growth. The Americas were particularly weak: excluding the impact of recently acquired Business Objects, licence sales fell almost 10 per cent year on year. An exceptional first-quarter performance in 2007 does offer some mitigation but a tougher market fits the darkening picture painted by US competitor Oracle at the end of March. It is taking longer for software customers to sign contracts and deal sizes are down.

SAP has stuck confidently to full-year guidance for overall sales growth (excluding Business Objects) of 12 per cent to 14 per cent. With the first quarter at the bottom of the range, that looks optimistic. SAP sells software with claimed strategic benefits for businesses, which provides some protection from the cycle. But, if the economic outlook worsens, SAP will feel the impact of sweeping cuts to capital expenditure budgets.

The group has another problem in that it still largely relies on selling software to big companies. SAP is targeting smaller businesses with its first foray into an online, on-demand service called Business ByDesign. But the move is proving harder than expected. SAP had hoped to have 10,000 mid-market customers by 2010 but it is, by its own admission, 12 to 18 months behind target. The roll-out has been reduced to just six countries this year. It makes sense to proceed slowly in order to get the product right but continued difficulties in this competitive segment will raise concerns over SAP’s long-term growth prospects.

Post and read comments on this Lex
Copyright The Financial Times Limited 2008 / Companies / IT - SAP delays software rollout / Companies / IT - SAP delays software rollout

SAP delays software rollout
By Maija Palmer

Published: April 30 2008 10:08 | Last updated: April 30 2008 18:22

SAP on Wednesday delayed the roll-out of its new online software for medium-sized businesses – a crucial part of its growth plans – and reported a steep fall in first-quarter profits.

The German group had hoped to generate €1bn from supplying its internet-based Business ByDesign software to 10,000 small to medium-sized customers by 2010. However, it said that it would take 12-18 months longer than expected to reach this target.

Business ByDesign is the company’s first foray into web-hosted software for the mid-market. Companies such as SAP and IBM are trying to cater for smaller customers as orders from big enterprises slow. The small business IT market is estimated to be worth about $400bn, but potential suppliers face stiff competition from entrenched competitors such as Microsoft.

Henning Kagermann, chief executive, said SAP was slowing down the roll-out as it looked for ways to reduce the cost of running the internet services. “We need to automate the running of the services, otherwise the cost base will be too high and the profit will not be good enough,” he said.

Mr Kagermann has promised that margins from the internet business will be the same as those of SAP’s other businesses. “I want to prove to the market that this way of selling software will not lead to a margin decline.”

While the company looks for ways to cut running costs, it will limit roll-out of Business ByDesign to just six countries and fewer than 1,000 customers.

SAP missed analysts’ estimates for its results for the three months to the end of March, reporting a 15 per cent increase in software and services revenues to €1.74bn, against expectations of around €1.8bn.

The weak results echo a disappointing performance by US rival Oracle last month, and compound fears that the software market may be slowing in the uncertain economic climate.

Mr Kagermann said the US remained a tough market, with customers spending less on software deals. He saw no signs of a slowdown spreading to Europe.

US sales, which account for a quarter of revenues, fell by 1 per cent, while European sales, which account for half of SAP’s business, rose 22 per cent.

Total revenues were €2.46bn ($3.8bn), up 14 per cent from a year ago. But net income fell 22 per cent to €242m, as SAP was hit by €130m in charges related to its acquisition of Business Objects last year, and a €40m investment in the Business ByDesign service.

Earnings per share fell 19 per cent to €0.21.

SAP reiterated forecasts that software and services revenues would grow 24 to 27 per cent at constant currencies this year, and said operating margins, excluding costs related to Business Objects, would be higher than expected because it was cutting back investment in Business ByDesign.
Copyright The Financial Times Limited 2008