Wednesday, April 29, 2009

SAP sales drop by a third

SAP sales drop by a third
By Gerrit Wiesmann in Frankfurt

Published: April 29 2009 18:14 | Last updated: April 29 2009 18:14

SAP, the world’s largest maker of business software, said sales fell by a third in the first quarter of 2009, highlighting companies’ reluctance to invest in information technology during a recession.

The slump was bigger than the 12 per cent drop in sales of such programs reported by rival Oracle in March. It led investors to sell SAP stock, although the shares rallied to close only 2 per cent lower at €29.50.

The German company said software sales dropped by a third to €418m ($557m). However, it managed to make up for this by raising revenues from maintaining SAP software installed on customers’ computers.

As a result, software and related services revenues were unchanged at €1.74m, outperforming Oracle, which saw joint revenues sink 2 per cent in its third quarter, which ran until the end of February.

For the full year, SAP said it continued to work on the “assumption” that software and related services revenues would be flat or fall by 1 per cent, allowing it to meet an operating-margin target of between 24.5 per cent and 25.5 per cent.

“While visibility for software revenues remains limited, we continue to take steps to protect our margin in this tough operating environment,” Léo Apotheker, SAP’s co-chief executive, said.

Mr Apotheker added that he was not worried by ­Oracle’s better performance in selling software at the start of 2009. SAP’s position as market leader was “not substantially changed” by what would prove to be a normal quarterly blip, he said.

Mr Apotheker signalled he did not want to follow Oracle into the hardware business after the US group agreed to buy server maker Sun. However, SAP’s strategy of organic growth would still be flanked by add-on purchases.

Mr Apotheker takes sole responsibility for SAP next month when his current co-chief executive Henning Kagermann retires.

SAP saw double-digit sales growth for much of 2008 – and an annual operating margin of 28.2 per cent – and it said as late as last summer that the crisis could be a boon as clients looked to cut costs with new software.

Yet, in autumn, the company warned that the fall-out from the global recession meant it could not give a sales forecast for 2009. Cost cuts – including a pay freeze and jobs cuts – followed.

SAP is cutting jobs for the first time in its 37-year history, aiming to reduce its workforce by 3,000 – 6 per cent of staff – to 48,500 by late 2009. Some 2,200 of these posts were cut last quarter.

This led to a one-off restructuring charge of €160m in the first three months of 2009, helping to drag operating income down 8 per cent to €332m.

Net income hit €204m, down 16 per cent from the first quarter of 2008.

Copyright The Financial Times Limited 2009

Software sales fall by a third at SAP

Software sales fall by a third at SAP
By Gerrit Wiesmann in Frankfurt

Published: April 29 2009 07:53 | Last updated: April 29 2009 07:53

SAP, the world’s largest maker of business software, on Wednesday painted a bleak picture of corporate spending on information technology when it said that sales of new software fell by a third in the first quarter of the year.

The Walldorf-based company said software sales – an indicator of follow-on sales from upgrades and maintenance – dropped 33 per cent to €418m, while software and maintenance revenues were flat at €1.74bn.

Last year, SAP regularly reported double-digit growth in both positions and last summer still boasted the economic crisis could raise information-technology spending as its clients looked to cut costs with new software.

But last autumn the company suddenly gave a stark warning about the fall-out of the global recession and said it could not give a sales forecast for 2009. Cost cuts, including a pay freeze and jobs cuts, soon followed.

“While visibility for software revenues remains limited, we continue to take steps to protect our margin in this tough operating environment,” Léo Apotheker, SAP’s co-chief executive said in a statement on Wednesday.

He stuck to his pledge, made at the start of the year, that cost cuts would help SAP to achieve an operating margin of 24.5-25.5 per cent in 2009, albeit down from a profit margin of 28.2 per cent the prior year.

SAP said this forecast was based on “the assumption” that full-year revenues from software and related services would be “flat” or show “a decline of 1 per cent” – although it said this was not a formal sales target.

The company is cutting jobs for the first time in its 37-year history, aiming to reduce its workforce by 3,000 people, some 6 per cent of total staff, to 48,500 by the end of 2009. Some 2,200 posts were cut last quarter.

This led to a one-off restructuring charge of €160m in the first three months of the year, helping to drag operating income down 8 per cent to €332m. Net income hit €204m, down 16 per cent from quarter one 2008.

Mr Apotheker, who takes sole responsibility of SAP when co-ceo Henning Kagermann retires later this month, said cost cuts were starting to have an effect and pledged SAP would continue with “tight cost controls.”

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Recession takes toll on non-financial sectors

Recession takes toll on non-financial sectors
By Richard Milne in London

Published: April 29 2009 19:42 | Last updated: April 29 2009 20:21

A string of European companies reported poor earnings on Wednesday as the global recession took a heavier toll on groups from the real economy than on banks.

Companies ranging from France Telecom to car parts maker Continental and pharmaceuticals group Bayer, which are both German, reported weaker earnings in the first quarter.

Meanwhile, Spain’s Santander, the largest bank in the eurozone, said its operating profit had risen.

Other industrial weak spots included steelmaker Arcelor-Mittal plunging to a $1.1bn loss and Siemens, Europe’s largest engineering group, issuing a profits warning in spite of a rise in earnings.

“Financials have done better, while real economy companies – outside consumer cyclicals – have been less impressive,” said Nick Nelson, equity strategist at UBS.

Banks such as Deutsche Bank, Credit Suisse and Santander’s Spanish rival BBVA have reported strong first-quarter profits, while companies from Euro Disney to Philips have reported weaker results.

European managers are generally refusing to say they see the “glimmers of hope” in the economy that several US companies such as General Electric have reported.

The chief executives of Siemens and BASF, the world’s largest chemicals group, even said they had seen further deterioration in recent weeks.

But both Conti and Bayer yesterday said they were seeing the first tentative signs of a bottoming out in the collapse of activity.

Mr Nelson said first-quarter earnings showed that “the rate of deterioration” was slowing in Europe, but that there would be more profit warnings and downgrades in coming months.

The pain in the real economy extended yesterday to diverse companies such as SAP, the German IT group, which said sales of new software had dropped by a third and France Telecom, where profits fell slightly.

German engineering companies – which make up the heart of Europe’s largest economy – reported a 35 per cent fall in orders in March and forecast further woe for this month.

Industrial companies have been hit hard not only by the collapse in demand for exports and cutbacks in investment, but also by the continued relative strength of the euro.

At the same time, some banks have seen improved conditions after a miserable 2008.

But other financial companies are struggling.

Allianz, the German insurer, saw operating profit fall 41 per cent in the first quarter.

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Thursday, April 23, 2009

Oracle faces culture shock in Sun’s open-source world

Oracle faces culture shock in Sun’s open-source world
By Richard Waters and Joseph Menn in San Francisco

Published: April 23 2009 21:42 | Last updated: April 23 2009 21:42

Larry Ellison is a famously activist exponent of competitive strategy. An avowed student of Sun Tzu’s Art of War, the Oracle chief executive has long followed an approach that sets Oracle’s interests against those of its main rivals, with Microsoft, IBM and SAP cast as the enemy.

With the acquisition of Sun Microsystems, however, he is about to walk on to new terrain where some of the methods that defined Oracle’s traditional approach to strategy no longer apply.

Sun’s main software assets – and the jewels for which Mr Ellison said this week that he had agreed to pay $7.4bn for the company – are all closely tied to the open source world: the Java programming language and development tools, which are partly open source, as well as the Solaris operating system and MySQL database.

That makes them unlike the roughly 200 software properties that Mr Ellison has acquired in the past. They are made freely available, and rely partly on the efforts of a wider group of developers to extend and support them. Their future success, in fact, relies on a technology community that stretches well beyond Oracle – and includes companies such as IBM, which also relies on Java as a core technology.

“Obviously Oracle is going to have to be a lot less heavy handed,” says Kenneth Chin, an analyst at Gartner. “They’ve acquired a lot of open-source assets, and they need to keep the communities involved.”

So far, Oracle has had little to say about how it will manage this balancing act. That has left the open source world trying to second guess what Mr Ellison will do next.

The focus has shifted in particular to how he will seek to make money from software properties that Sun itself so glaringly failed to “monetise” in the past, and whether his real intention is even to subvert some of the assets he is acquiring to protect Oracle’s existing business model.

The future of MySQL – an open source database bought by Sun last year, which has come to be seen as a long-term threat to Oracle’s own core database software business – has become the most immediate source of concern.

Marten Mickos, the former chief executive of MySQL, admits that Oracle’s acquisition of an upstart rival has sent a chill through the open-source community, and he likens it to Goliath vanquishing David. However, he also claims that it will still be in Mr Ellison’s own interests to maintain the software: “I think MySQL is cannibalising Oracle anyway,” so Oracle might as well benefit from that process directly, he says.

Most observers do not expect the hard-headed Mr Ellison to see it this way. Gary Reback, a Silicon Valley antitrust expert, says there is a chance that anti-trust authorities will force him to divest MySQL, but adds: “I think he wins any way you cut it. If he keeps it, he kills it: if he spins it off, who wants it without the top developers anymore?”

There are some potential limits. Mitch Kapor, a leading figure in the open-source world, points out that MySQL has a life beyond Oracle’s control: the software has already been “forked”, meaning alternative open-source versions have been created that are outside Oracle’s control.

However, stripped of the sponsorship of a big company willing to supply the core group of developers to push the project forward, MySQL could lose momentum as a significant rival to Oracle.

Mr Ellison’s intentions for Java have also become the centre of considerable speculation. Created by Sun as a way to counter the growing influence of Microsoft, Java’s power comes from its adoption by a wide group of companies, including IBM. If Oracle upsets this ecosystem it would undermine the value of Java – something people close to the company have been at pains to stress.

Yet maintaining Java’s openness, while at the same time directing its future development, will be a delicate balancing act, requiring the exercise of what Bill Whyman, an analyst at ISI, calls “soft power” – not Mr Ellison’s strength.

“We always wanted Java’s evolution to be participatory, but fully open would compromise compatibility,” says Bill Joy, the Sun co-founder and former chief scientist. “I believe Oracle shares these values, so am not concerned.”

More directly, Oracle has made clear that it plans to make money from Java in a way that Sun failed to do – another source of potential conflict with the rest of the technology world. Besides simply raising the licensing fee, Oracle could try to levy a small fee on every application that runs on Java, according to Gartner – a move that would have particular implications for the mobile world, given that Java is shipped on virtually all mobile phones.

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Friday, April 17, 2009

SAP’s New CEO to Inherit Far More Complex Product Set

Friday, April 17, 2009
Bruce Richardson

On April 29, SAP will host a conference call to discuss its results for the first quarter ending March 31. The company is also expected to announce that Henning Kagermann will be retiring from his role as Co-CEO. Fellow Co-CEO Léo Apotheker will assume the top position.

Knowing Mr. Kagermann, I bet he would have preferred to leave his successor with a strong pipeline and a robust economy as he slips quietly away. During a brief conversation a few weeks ago, I asked him whether he expected to see the economy recover by the end of this year or if we would we have to wait for 2010. Mr. Kagermann said that he thought “we will be lucky if it’s 2010.”

Over the last few weeks, I’ve sat through a lot of product discussions with various SAP executives and dozens of the company’s largest customers. Based on my observations, Mr. Apotheker faces numerous challenges. The top one may be the increasing complexity of the company’s product line and strategy. Here are some observations.

Surprise! Separate Enhancement Packs for ERP and each New Dimension product

When I attended the SAP Business Suite 7.0 launch in February, I left believing that all of the company’s new products would be delivered through an annual Enhancement Pack that covered the whole product spectrum. As it turns out, there will be separate packs for ERP and each of the New Dimension products. (The latter is an old label that refers to SAP’s offerings for CRM, SCM, HCM, and SRM.)

In addition, each release is cumulative, meaning that Enhancement Pack 5 will contain all of the features included in the previous packs. While this is great news for vendors like IntelliCorp and Panaya, which offer tools to help buyers compare the new releases with the current versions, it adds a lot more complexity to large implementations. This is especially true if SAP reverts back to separate release schedules for each of the various New Dimension products.

At the launch, SAP also introduced the concept of value scenarios. If you read my piece, “A Closer Look at the New SAP Business Suite,” you may remember that SAP had created 30+ vertical-specific scenarios based on end-to-end business processes, including inspired shopping experience, integrated product development, and collaborative demand and supply planning.

These scenarios are more like frameworks than composite apps. Still, a scenario such as collaborate demand and supply planning could involve pulling data from CRM and supply chain management in order to create the end-to-end process. This builds in a level of dependence on synchronized product releases. This is a challenge giving that SAP software is developed in 10 or 11 labs around the world.

Three types of apps: transactional, analytical, and collaborative

SAP has quietly built in additional complexity by adding different types of applications. In the R/3 days, its world consisted of transactions, with all of the results stored in a database.

Then, SAP developed and acquired a set of business intelligence/performance management products that pulled data from multiple data sources and content types, both structured and unstructured. The latter creates an issue when you see the world as a set of transactions. For example, what do you do with unstructured data? Where do you store it?

With the acquisition of Business Objects, SAP will be offering far more powerful and complex tools capable of managing enormous volumes of real-time data. This will likely result in a lot more members in the Terabyte Club, a moniker created by AMR Research’s Derek Prior.

Returning to the collaborative demand and supply planning scenario, these new collaborative apps offer a different challenge. In this application, SAP envisions a sort of a heterogeneous trading hub where a manufacturer may be exchanging real-time data with customers, suppliers, third-party logistics firms, contract manufacturers, financial institutions, regulatory agencies, and other interested parties.

The combination of the three types of applications, higher data volumes, and increased transactions is putting more pressure on SAP to open up NetWeaver to support third-party products. Discussions with customers, software vendors, and former employees point to the need for improving or replacing SAP NetWeaver Process Integration (PI). Formerly known as XI, PI is SAP’s enterprise application integration toolset.

Add SaaS and cloud to the soup

While SAP has been relatively quiet about its plans for expanding its on demand and software-as-a-service (SaaS) products beyond CRM and SRM, it’s logical to assume that over the next three to five years, most companies will find themselves support a hybrid architecture consisting of traditional on premise deployments and the rapidly growing on demand software.

Then there is the subject of cloud computing. A few weeks ago we spoke with SAP CTO Vishal Sikka about his plans. He told us that his team has been “working with Amazon for some time.” Logical cloud offerings include backup and archive, support for test and demo systems, and some virtualization support. In terms of offering applications on the cloud, Dr. Sikka pointed to several issues that need to be resolved: lack of analytics, integration challenges, and the difficulty of supporting transaction-intensive functions such as available to promise.

Urgent need for product roadmaps spanning two to five years

So, as you imagine the challenge of mixing and matching transactional, analytical, and collaborative applications in some combination of on premise, on demand, and in the cloud, you can feel the CIO’s pain. Clearly, CIOs have a lot more work ahead on governance, master data management, insourcing/outsourcing, and taming the total cost of ownership.

In meetings with SAP customers, we usually hear the same request unanimously: “Please help get SAP to provide us with product roadmaps.” Most are trying to slot in new, bite-sized projects over a multiyear period. This is much harder when you don’t know the release schedules. To date, SAP has been reluctant to disclose detailed plans. When we push back, the answer usually revolves around revenue recognition concerns. Okay, but that’s not very helpful for customers.

We will plead your case to Mr. Apotheker at SAPPHIRE

The next time we see Mr. Apotheker will be at SAPPHIRE in Orlando (May 11–14). In the past, Jim Shepherd and I have had the opportunities for one-on-one chats with Mr. Kagermann, Mr. Apotheker, and other SAP board members. Assuming that tradition holds, I promise we will relay your requests for detailed roadmaps for user interface plans, applications, NetWeaver, Business Objects, SaaS and clouds, and implementation strategies. Would you like more guidance on pricing, too?

We will also ask him about the economy. I hope he’s a lot more optimistic than his soon-to-be former boss. Look for our analysis next month.

On my blog, we are also looking for your view on your interest in new research on the future of work. Please take a minute to read the posts and add your thoughts.

In the meantime, I welcome your feedback and ideas—