SAP: "Only a fool would try to predict what is going to happen"

Published: November 3, 2008

by Timothy Prickett Morgan

Well, that title pretty much sums up the sorry state of the business world these days, right? That was Leo Apotheker, the co-chief executive officer of German application software giant SAP, when he was asked by the Wall Street Journal about projecting where the fourth quarter of 2008 might be in terms of revenues and profits.

SAP reported its third quarter financial results last week, with software revenues up 7 percent to €763 million and services revenues (including software support) up 15 percent to €1,994 million. While this was pretty good given the economic environment, the numbers were supposed to be better and SAP was not expecting to be seeing a net income decline of 5 percent, to €388 million.

So what caused the drop in sales and profits at SAP? Small and midrange shops stopped spending money in September, according to Apotheker. "What happened in the second half of the quarter was indeed that sudden drop in small and medium size enterprise business was actually rather significant," Apotheker explained in a conference call with Wall Street analysts. "It's one of the reasons why we had this significant impact. In the meantime, we are continuing to talk to our SME prospects and partners. We have come up with a series of offerings that are particularly geared towards the SME market." Financing was a big issue for small and midrange shops, and buying an SAP ERP suite, even one geared for SMBs is a big ticket investment and often requires financing to get done. But even with financing assistance to its customers, SAP is not yet calling a turnaround in the SMB space that has become increasingly important for the software giant's growth." I think it is a little bit premature at this moment to make a prediction of what is going to happen in the SME space," Apotheker said, adding that SAP's pipeline to SMB customers remains full but the company is in no position to predict closure rates for deals.

SAP reckons that its share of the $38.7 billion global application software and related services market was 33.4 percent averaged across the past four quarters, which is a 6.5 percent swing in its favor compared to the third quarter of 2007; about half of that share swing came from growth and half from its acquisition of business intelligence software supplier, Business Objects. A lot of that growth, by the way, has come from the Business One suite, which is aimed at midrange shops and which passed its 20,000th installation in mid-July. That represents a doubling of the Business One installed base in under two years, by the way. The Business ByDesign online application suite is still rolling out, announced with much fanfare a little more than a year ago, and only kicked in €64 million in sales in the quarter (and is booked as a service, not a software, sale).

By regions, SAP's sales were tepid in the Americas and Europe and pretty good in the Asia/Pacific-Japan region. In the third quarter, SAP had €344 million in software sales in Europe, up 4 percent, €280 million in the Americas, up 6 percent, and €139 million in Asia/Pacific-Japan, up 18 percent. Software sales in its home German market rose by 20 percent to €393 million, while the rest of EMEA accounted for €658 million, up only 12 percent. Sales in the United States came to €486 million, up only 9 percent, while the rest of the Americas €178 million, up 27 percent. SAP pushed out €98 million in software sales in Japan in Q3, up 13 percent, while the rest of the Asia/Pacific region accounted for €181 million in sales during the quarter, up 18 percent.

Earlier this month, SAP instituted a hiring freeze, cut travel expenses, and canceled some employee training to try to reduce its costs as it saw the economy heading south and profits under pressure. The company is trying to reduce costs by €200 million in the fourth quarter because of the souring of business conditions.

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