SAP Product Promise Pushes Ahead Of Profit

Software giant's first-quarter financial results fall short of expectations as its mobile, in-memory database, and on-demand products ramp up.
SAP reported Thursday that software revenue and operating profits both increased 26% in the first quarter. But higher costs and lower-than-expected profits sent the company's stock skidding nearly 7% in early trading.

Defending the performance, SAP executives said the company is "exactly on plan." Citing "triple-digit-million euro" sales pipelines for SAP's Hana in-memory appliance and mobile applications -- products that have yet to see wide release -- they reaffirmed the company's full-year guidance for a 10% to 14% increase in software and software-related service revenues.

SAP's software revenue was 583 million euros ($864 million) for the first quarter ended March 31, up 24% in constant currencies from the same period last year. Software and software-related service revenues were 2,327 million euros ($3,449 million), up 17% in constant currencies from a year earlier.

Net profits, the measure that most disappointed analysts, were 403 million euros ($597 million), up 4% from last year but well short of the 515 million euros expected by analysts. Profits were impacted in part by a 112 million euros ($166 million) charge tied to SAP's acquisition of Sybase in 2010.

The first quarter is historically SAP's weakest, so the results weren't alarming, according to analyst Jason Maynard of Well Fargo Securities. "Instead, it seems the current hype around new solutions like Hana, Mobility and On Demand got ahead of itself," wrote Maynard in a research note.

So when will product interest turn into bottom-line profits? Hana will clearly be a highlight of the company's annual Sapphire event in May. SAP's co-CEO Bill McDermott told Information Week that he expects the general release of Hana in June "will lead to a progressive build in sell-through on a very strong pipeline."

McDermott said Hana's in-memory technology will bring "sense-and-respond" capabilities to retail environments in which companies want to know in real time which items are selling and which aren't by geography and store. He also noted sales scenarios where accurate knowledge of inventory and past purchases is needed from the supply chain to the point of sale.

SAP is already building sales in mobile, McDermott said, now that it has built applications and device-management and security capabilities on the Sybase Unwired platform. The release at Sapphire of a software development kit for that platform will boost partner interest and demand, he said.

In the on-demand, software-as-a-service sector, SAP seems to be over-cautious about the roll-out of its Business ByDesign suite. SAP has only 400 customers to date for Business ByDesign, which it's aiming mostly at small and midsize companies, and McDermott said it will have 1,000 customers by the end of this year. By comparison, CRM SaaS leader has been adding tens of thousands of customers each quarter.

When will ByDesign hit scale? McDermott said SAP is selling to SMBs entirely through resellers, about 150 of them at present. "It's more difficult to get the first 1,000 customers than it will be to get the next 9,000," he said. SAP executives also noted the upcoming release of SAP Sales OnDemand, an app that runs on the ByDesign platform and that is set to debut at Sapphire.

Despite SAP's forward-looking spin, analysts inevitably compared the company's most recent financial results to those of Oracle, which turned in a strong performance highlighted by a 29% increase in new software license sales for the quarter ended Feb. 28.

Oracle's increases were led by its database business. McDermott asserted that SAP beats Oracle in eight out of 10 competitive applications bids. He listed wins against Oracle in the most recent quarter, including Teco Energy, Societe Generale, J.D. Wetherspoon, and Hewlett-Packard.

And on that last note, McDermott derided Oracle's decision to stop developing its software for the HP-Intel Itanium platform. That move has been widely perceived as an attempt by Oracle to prop up sales of its Oracle/Sun Sparc servers as a replacement for Itanium servers. "Heavy handedness and vendor lock-in are not resonating well with customers," McDermott said.

What will fail to resonate well with financial analysts will be another SAP quarter that falls short of high expectations. SAP has doubled its market capitalization since McDermott and co-CEO Jim Hagemann Snabe took the helm last year, and the stock has been the best performer on Germany's DAX index so far this year.

SAP mobile apps were just released, and Hana won't hit general release until June. That doesn't give these products much of a runway in the second quarter, but all eyes will be on the early results.