SAP Bullish Despite Third Quarter Shortfall

SAP on Wednesday reported double-digit gains in revenue and earnings for the third quarter. Nonetheless, the performance fell short of expectations, sending the company's stock down 6%. Despite the shortfall, co-CEOs Bill McDermott exuded confidence, saying he "looked forward to the day" when SAP can go toe to toe with Oracle's years-delayed Fusion Applications.

On the surface, SAP's results sounded impressive. Software revenues were up 15% to 656 million Euros ($902 million) for the three months ending September 30 (all figures are in constant currencies). Total software and software-related services revenues increased 13% to 2.35 billion Euros ($3.23 billion). Quarterly profits were up 12% to 501 million Euros ($689 million) but were about 9% shy of analyst expectations of 553 million Euros ($760 million).

SAP said the addition of Sybase was responsible for just less than half of the increase in software and software-related services revenue (versus slightly more than half for SAP). The company declined to break out its software-only results. Sybase reported $96 million (70 million Euros) in license revenue in the third last year, which suggest it was responsible for more than half of this year's increase in quarterly software revenue.

Pressed by analysts to detail growth prospects for 2011, co-CEO Jim Hagemann-Snabe said SAP had effectively doubled its addressable market through forays into software as a service (SaaS), mobility, its soon-to-be-released HANA analytic appliance and emerging markets such as the BRIC nations of Brazil, Russia, India and China.

Can these new opportunities really drive that much growth? Hagemann-Snabe himself downplayed the revenue of Business ByDesign, SAP's SaaS-based enterprise applications suite rereleased in July. ByDesign is SAP's best hope of reaching new customers, but Hagemann-Snabe stuck to the cautious stand of not projecting customer volume or revenue targets for the offering.

Mobility is where SAP is counting on big synergies from its Sybase acquisition. The Sybase Unwired platform is currently being overhauled to be natively aware of all of the components and services within SAP's Business Suite. With the help of partner and customer developers, who will build apps on the platform, mobility will enable hoards of smart phone users to access SAP information and workflows, Hagemann-Snabe said. There are 38 million users of SAP software currently, whereas the total universe of mobile business users exceeds 2 billion, he said. Nonetheless, this opportunity is mainly about cross-selling existing SAP customers on mobility.

As for SAP HANA, the High-Performance Analytic Appliance, that won't be introduced until later this year. Hagemann-Snabe said SAP has "oversubscribed" its plan to work with 50 initial customers. It's not at all clear when the device will move beyond this trial period and be generally available.

SAP's in-memory technology and column-oriented database are proven in the BW Accelerator and SAP BusinessObjects Explorer appliances. But those two devices went after largely static data within data warehouses.

The key appeal of HANA is access to transactional data within SAP. That will open up tremendous possibilities for real-time insight. But it also defines HANA as an up-sell product for existing SAP customers -- and not something that can be sold into non-SAP environments.

If you boil it down, it's clear that the real growth numbers for SAP in 2011 will depend on organic growth of SAP Business Suite. BRIC opportunities might help, and incremental SaaS, mobile and HANA sales will pad the bottom line. But barring another acquisition, the bulk of the growth will have to come from sales of conventional, on-premise ERP.

On this last front, McDermott was positively giddy about the prospect of going up against Oracle Fusion Applications in competitive bids in 2011. "They don't do very well in generation-one releases, which is why they've watered down their messaging to beta-testing the products," McDermott said.

In a flourish of saber rattling, McDermott added, "we look forward to the day when they have some kind of a new product because that will put all the customers of all the rollups Oracle has done through mergers and acquisition into a buying mode."

And when and if those customers consider upgrading to Fusion, "we all know they're going to shop it against SAP, if for no other reason than to keep Oracle honest on price," McDermott said. "When we're at that table, my money is on SAP."