We had the opportunity to talk with SAP’s Bill McDermott about an hour before the earnings call on April 30. Mr. McDermott is president and CEO of SAP Americas and SAP Asia Pacific Japan. Last month, he was named to the SAP Executive Board. Shortly before the call began, SAP issued its earnings release for the first quarter ending March 31. A quick glance showed that total revenue was Euro 2.46B, up 22% in constant currency. The closely-watched software license revenue number was Euro 622M, up 18% in constant currency. While the latter appears to indicate strong performance in an uncertain economy, Goldman Sachs noted that it came in “well below Street expectations of Euro 670-680 million” because of relatively poor performance in the Americas: license revenue was down 2% compared to 1Q07. By the end of the day, SAP’s shares were down 4.2%. The other item of note in the press release concerned SAP’s plans for Business ByDesign. You may recall that when SAP first began talking about the new software for small and midsize companies, its expectations were that it would allow the company to reach the 100,000 customer mark by 2010. The company has now tempered expectations. It expects that it will take 12 to 18 months longer for SAP Business ByDesign to reach $1B in revenue and 10,000 customers. As a result, SAP said it will reduce its “accelerated investments” in the new software by Euro 100M this year. The company also said it expects to “engage in significantly less than 1,000 customers in 2008.” Bill McDermott: Always upbeat, always on message If SAP executives were disappointed by the Americas’ performance, you certainly couldn’t tell it by talking to the company’s top sales executive. As always, Mr. McDermott was upbeat, preferring to focus on total revenue and software and software-related service revenue rather than license sales. Given that his territory had been expanded to include SAP Asia Pacific Japan, he was especially proud of the continuing turnaround there; license revenue was up 55% in constant currencies. When asked if he saw a slowdown in the U.S. market, he said some buyers had become more cautious. In some cases, boards were now taking a second look at planned expenditures. The subject then turned to hot verticals. He immediately cited banking and retail. On the banking side, companies are starting with financials. The plan is to move them to more of the ERP suite and then on to core banking applications. As for retail, Mr. McDermott said that “business was up 100% year over year” and named several big wins in the quarter. From verticals, we segued to hot products. At the top of his list were SAP Business Suite 6.0 and CRM 7.0, with strong plugs for supply chain, financials, performance optimization, GRC (governance, risk management, and compliance) and the Business Objects product set. The conversation then veered toward new business. More than half of the deals came from net new customers, mostly from small and midsize accounts. When asked if he was seeing interest from customers looking to replace older legacy ERP systems, he said not yet, but did say that the company was doing well “picking off Oracle-related properties” in HR, customer management, and ERP. My sense was that these were mainly customers with a mix of SAP and Oracle applications. I asked him if he saw any areas in need of improvement. His immediate response was “improve the margins.” Given that SAP has recently named its first chief operating officer and is scaling back SAPPHIRE-Berlin and expenditures on Business ByDesign, I expect to see “improve the margins” as a dominant theme for 2008. Speaking of Business ByDesign, I asked about the delay in ramping up the volume. He said that “we want more functionality” before doing so. Given that this product set is a core component of the company’s side-by-side innovation strategy, we will push for more details at SAPPHIRE-Orlando. Returning to geographies, Mr. McDermott cited strong results in India, China, Japan, Russia, Brazil, and Colombia. He said specifically that Japan had a “fantastic quarter” and described Brazil and Russia as “really bullish.” In addition to margins, Mr. McDermott later named another area for improvement: converting the Business Objects field people from a “tools sales force to an enterprise applications sales force.” From field execution, we turned to partners and the perennial talent shortage issue. He told me that “every partner has audacious hiring plans.” When tallied up, partners plan to hire 30,000 additional SAP resources. When asked if this would be sufficient, he admitted that he “would like to see 50,000.” I closed the conversation with a request for a sneak preview of SAPPHIRE. The theme is “Beyond Business Boundaries” and the realities of globalization. While declining to discuss any new product announcements, he did say that most of the attention will be on the SAP Business Suite, side-by-side innovation, and Business Objects. Interest in Business Objects has been strong. In the 100 days since the deal was completed, 60 of SAP’s top 100 accounts have requested an “immediate engagement.” Many have begun blueprinting exercises. We will continue to report on all facets of SAP’s performance. Coming next week: SAPPHIRE-Orlando If you fantasize about being in Orlando in May, you’re either under house arrest or on death row in Texas. The weather promises to be hazy, hot, and very humid, with likely torrential downpours timed just as the sessions are ending for the day. Orlando in May is proof that we’re willing to endure anything to bring you the latest analysis on SAP. Look for our analysis next Monday. In the meantime, what do you make of SAP’s license shortfall in the Americas? Was SAP too aggressive taking deals in 4Q07 at the expense of the first quarter, or do you see a slowdown in spending? Will Business ByDesign ever be successful in the SMB market, or will it ultimately be positioned as the replacement for R/3 and the current Business Suite? Let me know what you think—brichardson@amrresearch.com. New: The First Thing Monday Blog We’ve finally started a blog. There, you’ll find previews of this column, additional information, commentary on news regarding the future of enterprise applications, and original content, like the latest post on “Software for the Recession Diet.”
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