SAP Profits Take a Whack as Business ByDesign Ramp Slowed

May 5, 2008 Timothy Prickett Morgan

The weak greenback has been a boon of sorts to IT companies based in the United States that export a lot of hard and soft wares to foreign companies, but it is no fun at all for companies headquartered outside the United States that do a lot of business there. Such is the case with ERP software giant SAP, which last week said its net earnings took an 22 percent dive to €242 million on sales of €2.46 billion, actually up 14 percent, in the first quarter ended March 30.

SAP’s profits were hit not just by the dollar-euro exchange rate, but also by acquisition costs relating to its buying of business intelligence expert Business Objects and the ramping costs of the company’s Business ByDesign online software offering for SMB customers, which was launched last fall.

The company said that software sales rose by 11 percent to €622 million, with services sales rising 15 percent to €1.74 billion. At constant currency, software sales were up 18 percent and services rose by 24 percent, so you can see the effect that exchange rates between the United States and Germany, where SAP is located, has on the company’s financials. (For companies like IBM and Hewlett-Packard, the exchange rate cuts the other way, with sales overseas ballooning as euros, yen, yuan, rupees, rubles, and other currencies are converted into U.S. dollars.)

SAP said that it added 1,570 SMB customers in the quarter, an increase of 28 percent compared to SMB customer sales in the year-ago first quarter. In attacking that SMB space, SAP had hoped to ramp up the Business ByDesign software as a service pretty quickly, and specifically at the launch last September, SAP executives said they could have 10,000 customers using it and driving $1 billion (not €1 billion) in revenues by 2010. (It is probably a good thing that SAP put the Business ByDesign stake in the ground in U.S. dollars and not euros, eh?)

As part of the financial news the company put out last week, SAP said that it will focus the Business ByDesign launch in six countries this year and then roll it out gradually in 2009; SAP expects to have significantly fewer than 1,000 customers for the product this year, in fact. And in good news for other suppliers of ERP software (packaged, service, or otherwise), SAP said that it would take anywhere from 12 to 18 months longer than expected to hit that 10,000 customer target for Business ByDesign. (It will not be surprising to see that ramp pushed out even further if the economy heads south in Europe in sympathy with the United States.) The slower ramp for Business ByDesign seems to be as much about cutting costs as anything else, since SAP says that it can trim €100 million in costs in 2008.

In terms of software sales, the Americas region fell by 13 percent to €217, and if SAP was located in the United States and reported financials in dollars, it would only have seen sales slip by 2 percent. SAP’s software sales in Europe, the Middle East, and Africa rose by 23 percent to €292 million, and sales in the Asia/Pacific region skyrocketed by 47 percent to €113 million (up 55 percent in local currencies in the region, in fact).

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