SAP's first-quarter software revenue--an indicator of maintenance
and services health--skidded 33 percent due to a "difficult operating
environment" and a tough year-ago comparison. Meanwhile, SAP altered
its maintenance pricing plans to allay customer concerns.
SAP on Wednesday reported first-quarter net income of 204 million
euros, down from 242 million euros a year ago. Revenue was 2.39 billion
euros, down from 2.46 billion euros a year ago. SAP managed
to hold software and software-related service revenue flat at 1.74
billion euros in the first quarter compared to a year ago. The
enterprise software company's first-quarter results a year ago were
pumped up by the acquisition of Business Objects.
The results were worse than expected. A Dow Jones Newswire poll
forecast SAP profits of 261 million euros on revenue of 2.55 billion
euros. By region, SAP saw U.S. revenue fall 13 percent with Japan
declining 16 percent. Europe, Middle East and Africa declined 3
percent.
Here's a look at the key SAP charts:
In a statement, co-CEO Leo Apotheker said
the company will "maintain tight cost controls" and take "further steps
to reduce expenses" by focusing on third-party costs and capital
expenditures. SAP had announced plans to cut its workforce to 48,500 by
the end of the year and as of March 31 the company had 49,916
employees. In the first quarter, SAP took a charge of 160 million euros
to cover 2,200 job cuts.
As for the outlook, SAP isn't providing software and software-related
service revenue projections. It does expect to maintain operating
margins in the range of 24.5 percent to 25.5 percent.
What's unclear is how much SAP's software revenue slide is
attributed to the economy versus pushback from customers annoyed with
maintenance fees. In a separate statement, SAP said it reached an agreement
with a federation of user groups to benchmark process improvement,
business continuity, protection of investment, and total cost of
operations and modify maintenance pricing. At first glance, it looks
like SAP has instituted a maintenance cap. Here's the passage in full:
In consideration of the current economic climate, SAP
is extending by three years the four-step price increase program
announced in July 2008 for customers that were migrated to SAP
Enterprise Support at that time. Originally scheduled to run until
2012, the program will now conclude in 2015, coinciding with the
recently introduced 7-2 maintenance strategy. Starting in 2010, the
price of SAP Enterprise Support for existing customers will continue to
increase based on individual contract terms but will not be higher than
a yearly fixed upper cap. This translates to an increase average of no
more than 3.1 percent per year from 2010 onwards. The price of SAP
Enterprise Support will be capped at 22 percent through 2015. With this
adjustment, SAP demonstrates a clear commitment and responsiveness to
its customers and the challenging global economic conditions they must
navigate today.
Dennis Howlett's analysis:
This should not be a surprise. Last year, I asked
Apotheker whether the company was prepared to share the economic pain
of its customers. At the time, I drew a blank stare. I'm convinced SAP
had no choice but to take these steps as a way of mollifying a very
unhappy and increasingly vocal customer group. Even so, it is good to
see that SAP has finally bent to the inevitable and now has an
opportunity to put this fiasco behind it.
Vinnie Mirchandani provides the following analysis:
Essentially it's back to negotiating with individual
customers annual increases. The question is can customers justify even
the 17 percent in this economy? And will the KPIs (key performance
indicators) show that some customers may be averaging $25,000, $50,000
a support call given how mature their usage is and how little they tax
support.
Indeed, this maintenance issue is becoming a big deal. That fact is not lost on Salesforce.com CEO Marc Benioff,
who released a no-maintenance opus to the press on Tuesday. Rivals such
as Salesforce.com are going to pound the maintenance cost drum. Here's
the Benioff memo targeted at the likes of Oracle and SAP.
For ten years, we've been driven by a simple vision:
The End of Software. Now it's time to take on a new challenge: The End
of Maintenance.
Let me tell you about a customer that I met on our Cloudforce
tour. This customer currently uses Siebel software to run her call
center. She pays more than $15 million a year for the privilege of
having to implement the updates that Siebel sends her. That does not
include backup. Or disaster recovery. And of course, it does not
guarantee that she will be using the latest technology. The maintenance
agreement only assures her that her outdated software will continue to
work. She is paying tolls on a road to nowhere.
We can help her, and many other customers, and deliver much
more for a fraction of what they currently pay in maintenance. It's
time to open up a new front in "The End of Software"- one that is long
overdue.
It's time for The End of Maintenance.
Every year, companies spend billions on maintenance fees and
get relatively little in return. Maintenance fees cover updates that
are mostly patches and fixes, but they stop far short of the kind of
innovation every that enterprise needs to survive. Companies pay to
keep the past working and they end up doubling down on technology that
can never keep up with their needs. The fees that companies pay have
actually been rising, from something like 17% a few years ago to
numbers more like 22% today. Every four or five years, companies are
paying for their software all over again.
It's time to set these businesses free and make them
successful in the Sales Cloud, Service Cloud and on our Force.com
platform.
Our new mission begins at a critical time in the economy, when
companies are questioning conventional wisdom as they never have
before. That, of course, extends to their IT budgets as well. The CIO
is in a tough spot right now. Corporate budgets are tightening. And our
rivals in the legacy client-server world are using this opportunities
to extract more money from their customers by raising maintenance fees.
I call this phenomenon "the compression of IT" and it resonates with
just about every CIO I speak with these days.
We have a better vision. We sell our customers a service and
every customer is able to use the latest. Innovations are included.
Upgrades are automatic and invisible. Customers' intellectual property
of customizations and extensions is rigorously preserved, and carried
forward without disruption.
The service gets better, not just less buggy. That's not what
people are getting for all those fees that supposedly buy them
"maintenance."
It's time to set these business people free: to give them the
experience of being wildly successful in the Sales Cloud, the Service
Cloud, and in their own unique applications that they can build on our
Force.com platform. This is the time to do it, because this is when
people need it: their IT budgets are tight, their business situations
are critical, and their old-world software vendors are taking care of
themselves instead of meeting the needs of their customers.
We've raised people's expectations for better alignment of
business value with IT cost. We've earned our leadership position in
enterprise cloud computing. It's time for us to set people free from
paying more and more to get less and less. It's time for The End of
Maintenance.
