SAP AG today reported strong financial results for its recently concluded second quarter as customers began to overcome concerns over the slowing economy and last year’s acquisition of business intelligence software provider Business Objects continued to bolster SAP’s growth.
The announcement of SAP’s strong financial performance followed yesterday’s news that rival Oracle Corp., as promised, has expanded its 16-month-old corporate theft lawsuit against SAP, charging that the company’s top executives, including Co-CEO Henning Kagermann, knew of the allegedly illegal business practices of third-party software maintenance provider TomorrowNow even before deciding to acquire the company in 2005.
SAP reported software revenue of €898 million in the second quarter ended June 30, 2008, an increase of 25% compared with the second quarter of 2007. SAP reported a 21% rise in software and software-related service revenue to €2.06 billion. Total revenue rose by 18% to €2.86 billion.
However, the company’s net income for the period fell 9% to €408 million. SAP attributed the lower earnings to higher operating and one-time expenses during the quarter. For example, SAP paid €11 million during the period to integrate Business Objects into SAP’s systems and processes. SAP also paid €24 million as part of its patent infringement suit settlement with i2 Technologies Inc. In addition, SAP wrote off €52 million worth of deferred support revenue related to the Business Objects acquisition.
Despite the rising operating expenses and one-time charges, Kagermann told financial analysts today, “We are pleased to report another strong quarter.”
Kagermann said the strong revenue growth enabled SAP to increase its share of the $38.1 billion enterprise software market to 33.7% during the quarter, a rise of 1.1%. “We continue to outperform the market with organic growth even during the integration of Business Objects,” he said.
SAP Co-CEO Leo Apotheker attributed SAP’s renewed strong revenue growth to a slackening of customer concerns about the slowing economy, particularly compared with this year’s first quarter. In that quarter, “we had a lot of hesitation in the market. People were becoming nervous,” Apotheker told financial analysts. But, “in the second quarter, the situation has normalized. We are now facing demand that is strictly value-driven. People demand very demanding business cases, and they are checking out the capability of the particular vendor to deliver that value,” he said.
That shift, Kagermann told analysts, has enabled SAP to take market share, particularly from smaller enterprise software vendors.
In the second quarter, SAP saw an acceleration in customer upgrades to its latest release, ERP 6.0. The number of customers licensing ERP 6.0 — 11,500 — has more than doubled since this time last year, Kagermann said. Adoption of SAP’s NetWeaver middleware platform also has increased. At the close of the second quarter, 42,800 customers had adopted the platform, an increase of 67% over the same period last year, he said.
SAP also saw strong growth in its products aimed at small and medium-sized companies. Although SAP recently said it is slowing the pace at which it rolls out its Business ByDesign on-demand product for small and medium-sized companies, the company in the second quarter increased the number of customers using its All-in-One product by 18%, to 12,100. The number of Business One customers in the quarter grew by 32% to more than 20,000.
SAP saw good growth in most regions of the world, although revenue in Japan was below expectations. Software and software-related services revenue in Europe, the Middle East, and Africa grew 21% in the second quarter, to €1.1 billion, and was up 17% in the Americas, to €662 million. While software and software-related services revenue was up 30% in Asia, to €288 million, that revenue grew by only 9% in Japan. Apotheker attributed this to poor operational execution in Japan. “Steps have been taken to address these execution issues,” he told financial analysts.
SAP’s business was particularly strong in China and India, growing by more than 50% year over year in both countries, according to Kagermann.
Also helping SAP during the quarter was a large deal signed with Daimler AG. The automaker signed a new global enterprise agreement that will see its SAP users grow from 55,000 to 100,000 and will include the purchase of new software, maintenance, software development, and consulting services. The Daimler global enterprise agreement — SAP’s 12th such pact — drove a 50% increase in subscription and other software-related service revenue during the quarter.
SAP signaled that it expects its strong performance to continue through the rest of the current fiscal year. Previously, SAP had said it expected non-GAAP software and software-related service revenue to grow in 2008 by a range of 24% to 27%. Now, the company said it expects to reach “the upper end of the range.”
ORACLE EXPANDS LAWSUIT
Separately, Oracle yesterday filed new, potentially damaging charges against SAP in its 16-month-old corporate theft case. In the U.S. District Court filing, Oracle charges that SAP board members — including Kagermann, CFO Werner Brandt, Gerhard Oswald, and Shai Agassi — knew at the time the company acquired TomorrowNow in 2005 that the maintenance provider’s “business model depended on routine, daily cross-use of misappropriated Oracle software applications and downloaded support products.”
The amended complaint is an attempt by Oracle to undercut SAP’s claim that, though some inappropriate downloading of Oracle proprietary material did take place, it amounted to nothing more than isolated mistakes by a subsidiary — TomorrowNow — and that those mistakes have been corrected. SAP officials have said that SAP AG was not involved in the actions that led to the suit, and they have maintained that a “firewall” existed between SAP and TomorrowNow.
In a prepared statement responding to Oracle’s amended complaint on Monday, SAP said, “Today, Oracle filed an amended complaint in Oracle v. SAP. SAP’s response is due to the Court on September 11, 2008. This amended complaint repeats many of the themes and allegations in Oracle's amended complaint filed in 2007. SAP will respond to this amended complaint in Court.”
Oracle’s original lawsuit, filed in March 2007 in U.S. District Court, charged that SAP and its TomorrowNow third-party maintenance subsidiary, beginning in late 2006, engaged in “corporate theft on a grand scale” by illegally downloading support material from Oracle’s Customer Connect Web site on behalf of SAP’s customers. The suit contends that the allegedly illegal downloads unfairly enabled SAP “to offer cut-rate support services to customers who use Oracle software, and to attempt to lure them to SAP’s applications software platform and away from Oracle’s.”
Oracle has said it intends to show that SAP’s TomorrowNow unit placed downloaded Oracle support materials and applications into what it called a “sandbox” from which it made those materials available to other SAP customers.
In recent filings, Oracle has also estimated that it will seek upwards of $1 billion in damages from SAP. The suit is scheduled to go to trial Feb. 8, 2010.
Rather than establishing a “firewall” between SAP AG and TomorrowNow, the amended complaint states, SAP executives at the top levels were involved in and aware of TomorrowNow’s alleged illegal activities from the beginning. Pre-trial discovery efforts, the complaint said, have shown that, on Dec. 21, 2004, a member of SAP’s due diligence team reviewing the potential acquisition of TomorrowNow reported to then-executive board member Agassi, “I am not sure how TomorrowNow gets access to PeopleSoft software, but it’s very likely that TomorrowNow is using the software outside the contractual use rights granted to them …”
“SAP AG and SAP America bought SAP TN anyway in January 2005,” the amended complaint continues. In the filing, Oracle claims that SAP went ahead with the deal because it wanted to use information collected by TomorrowNow to “distract Oracle and take the PeopleSoft/JDE customer maintenance and future applications sales Oracle expected to achieve with the PeopleSoft deal.”
According to Oracle, SAP also calculated — incorrectly — that Oracle would not sue, out of fear of involving customers in the legal proceedings.
Before finalizing the TN acquisition, the suit claims, SAP America and SAP AG officials asked TN to make a representation that it had not infringed on PeopleSoft’s intellectual property. “But … TN’s two shareholders, Seth Ravin and Andrew Nelson, refused to make any representation that SAP TN had respected PeopleSoft’s … intellectual property rights,” the filing reads.
Besides having top-level officials who were aware of TomorrowNow’s alleged illegal business practices, the amended suit claims, SAP AG and SAP America allowed employees to access TN’s systems — containing downloaded Oracle support materials and applications — using a special link on TN’s website and using SAP America’s SAPnet network. TN, SAP America, and SAP AG employees also “routinely e-mailed content and intellectual property among themselves,” the amended suit claims.
TN, SAP AG, and SAP America employees actively shared this information, the suit claims, because they wanted to leverage TN services and information to encourage Oracle customers to switch to SAP under SAP’s “Safe Passage” program.
Oracle further claims that SAP officials considered altering TomorrowNow’s business model to protect the company from legal challenges from Oracle. SAP developed a plan, the suit says, called Project Blue, that involved removing allegedly infringing Oracle software from TN systems and storing support materials remotely at customer sites. In the end, however, SAP abandoned the plan because it would have been too expensive and difficult to implement, Oracle’s amended complaint says.
Oracle will seek punitive as well as real damages in the case, according to this week’s filing.