Looking ahead to its performance in 2007, SAP today painted a modest picture of financial expectations, saying that top-line growth will range between 12% and 14%, which would be a slight improvement on its 2006 revenue growth.
At the same time, the software giant struck an aggressive posture toward the mid-market, providing further details on a planned third product line for smaller companies that will require SAP to invest up to €400 million in a new "business model" to serve mid-market organizations in all industries.
SAP's financial guidance for 2007 and the details surrounding the new mid-market offering, to be officially announced in March, were revealed today in Frankfurt at the company's annual conference to report both fourth-quarter and full-year 2006 financial results. Earlier this month, SAP surprised the market by saying that fourth-quarter results would fall short of its expectations. It was the second time in six months that SAP had issued an earnings warning.
Today, SAP substantially reiterated the lower numbers it announced on January 11, saying that software revenues for the fourth quarter rose 7% (12% at constant currencies) to €1.3 billion, from €1.2 billion in the like period in 2005. Software revenues for the full year rose 10% (12% in constant currencies) to €3.1 billion. In constant currencies, SAP had projected 15%–17% growth in software revenues for 2006. Total revenues for the quarter also grew 7% (12% in constant currencies) to €3 billion. Total revenues for the year grew 10% to €9.4 billion.
Net income for the fourth quarter, however, was another matter. The quarter's net soared 29% to €799 million, from €619 million last year.
But the results for 2006 clearly disappointed SAP's top management. "We finally couldn't achieve our guidance on software license growth. It's a pity," said Chairman and Chief Executive Henning Kagermann during a presentation to financial analysts. Added Chief Financial Officer Werner Brandt, "2006 was a tough year for SAP."
The officials, however, did not note any secular change in market trends that could have caused the shortfall in results. Brandt cited what he called "a lot of headwind" coming from currency differences, particularly the value of the dollar versus the euro, as a major contributing factor.
Brandt did reveal what he called a contract "accommodation" with an unidentified U.S. company that occurred in the third quarter. He said that SAP agreed to modify contracts signed with the company between 1997 and 2005, which resulted in a €30 million reduction in third-quarter software revenues in the U.S. However, Brandt said, "There are no accounting implications for 2006. We did not give any money back to the customer and we expect to re-instate the revenue in future years."
In its guidance for 2007, SAP said that it was developing a new profit and loss reporting structure that will result in the creation of a new way to categorize its revenue lines. The company has been breaking out its results in terms of product revenues, software revenues, and total revenues. In 2007, SAP will create a line item called "subscription and other software-related services revenue" to reflect the need to account for new types of revenue streams. Under this new category, SAP said it expects full-year 2007 software and software-related services revenue to increase between 12% and 14% at constant currencies.
Within this context, SAP said it would invest between €300 million and €400 million in its new mid-market initiative. Code-named A1S, the forthcoming new mid-market, on-demand offering was touted by Kagermann as a "game-changing" product that will enable SAP to exploit what he characterized as a $1 billion "business case" opportunity by 2010 that could generate 10,000 customers per year from 2010 onwards.
Kagermann said that A1S, which SAP first talked about at its annual meeting for analysts and press in December of last year, is targeted to what he called the "non-buyer" segment of mid-market companies wanting rapid value and low risk from an ERP deployment, and for whom "functionality is not that important."
"We have developed what we believe is a game-changing product," Kagermann said. "It is a suite in a box. It can cover the entire business of a mid-market company. ...Fundamentally, we want to grow organically through innovation. We cannot buy innovation."
A1S will join SAP's All-in-One and Business One, which are already offered to small and medium-sized businesses. There are currently 9,500 All-in-One customers and 13,000 Business One customers. Earlier this month, SAP introduced an enterprise software-oriented architecture-based version of All-in-One that uses the mySAP ERP code base.
During a question-and-answer session with financial analysts, Kagermann was asked whether A1S was meant to address any shortcomings in SAP's current mid-market offerings and how the A1S initiative would differ from mid-market strategies embraced by competitors, particularly Microsoft.
"This is not a reaction," Kagermann said. "We are successful in the mid-market. It is more an additional opportunity. ...Microsoft did it with a traditional product. Could I get 10,000 customers with All-in-One? No."
In an interview with Managing Automation, SAP Americas President and Chief Executive William R. McDermott expanded on A1S, explaining that the new product will be targeted to organizations with between 100 and 500 employees. Business One, he noted, is designed for smaller companies, while All-in-One is suitable for organizations with more than 500 employees.
He said that A1S will be an entirely new platform that will not use code from either Business One or All-in-One but will be SOA-based. "Initially, it will only be a hosted product," he said. McDermott also said that the product will initially provide basic business functionality, such as accounting capabilities.
SAP said it would invest in a new business model to support the introduction of A1S. The investment, SAP said, will drive go-to-market strategies that include internal processes and infrastructure to support a "higher volume" business, new customer engagement models, and a partner network.