RealTime IT News

Chaos Abounds But SAP's Outlook Remains The Same

SAP on Wednesday offered investors a relatively modest sales outlook for 2008. Considering the current economic malaise, however, it looks downright bullish.

The world's largest business application vendor told analysts to expect sales growth of between 12 percent and 14 percent this year, identical to the forecast it provided -- and eclipsed with 17 percent growth -- this time last year.

But, for several significant reasons, 2008 is shaping up to be a much different year for SAP and the rest of the enterprise software world.

For years, the company stubbornly eschewed the growth-by-acquisition strategy preferred and perfected by archrival Oracle.

Until this year, that is. SAP joined the consolidation fray when it shelled out $6.7 billion in October for business intelligence software vendor Business Objects, the largest acquisition in its 36-year history.

Excluding acquisition-related costs of about $266 million, SAP today said it expects Business Objects' license and services revenue to contribute another 12 percent to 15 percent in total sales growth, meaning the newly merged company will deliver growth of between 24 percent and 27 percent for the year.

Operating margins are expected to check in between 27.5 and 28 percent this year, up a smidge from the 27.3 percent margins SAP enjoyed in 2007.

Immediately after the company announced the deal, several analysts openly questioned both the timing of the acquisition and the logic behind abandoning its organic-growth mantra to play Oracle's game.

"There is little to commend SAP's acquisition," Adam Shepherd, an analyst at Dresdner Kleinwort, wrote in an October research report. Along with eroding operating margins, per-share earnings and a ton of cash, Shepherd said the "perceived reversal of the company's focus on organic growth" may be the biggest sin of all.

Cowen & Co.'s Peter Goldmacher was more succinct: "We are concerned that SAP has waited too long to make a move in the space and is doing the deal from a position of weakness," he wrote in a research report after the deal was announced.

At the time, SAP CEO Henning Kagermann shrugged off the criticism, arguing the merger would "bring both data extraction capabilities and market-leading front-end query and reporting tools" to its NetWeaver business intelligence (BI) stack.

Earlier this month, he said SAP would remain open to future acquisitions because "you never in life should exclude an opportunity in business."

To SAP's credit, the merger is already bearing fruit in the form of nine new and jointly developed BI and business optimization applications that will be available at the end of the month.

Along with integrating Business Objects and, perhaps, targeting other independent vendors for acquisition, SAP in 2008 intends to make its fledgling Software-as-a-Service (SaaS) offering, Business ByDesign, an even larger focus of its overall strategy.

On Wednesday, Kagermann told analysts SAP expects to garner 1,000 customers for the on-demand application service by the end of the year, up from about 150 customers -- some paying and some just test-driving -- who are using Business ByDesign today.

SAP believes this subscription-based offering will appeal to small- and mid-sized businesses that it's counting on to reach its stated goal of 100,000 worldwide customers by the end of 2010.

But until Business ByDesign catches on with the SMB crowd, SAP shareholders will be picking up the tab.

While announcing its financial results Wednesday, SAP cited its extensive Business ByDesign investments as the primary reason that yearly earnings slid to $1.12 billion from $1.19 billion, despite the fact that sales improved 17 percent in the same period.

SAP said it spent about $185 million last year to develop Business ByDesign and plans to invest more this year as it takes the on-demand package to market.

But optimism abounds. Excluding the Business Objects business, the company projects 12 percent to 14 percent revenue growth -- at what many economists are calling the early stages of a U.S. recession that could very well bleed into other international markets.

"We have no indication from anybody that they will change their spending behavior," Kagermann said during an interview on CNBC's "Squawk Box Europe," adding that "even if there is a slowdown in the economy in the future, we deliver the right solutions for companies to prepare for such a slowdown."

At least one analyst isn't convinced.

"They are too optimistic for 2008," Cowen & Co.'s Goldmacher told InternetNews.com today. "The Business ByDesign business is a big mistake and will drag margins lower and the Business Objects deal will only make matters worse."

"SAP has lost its way and is struggling to for a new trick," he added.