SAP Cuts Investment in Business ByDesign as Net Income Falls

SAP is putting the brakes on the roll-out of Business ByDesign, its offering for small businesses, it said Wednesday, as it reported first quarter net income down 22 percent compared to a year earlier, on revenue up 14 percent. The quarter is the first to incorporate the results of Business Objects, which SAP acquired Jan. 21.

The company said it is cutting investment in Business ByDesign, and will miss its target of US$1 billion in revenue and 10,000 customers for the product by 2010. It will now take a year to 18 months longer to reach that level, as it works with customers and partners to fine-tune the product, it said.

SAP reported signing up more than 1,570 small and medium-size business (SMB) as new customers in the first quarter, excluding those brought by Business Objects, but few of those are using ByDesign. SAP expects to engage with fewer than 1,000 Business ByDesign customers in total this year, it said, and will concentrate its sales efforts on just six countries where the most productive early customers are based.

It will delay rolling Business ByDesign out to other countries until next year, and as a result will invest around €100 million ($158 million) less in the product this year than it previously planned, cutting investment to between €75 million and €125 million.

That will help boost SAP's operating margin, which dropped to 14.6 percent for the first quarter, down from 20.2 percent a year earlier.

The company reported net income of €242 million for the quarter, on revenue of €2.46 billion, compared to net income of €310 million on revenue of €2.16 billion a year earlier.

Analysts had expected revenue to rise around 40 percent to $3.96 billion (€2.51 billion), according to a consensus poll of 13 analysts by Thomson Financial Network.

The results incorporate those of Business Objects from Jan. 21, excluding some ongoing support revenue that U.S. Generally Accepted Accounting Principles (GAAP) prevent SAP from recognizing. The results are preliminary, and depend on the as-yet undecided final purchase price allocation SAP must make for its acquisition of Business Objects.

Looking ahead, SAP expects full-year software and software-related service revenue to increase by between 24 percent and 27 percent at constant exchange rates. Around half of that growth will come from SAP's ongoing business, and half from Business Objects, it said.

Analysts see SAP's revenue growing at around 26.5 percent during the current quarter, but slipping back in the third quarter to around 16 percent for a full-year average of 26.9 percent, according to the Thomson poll.

SAP raised its operating margin expectations for the full year, to between 28.5 percent and 29 percent at constant exchange rates, compared to 27.3 percent in 2007. It had previously indicated a range of 27.5 percent to 28 percent. The expected improvement will come from the reduction in SAP's investment in Business ByDesign.

The company plans to maximize the return on its investment to date in Business ByDesign by reusing its innovations and technologies in existing products, a move it expects will contribute significantly to revenue in 2010. Nevertheless, the company said it maintains its full confidence in the Business ByDesign and the associated business model.

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