I'm feeling lazy today so rather than do all the reading that is necessary for me to cook up the Main Dish, I'm going to serve up some leftovers and talk about the results that SAP just announced.
I admit that I am biased in the my view on SAP, but I think the results that the company has been generating support the notion that SAP is one of the best managed technology companies in the world (over 128 quarters of financial results and only 1 of them in the red). Furthermore, the continued results are a statement to the power of durable customer relationships that are based in something more than just the rhetoric, but in a fundamental belief that if you do what you say you will do and put your customer first, that you can ride out rough markets and emerge stronger than the competition. SAP doesn't do everything well, in fact there are some things we do that are just mind boggling to me, but SAP does the important stuff well.
Software revenue for the 3rd quarter incrased 13% to $621m, and total revenues for the quarter are up 8% to $2.27b. So much for the notion that enterprise IT budgets are still tight. The net of the license numbers is that SAP took significant market share away from competitors in the period, and in fact, the worldwide market share for SAP increased a percentage point in the period to 56%. To put that number in perspective, the SAP market share is greater than Oracle, Peoplesoft, Microsoft, and Siebel combined.
How do the sales groups continue to turn out these impressive numbers? It's no simple task, as anyone can testify, but it really comes down to some key points. First and foremost, the account teams within SAP's customer base absolutely own those accounts, and they have positioned themselves as trusted advisors to both the C-level executive teams and to the IT groups. Very little gets past those account executives when it comes to what's going on within their customers businesses. I think the point that is often overlooked within this model is that SAP's account executives are truly advocates for their customers; to be sure they are motivated to grab every dollar (euro) they can from the IT budgets, but they won't overpromise what can't be delivered because they are incentivized to maintain the lifelong value of the relationship, not just the quarterly value. Yes, they carry a number and it's expected that it will be met, but the number itself is not arbitrary, it's a reflection of the reasonable value of the customer accounts they are working.
The next item is maintenance revenue, which is a staggering $907m for the quarter, up 10%. By the way, maintenance and license revenue don't necessarily move in lock step because not all maintenance agreements come due in the same period of time, so while license revenue was up 13% it should not be expected that maintenance rev would be up by the same amount. In fact, because of natural attrition with customers taking old products off maintenance, it's not unexpected to see maintance stay flat during a period. What the maintenance revenue indicates is that customers are seeing value in their maintenance relationship with SAP, and that the support products the company is providing are comprehensive. Too many software companies look at maintenance as the ATM of the business model, they just make sure they have telephone support covered and do a few patch releases to cover the bases and it's golden. I believe that customers see through that pretty easily and that's why you see so many enterprise customers going off maintenance.
Expenses were up 6% on the quarter, which is not surprising but some comments I saw indicate that this is higher than we would like. Increased sales activity drives the great amount of this increase, and I think it's reasonable to suggest that we can continue to drive down selling costs through increased use of technology in the sales cycle. This is one of the more interesting problems in enterprise software - unit economics.
On the channels side, 32% of license volume came from indirect channels. I suspect that a big part of this growth is the success we are having in Asia-Pacific where we are gaining from the upgrading of manufacturing capacity in India and China.
The small and medium sized business market growth is another driver for indirect channels. For the first time, we have broken out our revenues for small and medium sized business, which is defined as any company less than 2,500 employees and less than $1b a year in revenue. Yeah, that's a pretty broad market but you have to draw the line somewhere. 30% of the quarters volume was to the SMB sector, the higher end of the market going through direct channels and the lower end through indirect. Quite amazingly, SAP can now speak of more than 4,200 customers on the BusinessOne offering and 5,600 customers on mySAP All-in-One, both of which are exclusively SMB solutions. These are big numbers by any measure. Over 1,200 3rd party partners sell these offerings to their small business customers.
All things considered, this was another great quarter for SAP. Revenues were up across the board indicating strong success with account management and the sales pipeline, customer satisfaction continues to trend positively, the product lines continue to fire well (especially in CRM where SAP has overtaken Siebel (rolling 4 quarter share is now at 135% of Siebel's revenue), vertical market focus is working well, and finally new markets in the SMB sector are showing results. Combine all of the above with expense containment and the results are going to be good, in fact the operating margin actually increased 1% to 26%. The only negative factor in SAP's results is that the reporting is in Euros which obviously has risen dramatically against the dollar meaning that SAP's results are negatively impacted.
Comments