SAP cuts investment in ByDesign as net income falls

SAP reported net income down 22 percent for the first quarter, and said it is cutting back its investment in Business ByDesign.

SAP is putting the brakes on the rollout 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 is in no rush to deploy the product more widely until it is sure it can deliver it profitably, said co-CEO Henning Kagermann in a conference call with journalists and analysts.

"We have to work out how expensive it will be for SAP if we run this product in a hosted environment. We have to make sure we make enough money with the product," he said.

To do that, SAP will take more time to optimize the end-to-end process of selling, delivering and running Business ByDesign, he said.

"We have too many manual steps in our hosting environment. We have to improve that," Kagermann said.

SAP reported signing up more than 1,570 small and medium-size businesses (SMBs) 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 Euro 100 million ($158 million) less in the product this year than it previously planned, cutting investment to between Euro 75 million and Euro 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 Euro 242 million for the quarter, on revenue of Euro 2.46 billion, compared to net income of Euro 310 million on revenue of Euro 2.16 billion a year earlier.

Analysts had expected revenue to rise around 40 percent to US$3.96 billion (Euro 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.

Charges associated with that acquisition also dragged down SAP's operating income by a‚130 million, although those numbers "are simply accounting driven," said Chief Financial Officer Werner Brandt.

The strengthening of the euro against the dollar also hurt SAP's results, "resulting in a huge negative headwind for SAP, roughly 10 percentage points," said Kagermann.

He preferred to focus analysis on non-GAAP figures, excluding currency effects and acquisition costs. On that basis, SAP's first-quarter revenue rose 22 percent, and net income rose 7 percent, the company said.

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