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SAP software revenue skids in first quarter

What's unclear is how much SAP's software revenue slide is attributed to the economy versus pushback from customers annoyed with maintenance fees.

This was originally posted at ZDNet's Between the Lines

SAP's first-quarter software revenue--an indicator of maintenance and services health--skidded 33 percent due to a "difficult operating environment" and a tough year-ago comparison. Meanwhile, SAP altered its maintenance pricing plans to allay customer concerns.

SAP on Wednesday reported first-quarter net income of 204 million euros, down from 242 million euros a year ago. Revenue was 2.39 billion euros, down from 2.46 billion euros a year ago. SAP managed to hold software and software-related service revenue flat at 1.74 billion euros in the first quarter compared to a year ago. The enterprise software company's first-quarter results a year ago were pumped up by the acquisition of Business Objects.

The results were worse than expected. A Dow Jones Newswire poll forecast SAP profits of 261 million euros on revenue of 2.55 billion euros. By region, SAP saw U.S. revenue fall 13 percent with Japan declining 16 percent. Europe, Middle East and Africa declined 3 percent.

Here's a look at the key SAP charts:

SAP Q12009 revenue

SAP Q12009 revenue analysis

In a statement, co-CEO Leo Apotheker said the company will "maintain tight cost controls" and take "further steps to reduce expenses" by focusing on third-party costs and capital expenditures. SAP had announced plans to cut its workforce to 48,500 by the end of the year and as of March 31 the company had 49,916 employees. In the first quarter, SAP took a charge of 160 million euros to cover 2,200 job cuts.

As for the outlook, SAP isn't providing software and software-related service revenue projections. It does expect to maintain operating margins in the range of 24.5 percent to 25.5 percent.

What's unclear is how much SAP's software revenue slide is attributed to the economy versus pushback from customers annoyed with maintenance fees. In a separate statement, SAP said it reached an agreement with a federation of user groups to benchmark process improvement, business continuity, protection of investment, and total cost of operations and modify maintenance pricing. At first glance, it looks like SAP has instituted a maintenance cap. Here's the passage in full:

In consideration of the current economic climate, SAP is extending by three years the four-step price increase program announced in July 2008 for customers that were migrated to SAP Enterprise Support at that time. Originally scheduled to run until 2012, the program will now conclude in 2015, coinciding with the recently introduced 7-2 maintenance strategy. Starting in 2010, the price of SAP Enterprise Support for existing customers will continue to increase based on individual contract terms but will not be higher than a yearly fixed upper cap. This translates to an increase average of no more than 3.1 percent per year from 2010 onwards. The price of SAP Enterprise Support will be capped at 22 percent through 2015. With this adjustment, SAP demonstrates a clear commitment and responsiveness to its customers and the challenging global economic conditions they must navigate today.

Dennis Howlett's analysis:

This should not be a surprise. Last year, I asked Apotheker whether the company was prepared to share the economic pain of its customers. At the time, I drew a blank stare. I'm convinced SAP had no choice but to take these steps as a way of mollifying a very unhappy and increasingly vocal customer group. Even so, it is good to see that SAP has finally bent to the inevitable and now has an opportunity to put this fiasco behind it.

Vinnie Mirchandani provides the following analysis:

Essentially it's back to negotiating with individual customers annual increases. The question is can customers justify even the 17 percent in this economy? And will the KPIs (key performance indicators) show that some customers may be averaging $25,000, $50,000 a support call given how mature their usage is and how little they tax support.

Indeed, this maintenance issue is becoming a big deal. That fact is not lost on Salesforce.com CEO Marc Benioff, who released a no-maintenance opus to the press on Tuesday. Rivals such as Salesforce.com are going to pound the maintenance cost drum. Here's the Benioff memo targeted at the likes of Oracle and SAP.

For ten years, we've been driven by a simple vision: The End of Software. Now it's time to take on a new challenge: The End of Maintenance.

Let me tell you about a customer that I met on our Cloudforce tour. This customer currently uses Siebel software to run her call center. She pays more than $15 million a year for the privilege of having to implement the updates that Siebel sends her. That does not include backup. Or disaster recovery. And of course, it does not guarantee that she will be using the latest technology. The maintenance agreement only assures her that her outdated software will continue to work. She is paying tolls on a road to nowhere.

We can help her, and many other customers, and deliver much more for a fraction of what they currently pay in maintenance. It's time to open up a new front in "The End of Software"- one that is long overdue.

It's time for The End of Maintenance.

Every year, companies spend billions on maintenance fees and get relatively little in return. Maintenance fees cover updates that are mostly patches and fixes, but they stop far short of the kind of innovation every that enterprise needs to survive. Companies pay to keep the past working and they end up doubling down on technology that can never keep up with their needs. The fees that companies pay have actually been rising, from something like 17% a few years ago to numbers more like 22% today. Every four or five years, companies are paying for their software all over again.

It's time to set these businesses free and make them successful in the Sales Cloud, Service Cloud and on our Force.com platform.

Our new mission begins at a critical time in the economy, when companies are questioning conventional wisdom as they never have before. That, of course, extends to their IT budgets as well. The CIO is in a tough spot right now. Corporate budgets are tightening. And our rivals in the legacy client-server world are using this opportunities to extract more money from their customers by raising maintenance fees. I call this phenomenon "the compression of IT" and it resonates with just about every CIO I speak with these days.

We have a better vision. We sell our customers a service and every customer is able to use the latest. Innovations are included. Upgrades are automatic and invisible. Customers' intellectual property of customizations and extensions is rigorously preserved, and carried forward without disruption.

The service gets better, not just less buggy. That's not what people are getting for all those fees that supposedly buy them "maintenance."

It's time to set these business people free: to give them the experience of being wildly successful in the Sales Cloud, the Service Cloud, and in their own unique applications that they can build on our Force.com platform. This is the time to do it, because this is when people need it: their IT budgets are tight, their business situations are critical, and their old-world software vendors are taking care of themselves instead of meeting the needs of their customers.

We've raised people's expectations for better alignment of business value with IT cost. We've earned our leadership position in enterprise cloud computing. It's time for us to set people free from paying more and more to get less and less. It's time for The End of Maintenance.

Aloha,

Marc