On the whole it was a solid quarter for the enterprise application giant. The company reported net profit of 408m euros ($583m), up 10% compared to the third quarter 2006, on total revenue of 2.42bn euros ($3.4bn), which was a 9% improvement on the same quarter last year, or 13% at a constant currency rate. Analysts had expected net profit of 405m euros ($579m) and total revenue of 2.44bn euros ($3.5bn).

License revenue was up 11%, or 15% at constant currency, to 715m euros ($1.02bn), while software and software-related services revenue grew to 1.74bn euros ($2.49bn), which was a 13% improvement, or 16% at constant currency.

As expected, the operating margin was flat at 24.8%, due largely to the effects of its investment in the SaaS Business ByDesign operation.

CEO Henning Kagermann pointed to good and rising NetWeaver licence sales and a good rate of R/3 contract conversions, both of which are important indicators of customer acceptance of its Business Process Platform and enterprise SOA strategy. During the third quarter, 11,200 SAP ERP licenses were sold, resulting in 6,800 productive systems. 142 R/3 migration contracts were signed. NetWeaver licenses sales reached 14,400 during the quarter, with 9,800 of them now productive. Over the nine-month period, NetWeaver sales had brought in 585m euros ($836m), and 42% year-on-year growth. If it can maintain those growth rates Kagermann believes the company will be on track to reach its 1bn euro ($1.42bn) NetWeaver license target by 2010.

The number of SMB customers using Business One grew 39% to 15,830. The All-in-One customer base expanded by 18% to 10,555.

Our plan is to continue to grow faster than the market and we expect growth to come by expanding our addressable market and our coverage of that addressable market. Stable growth will come from out traditional business of horizontal and vertical applications, and accelerated growth will come from leveraging segments of the Business Process Platform, SME, and business users, said Kagermann.

He said future growth in both the BPP and SMB segments would be based on organic growth, even though the SMB segment had been boosted previously through the purchase of TopTier. Future acquisitions are likely to be seen in the business user area where SAP is looking at a combination of acquisition-based and organic growth. He said the proposed Business Objects acquisition fitted into this category and that despite it being bigger than SAP’s usual acquisitions it met the criteria of providing value to business users rather than being carried out to gain customers or market share.

The third quarter saw the launch of Business ByDesign, SAP’s SaaS business application suite offering. Kagermann said 20 users are now live on the system. However, the extent to which each customer is using it is unknown. Some of the customers who were using it at launch time were either using very limited functionality or had less than a handful of users.

Kagermann identified certain Business By Design milestones. The first live client was its first, its second is to have 100 live customers by the end of the year. That is important because in the fourth quarter we will be upgrading the software so we will learn about seamless upgrades, he said. In the first quarter 2008 the plan is to push the product so SAP can start really assessing performance and over the rest of the year it will work on improving the internal cost of ownership and working out exactly how much it costs SAP to get a client live on the system.

Kagermann provided some interesting insights into the Business ByDesign business. He has always said it is not just a new application but also new technology and a new business. The milestones show just how much SAP knows it has to learn on all fronts from performance, to managing upgrades, to the internal cost of ownership. He indicated than costs are not currently where SAP wants them to be and that is something it will work on next year. SAP does not intend using other parts of the business to subsidise Business ByDesign. Of the 300m euros ($429m) to 400m euros ($571m) originally allocated to Business By Design almost a year ago, 85m euros ($121m) has been spent.

Our View

There is not much to criticize on the financial front because the third-quarter figures were solid and showed growth. There was a hint of slower growth in the US market but nothing to be concerned about at this stage.

However, the insights into Business ByDesign were informative. SAP was always going to be facing a steep learning curve and Kagermann’s comments bear that out. But they do not indicate that the company is experiencing an unexpectedly steep ascent. What they do make clear is the extensive role early adopters will play in that learning process. SaaS has always been about different risk, rather than no risk, something the SAP service is highlighting.