SAP : The SAP Support and Maintenance Series – Part 1 of 3

Since last year, SAP Support has been a major part of the news - first with SAP announcing Enterprise Support, the market’s reaction to a rise in support cost - from 17% to 22%, a critical reception from customers, the SAP response of rolling back the support price in DACH (Germany, Austria and Switzerland), the emergence of service partners who ‘supposedly’ offer AMC (Annual Maintenance Contract) equivalents to SAP customers, and more recently the erstwhile rumors in the market about Siemens planning to cancel their Annual Maintenance Contract with SAP and the trend which could begin if this had come true.

I will try to cover these issues in my next few blogs, but first we should understand the financial implications of Support services to SAP and the customer.

A few main points should be noted before we go into the details of the SAP Earnings Reports. Check out Table 1.

There are two main headings in revenue- ‘Software & Software-related service revenue’ and ‘Professional Services and other revenue’; the latter ranging from 24% to 27% (in FY 2007, FY 2008 and 9M FY 2009).
Under Software & Software-related service revenue (which has varied from 72% to 75% in the same time period) there are two main sources of revenue - Software revenue and Support revenue.
Software revenue is self-explanatory - revenues resulting from sales of SAP licenses for products and solutions, including Solutions for Large Enterprises (Business Suite, Industry Solutions), Solutions for SME (SAP Business All-in-One, Business ByDesign, Business One), SAP BusinessObjects Portfolio, SAP NetWeaver Technology, Sustainability Solutions, etc.
Software-related service revenue comprises revenues earned by support services provided by SAP Custom Development and SAP support units (Global Support, Customer Assurance at SAP BusinessObjects and likewise for SAP SME).
Professional Service revenue consists of earnings through Consulting, Education and Managed Services.

Table 1

(in Million Euros)	2006	2007	2008	9M 2009
Software revenue	3,071	3,407	3,606	1,487
Support revenue	3,533	3,852	4,602	3,922
Software and software-related service revenue	6,604	7,441	8,466	5,632
Professional services and other service revenue	2,723	2,744	3,039	1,823
Other revenue	74	71	70	27
Total revenue	9,402	10,256	11,575	7,482

Table 1 gives the details of the revenue breakdown over the last four financial years. There is a remarkable decrease in the software revenue for 9M 2009 and this can be attributed to a couple of reasons. First, the economic slowdown would have discouraged customers from spending on new licenses in the corresponding period and hence this low number. Second, license sales pick up in the last quarter of the year. In fact, a close look at quarterly and annual reports will prove that historically about 40% of the annual license sales take place in the 4th quarter.

On the other hand there is a steady increase in support revenue through the time period. This is even more noticeable in the graph (Picture 1) where the percentage of support revenue to total revenue spikes to nearly 52% from its average of 37% to 39% over the previous three years. This percentage may reduce once license sales pick up in the last quarter. But even then, in direct number terms if the 9M 2009 support revenue is extrapolated, SAP will easily make more than 5 Billion Euros from support in FY09.

The fact that support revenue accounts for approximately 40% of the total (and now over 50% for FY 2009) has a huge financial implication. This is an assured source of revenue for SAP – given that customers do not terminate their Annual Maintenance Contracts. It does not depend on cyclical downturns in the economy and continues to grow in spite of less license sales.

On the other hand for the customers this is a constant expenditure which not only has a sizeable impact on the bottom-line but also reduces the IT spend available on new projects. Hence, customers need to be assured that this spend returns the desired value and cannot be replaced by other service providers.

Picture 1