SAP, PeopleSoft Earnings Look Brighter; ERP Strikes Back

Event Summary

1990s Enterprise Resource Planning (ERP) juggernaut SAP AG is heading into the new millennium looking like its old self, and its rival PeopleSoft is not looking too bad either. Surprising many, enterprise software giant SAP pre-announced strong fourth quarter earnings, saying pre-tax earnings had doubled the final quarter of 1999 after a third-quarter profit warning. License revenue skyrocketed 40% to 800M EUR ($822.7M U.S.) in the fourth quarter and sales rose 25%, well above Wall Street estimates. However, SAP did not break down the revenue among geographies or product lines. SAP has heavily invested in its Internet-based software system but there is no evidence it is contributing to the surge in software sales. Meanwhile, PeopleSoft also pre-announced a strong fourth quarter, saying it expects to beat Wall Street estimates. Earnings from recurring operations are expected to be two to four cents a share. PeopleSoft's license revenue is expected to grow 35% to 40% in the fourth quarter from the previous quarter, but a reduction in service revenue of up to 5% will offset much of the increase. PeopleSoft said revenue from enterprise software should rise 30% to 35% while revenue from its recently acquired Customer Relationship Management (CRM) system would grow 50% to 60% for the quarter from the previous quarter. Last week PeopleSoft finalized its purchase of Vantive Corporation, its long-time partner for CRM systems. Charges of $50M to $70M for the purchase will be reflected in fourth quarter results.

Market Impact

This chain of events should cause some ERP doomsayers to retract their sensationalistic predictions aimed solely at attracting increased market attention. The factor that caused ERP implementations' rush and incredible market growth of well over 40% in the years preceding 1998 -- the Y2K problem resolution -- turned into a market nemesis during 1998/99. It was unrealistic to expect sustained high growth for a prolonged period of time. The same holds for hastily declaring the market dead when the market leader reports a growth of less than 20%, neglecting the fact that, at the same time, some nimble, smaller players (IFS AB, Great Plains, Symix Systems) have achieved stellar performances.

The fact remains that the majority of ERP vendors have initially been taken aback by a combined effect of the following major factors: the Y2K-caused market slowdown, the Fortune 1000 market saturation, a bad reputation for exorbitantly expensive and protracted implementations, and the market attention's shift to e-commerce (B2B, B2C), supply chain management (SCM), client relationship management (CRM), business intelligence, and other extended-ERP applications. We also believe that the majority of vendors tackled those difficulties with appropriate, time-and-money-consuming counteractions like developing more implementation-friendly and industry-tailored products attractive to the untapped mid-market, as well as expanding product functionality to cover above-mentioned hot trends, to name but a few. Fourth quarter results from SAP and PeopleSoft as well as strong recent reports from J.D. Edwards and Oracle Corporation demonstrate the market is on its way back. We expect sales to return to full force by the end of the second quarter 2000. Only the Baan Company continues to struggle, since its business situation remains seriously aggravated in the wake of its CEO and CFO resignations earlier this month.

User Recommendations

The above mentioned title should be rephrased into 'Baan is (maybe) dead: ERP is here to stay'. This does not however imply that both vendors and their affiliate system integrators will not have to seriously put their current business models under a magnifying glass. The 'gravy train' days of multi-year implementations, with $2000 consultant's charges per day, and yet without producing obvious results, are well behind us. Users should be aware of the fact that they need a reliable back-office system in place in order to conduct their e-commerce business or client relationship management. Therefore, we encourage them to aggressively inform themselves about vendors' latest product offerings and vigorously negotiate contract terms. Vendors' corporate viability remains a crucial factor in any selection process, and it seems as though the most of major ERP players are going to be around for a significantly long time to come.

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