SAP Posts Solid Q499, but Warns of Q100

SAP Posts Solid Q499, but Warns of Q100
P.J. Jakovljevic - February 7th, 2000

Event Summary

On January 24, SAP announced its preliminary year-end results and warned that its new employee stock option plan and marketing and staff additions for its Internet software system would likely outpace sales in the first quarter of 2000. However, strong fourth quarter 1999 and year-end results announced on the same day gave SAP a very good standing entering the New Year. Sales grew 18% to EUR 5.11B ($5.13B U.S.) in 1999 from EUR 4.32B ($4.34B) from 1998. Year-end pretax profits, excluding charges for the employee Stock Appreciation Rights (STAR) plan, grew 18% over 1998 to EUR 1.120B ($1.125B) from EUR 948M ($952M). Including STAR costs, pretax profits grew 5% year over year to EUR 981M ($985M) from EUR 932.0M ($935.8M).

SAP desperately needed to institute some sort of employee stock plan to retain key personnel. The company has seen many of its top executives leaving for dot-com startups and other companies offering lucrative stock option plans (i.e., Siebel and Oracle). For now, however, SAP only extends the STAR program to top-level executives.

Fourth-quarter sales rose 30% to EUR 1.65B from EUR 1.27B in the corresponding quarter of 1998. Product revenue for the quarter jumped 43% to EUR 1.13B from EUR 793M in the previous year's quarter, mainly from a 45% leap in licensing revenue to EUR 811M from 4Q98's EUR 559M (See Figure 1). And, also on a positive note, 16% of licensing revenue came from sales of products, with EUR 129M in sales, most of which was booked in December.

SAP said it would disclose license sales in the future, something Wall Street and industry analysts have been advising the company to do in the past. Consulting revenue for the quarter grew 12% to EUR 408M from EUR 364M in the final quarter of 1998. Besides taking a hit from the STAR program and the marketing of, SAP said service revenue growth would likely be slower the first part of 2000 than in the past. However, SAP expects revenue for 2001 to be twice 1998's revenue.

Market Impact

We believe that SAP is well beyond its 1999 malaise, which was caused by a combined effect of well-known major factors: the Y2K-caused market slowdown, the Fortune 1000 market saturation, its 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 believe that SAP tackled those difficulties with appropriate, time-and-money-consuming counteractions like developing more implementation-friendly and industry-tailored products attractive to the relatively untapped mid-market (Accelerated SAP), as well as expanding its product functionality ("New Dimension") to cover the above-mentioned hot trends, to name but a few.

SAP's willingness to disclose its results should earn it additional credibility and create a sense of goodwill within the analyst community. However, we remain reserved about how well SAP will do with its e-business products like the Marketplace, a business community portal, and the Workplace, a desktop portal that has yet to find widespread market acceptance.

SAP is doing a good job of mining its huge client base with sales of its Business Information Warehouse (BW). It has also delivered 350 installations of Supply Chain Management (SCM) systems, including the SAP Advanced Planner and Optimizer (APO) product, as well as 400 copies of its Customer Relationship Management (CRM) product. However, only a handful of companies have actually installed these products so far.

We also believe that the belated introduction of the employee stock option plan (STAR) will be insufficient unless SAP extends the program to all its employees. Failing to do so would give rise to an exodus in its mid and lower ranks, too.

User Recommendations

SAP should be included on almost any initial long list for global extended-ERP selections. SAP remains the ERP leader, and its strong resources give it the ability to overcome possible hurdles much sooner than most of its competitors in a similar situation. However, existing and potential users currently evaluating SAP products, particularly its "New Dimension" suite of products beyond the core R/3 ERP system, may benefit from considering already available and fully functional components from other vendors, instead of blindly following their brand loyalty (which may result in either waiting for a firm release date or putting up with sub-optimal functionality).


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