SAP Q3 Results Cause Mixed Reactions




SAP Q3 Results Cause Mixed Reactions
P.J. Jakovljevic - November 16, 2000

Event Summary

On October 19, SAP AG (NYSE: SAP), the leading provider of enterprise software solutions, announced its results for the quarter ended September 30, 2000. In the third quarter, revenues rose 27% over the same period last year from EUR 1.12 billion to EUR 1.42 billion. Operating income before charges for the employee stock appreciation rights program (STAR) was up 89% to EUR 202 million compared to EUR 107 million in 1999. Net income in the quarter increased 96% to EUR 88 million compared to EUR 45 million in 1999 (See Figure 1).

Figure 1.

In Q3 2000, product revenues increased 49% to EUR 913 million from EUR 611 million in 1999. License revenues, which are composed of mySAP.com sales as well as component based software sales, rose 53% to EUR 480 million. However, consulting revenues increased only 2% to EUR 404 million while training revenues grew 6% to EUR 95 million. In the third quarter, SAP's operating margin (before STAR) improved to 14% from 10% in last year's third quarter. STAR expenses for the quarter increased 116% to EUR 54 million compared to EUR 25 in 1999.

Sales of mySAP.com, SAP's leading e-business platform, accelerated to EUR 294 million in the quarter or 61% of total license revenues, compared to 47% in Q2 2000. New customers accounted for 49% of mySAP.com sales.

"In the third quarter, mySAP.com established itself as the leading e-business platform," said Hasso Plattner, Co-Chairman and CEO of SAP AG. "The market clearly understands the power of our new solutions and the number of installed supply chain, customer relationship management and business intelligence systems is growing rapidly. We are going to capitalize on this deepened understanding to speed acceptance of our new technology."

"We had a very good third quarter as mySAP.com awareness grew and our US organization continued to rebuild," said Henning Kagermann, Co-Chairman and CEO of SAP AG. "Moving into the fourth quarter, we expect demand to keep growing. While the fourth quarter of 1999 was extremely strong, we still expect solid top line improvement for the fourth quarter of 2000."

The following are some of the most important events during Q3 2000:

  • SAP unveiled a wide-ranging, global advertising and promotional awareness campaign (for more information, see Has SAP Found Magic Formula (One) To Learn The Ropes Of Marketing?).

  • SAPMarkets Inc., the SAP subsidiary dedicated to creating and powering globally interconnected business-to-business marketplaces, and Commerce One, Inc. announced availability of both MarketSet and Enterprise Buyer, their jointly developed e-business offerings that combine Commerce One's e-marketplace infrastructure with e-procurement, supply chain, product planning and analysis applications from SAP and SAPMarkets (for more information, see SAP Gives Up, Declares Victory. Again).

  • SAP AG announced a broad realignment of its global development force of almost 6,000 people worldwide. SAP is establishing six General Business Units (GBUs) to manage its applications development activities; seven Industry Business Sectors, responsible for the development of mySAP.com industry solutions; and three additional GBUs, responsible for particular technologies. SAP expects the changes to create a more nimble organization, enabling SAP to better respond to the fast-changing needs of its customers and the overall market (for more information, see SAP to Become Leaner, Meaner and More Organized).

Market Impact

SAP seems to be performing well despite disappointing some Wall Street pundits. While not quite reverting to its golden days of ERP supremacy and now having Oracle and recently reinvigorated PeopleSoft making inroads into its market share, SAP's management should nevertheless be pleased with the increase of license revenue and reinvigorated success in the North American (47% license revenue increase) and Asia-Pacific (109% license revenue increase) markets. Despite its huge customer base and mind share created throughout the 1990s, SAP has had notable challenges over the past two years (for more information, see SAP - A Leader Under Reconstruction). It has recently tackled some of these though.

The company, which belatedly recognized its US image problem of not being flexible enough, eventually resorted to an internal restructuring and an external image renovation through much more aggressive advertising. The company also seems to be more focused on partnerships and working with other vendors that specialize in e-business and CRM software. These moves seem to have desired effects given the fact that the biggest contribution to revenues came from mySAP.com. Continuing to rise, it contributed to 47% of revenue in 3Q00 compared to 19% of total license revenue in 1999. SAP has also simplified the pricing scheme for its e-business products, which should also play the significant role in customers' acceptance of mySAP.com. With the new pricing structure, SAP customers will only pay for actual transactions entered into the system. There will be no charge for system access by unidentified external third parties if they only request information and do not create or change anything.

The percentage of revenue coming from the former New Dimension products, SAP's Customer Relationship Management (CRM), Advanced Planner & Optimizer (APO), Business Information Warehouse (BW), and others, also shows SAP is in good shape, resulting in 28% of total software license revenue. SAP has also been adding new customers to its humongous customer base of over 13,500 enterprises, with approximately 450 added during the last quarter.

However, one should bear in mind that SAP's export figures have been bloated to a degree by currency effects, namely a recent favorable exchange rate between dollars and Euros. Even without that effect, 17% revenue growth in the US is much less compared to recent reports from its direct competitors, which should indicate a possible loss of market share. Also disappointing were almost flat consulting and training revenues. While this may mean the simplification of implementing new SAP products (which has been notoriously difficult in the past) it also may cause serious shakeups and restructuring within its consulting partners network. One should also account for the ongoing costs of cross training SAP consulting force on e-business applications from its traditional ERP functional orientation; the same holds for the sales force that has been reorganized around vertical industries in respective CRM, supply chain management (SCM), and business intelligence product areas

Nevertheless, the good news is that SAP seems to have stemmed the tide of recent staff departures in the US, with employee turnover in US operations returning to levels of prior years. Furthermore, certain industries like the public sector, financial services, media, healthcare, and targeted service markets, reported remarkable growth. Many of these deals have also included the traditional R/3 ERP system, showing encouraging signs that core ERP is not yet obsolete.

User Recommendations

Potential and current SAP users can be assured about its viability and the invincibility of its market share lead. The company remains solid and will be around for a long time to come. More important will be how well the SAP sales and service force, particularly in the US, can demonstrate the touted benefits to the prospect or customer.

Due diligence should always be paid to satisfying your unique requirements as derived from your unique e-business strategy. While selecting a strategic software partner is a challenging and risky undertaking, the positive news is that there are more companies competing for your dollars. Nonetheless, one would be hard pressed to find a case where SAP should not be included on at least an initial long list of vendors in a global ERP selection. The depth and breadth of mySAP.com's offerings are attractive at first sight.

More comprehensive recommendations for both current and potential SAP users can be found in SAP - A Leader Under Reconstruction.

 
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