Event
Summary
On April 19, SAP AG (NYSE: SAP), the leading provider of
business software solutions, announced its results for the quarter ended
March 31, 2001. In Q1 2001, revenues increased 29% over the same period
last year from EUR 1.2 billion to EUR 1.5 billion (See Figure 1). Net
income in the quarter more than doubled (up 117%) to EUR 117 million compared
to a year earlier when SAP had its worst quarter in its almost 30 years
long history. Although aware of the current challenging environment, SAP
remains confident about expectations for its operations through the first
three quarters of 2001. For the nine months ending September 30, 2001,
the company expects that revenue will slightly exceed the 23% growth rate
achieved in fiscal 2000.
Figure
1.
"These
results confirm SAP's leadership in providing complete e-business solutions
that companies want," said Henning Kagermann, Co-Chairman and CEO of SAP
AG. "Our organization is focused and energized. When you combine this
with the growing customer understanding of the power of mySAP.com and
our strong pipeline, 2001 looks like another very good year for SAP."
For
the first time, the company has provided additional information on revenues
from certain specific software solutions. In Q1 2001, software revenues
related to mySAP CRM (Customer Relationship Management) reached approximately
EUR 67 million, while mySAP SCM (Supply Chain Management) related revenues
totaled around EUR 103 million, which proves that SAP's claims of becoming
the No.2 SCM vendor a year ago were merely wishful thinking (see, SAP
Declares Victory Over Manugistics, Takes Aim at i2). These figures
include revenues from designated solution contracts, as well as figures
from integrated solution contracts, which are allocated based on usage
surveys.
In
the quarter, revenues in Europe, the Middle East and Africa (EMEA) region
increased 31% to EUR 796 million and in the Asia-Pacific region (APA)
revenues were up 28% to EUR 178 million. Revenues in the Americas region
rose 26% to EUR 550 million. At constant (adjusted) currency rates, revenues
in the Americas rose a solid 20%. License revenues grew 24% to EUR 458
million while consulting revenues increased 38% to EUR 458 million. However,
it should be noted that license revenues in the US grew only 7%, while
at constant currency rates it would be flat. The number of full-time equivalent
employees at March 31, 2001, was 25,218, a 14% increase over the number
at March 31, 2000. Since December 31, 2000, SAP has added more than 1,000
new employees.
In
the quarter, SAP announced it intention to acquire TopTier Software, an
SAP partner that has market leading technologies and know-how in creating
enterprise portals (for more information, see SAP
Acquires TopTier To Further Broaden Its Horizons). SAP will create
a new company, SAP Portals, dedicated to developing and marketing more
comprehensive, open-enterprise portal and business intelligence products.
SAP Portals will be a global company with headquarters in Palo Alto, Calif.
and will initially employ more than 700 people. SAP Portals will combine
TopTier Software with SAP's existing efforts in enterprise portals. One
of the first assignments of SAP Portals will be to create a portal for
the new joint venture between SAP and Yahoo!
Market
Impact
SAP
continues to be a stalwart vendor despite the gloomy prospects of the
economy. It has broken away from its traditional ERP mindset and is moving
in a direction to penetrate more prospective markets, such as e-Business,
supply chain management (SCM) and Customer Relationship Management (CRM).
It has even abandoned its proverbial stubborn policy of only developing
functionally superior software in-house. To that end, SAP has become more
focused on partnerships and working with other vendors that specialize
in e-business software. The recent partnerships with Yahoo! and
Ascential Software along with recently renewed wedding vows
with Commerce One speak in that regard.
Possibly
tarnishing this image, though, could be SAP's very recent decision to
end the reselling agreement with Nortel's Clarify call center
product for the missing pieces of its CRM solution. It only exemplifies
how fragile partnerships in the market can be, and it leaves the existing
customers confused and disconcerted. Prospective customers face the following
choices: go for a currently inferior arrangement, wait for SAP's native
functionality to be delivered, or opt for some other product at this stage.
Nonetheless,
during its recent European Sapphire user conference, SAP articulated a
sound e-business strategy that will have to be substantiated in the forthcoming
period though. Its product's componentization, openness and outward-looking
strategy should be appealing to both current and potential users. SAP's
alleged humility and non-insistence on locking customers into its technology
would leave Oracle as the only apparent proponent of the 'one-stop
shop' mantra.
It
appears as though SAP feels confident now that its software solutions
outside core ERP can attract customers outside its humongous install base
on a stand-alone basis. To that end, SAP has identified the following
product lines as main pillars of its product strategy:
- portals
(through the TopTier acquisition and subsequent SAP Portals subsidiary)
- trading
exchanges (through its SAPMarkets subsidiary)
- CRM,
SCM, product life-cycle management (PLM) and ERP (through SAP Solutions
subsidiary).
After years
of wavering, SAP's SCM software, as well as PLM software seem to be catching
up with the functionality of niche specialists. While SAP's aspirations
of selling these, as standalone point solutions are still going to face
fierce pure-SCM players competition, SAP can at least rely on a huge existing
base to cross-sell to. The percentage of revenue coming from SCM (22%)
speaks for the fact that resolving the 'nuts-and-bolts' collaboration
problems that span multiple enterprises and multiple functional areas
is becoming more important than ever.
While initially
tardy in joining the e-commerce gold rush, SAP has recently exerted immense
effort and expertise in delivering collaborative commerce business maps
that define steps, roles, technologies and value statements of more than
hundred collaborative business scenarios. The scenarios have been incorporated
into the recently announced SAP Solutions Architects tool, which comprises
a number of other integrated tools such as the e-Business
Case Builder, AcceleratedSAP and Best Practices for
mySAP.com.
The SAP Solution
Architect is connected to the SAP Solution Manager, a portal for implementing
the system operations infrastructure and supporting ongoing operations
of an entire enterprise solution. Both the SAP Solution Architect and
the SAP Solution Manager are connected to the SAP Service Marketplace,
which provides a partner directory, catalog-based buying and selling of
services, business collaboration with the SAP community and information
exchange forums. These three elements together are devised to form SAP's
service infrastructure covering the entire life cycle of an e-Business
solution.
On a more
down note, keep in mind that SAP's flat license revenues in the US were
dismal compared to recent growth from its direct competitors (e.g., Oracle,
PeopleSoft, i2, Siebel, Manugistics, and J.D.
Edwards), which should indicate a possible loss of market share and
incomplete US-organization transition. Also, the EMEA market contributed
52% of total revenue, which shows the importance of the European market
to SAP's top line. Should the European market falter as a result of the
current slowdown in the US, SAP may be hard pressed to meet its bullish
predictions for 2001.
One should
also account for the ongoing costs of cross training the SAP consulting
force on new and still developing 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, SCM, business
intelligence and other product areas. Another caveat is that a significant
part of the SAP US-based workforce has been with the company for less
than a year owing to defections of a year ago and to recent recruitment.
On the other hand, long-time SAP sales people are much more versed in
selling large, 'the whole enchilada', ERP contracts and /or upgrades than
they are in selling CRM, SCM and PLM point products. Lack of dedicated
sales resources in these areas may impede SAP's proficiency to sell these
products outside of its install base.
Therefore,
SAP's unwieldy and scattered global development organization, disparate
product components and their developments' coordination, and the lack
of sales focus may hamper the execution of its otherwise attractive strategy.
SAP should clearly articulate the delivery milestones of its recently
announced e-business strategy. These should address time frames for all
main product lines releases, and also, how customers can feasibly migrate
piecemeal from individual components to the integrated whole. SAP R/3
Enterprise, the next major release of its flagship ERP suite, which
is slated for general availability in 2Q 2002, and which will supposedly
provide an R/3-based platform, upon which customers can incrementally
deploy new mySAP.com and 3rd-party components without the need to update
their core ERP systems, is the step in the right direction, but with the
long way to go.
User
Recommendations
SAP's viability and the business applications market's leadership remain
unquestioned. More important will be how well the company will execute
its ambitious vision. The market has often in the past witnessed how long
the road between the vision and execution is.
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 may be attractive to a
wide range of companies, both industry- and size-wise. However, users
should question the company's delivery fulfillment of its strategy and
appreciate that integrating SAP's components to other software will remain
painstaking despite SAP's commendable initiative in facilitating that.
Non-SAP Top Tier customers should promptly clarify their support status
and SAP Portals' product development strategy. The same holds for SAP
users of the Clarify call center CRM product.
More
comprehensive recommendations for both current and potential SAP users
can be found in SAP
- A Leader Under Reconstruction.