SAP Defies Economic Slowdown, For Now

Event Summary

On January 23, SAP AG (NYSE: SAP), the leading provider of business software solutions, announced its preliminary results for the fourth quarter and year ended December 31, 2000. In the fourth quarter, revenues increased 31% over the same period last year to EUR 2.164 billion (See Figure 1). Net income in the quarter increased 16% to EUR 366 million. Earnings per share increased 15% to EUR 1.16 (1999: EUR 1.01).

Figure 1.

Sales of mySAP.com, SAP's leading e-business platform, grew 412% to EUR 661 million in the fourth quarter. mySAP.com revenues represented 63% of total license revenues in the quarter, compared to 61% in the third quarter. Over the full year, e-business sales grew to EUR 1.3 billion, or 53% of license revenues. License revenues, which are comprised of mySAP.com sales as well as component based software sales, grew 30% to EUR 1.056 billion.

In the fourth quarter, revenues in the Europe, Middle East and Africa (EMEA) region increased 42% to EUR 1.136 billion and in the Asia-Pacific region (APA) revenues were up 38% to EUR 231 million. However, revenues in the Americas region rose only a modest 17% to EUR 797 million.

For 2000, sales grew 23% to EUR 6.266 billion , compared to EUR 5.110 billion in 1999 (See Figure 2). Net income for the year increased 4% to EUR 626 million. mySAP.com accounted for 53% or EUR 1.3 billion of license revenues for 2000, which rose 27% to EUR 2.46 billion. Consulting revenues grew 6% to EUR 1.646 billion while training revenue increased 2% to EUR 401 million.

Figure 2.

"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."

"All of the pieces of our e-business strategy are in place - people, products, marketing and commitment to win - and we have the customer wins and win-backs to prove that we successfully reinvented SAP," commented Hasso Plattner, Co-Chairman and CEO of SAP AG. "There is no other business software vendor with the product depth, industry knowledge and global reach of SAP."

Market Impact

SAP seems to be performing well despite gloomy prospects for the economy. While the statement that SAP is stronger than ever may be too stretched, SAP's management should nevertheless be pleased with the increase of license revenue and reinvigorated growth in almost all markets worldwide. The results might vouch for a better future for SAP, which 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.

SAP seems to have overcome its traditional ERP mindset and has made different approaches to enter more rewarding adjacent software markets, such as e-procurement and Customer Relationship Management (CRM). Even more, it has realized that building functionally superior software in-house would not suffice. To that end, the company has become more focused on partnerships and working with other vendors that specialize in e-business and CRM software. SAP formed a true partnership with Commerce One for procurement software (for more information, see SAP Gives Up, Declares Victory. Again. and SAP Becoming a (Legal) Polygamist). This might be an exemplary relationship of two companies forsaking their individual development projects and exerting all their energy into a single, synergistically developed product. This does not seem to be the case with the shaky counterpart alliance of the three titans - i2, Ariba and IBM. As for CRM offerings, SAP has been selling Nortel's Clarify products for the missing pieces of its solution (for more information, see SAP Gives in to CRM (Part Time) Matrimony).

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 over 50% of software revenue in 2000, compared to measly 19% of total license revenue in 1999. SAP has, in the meantime, clarified most of the confusion initially surrounding the product position and has simplified the pricing scheme for its e-business products, which should have played the significant role in customers' acceptance of mySAP.com. Look for more than 70% of license revenue to be attributed to mySAP.com in 2001.

SAP has also been delivering its internally developed products. After years of faltering, SAP's supply chain management (SCM) software, particularly its Advanced Planning and Optimization (APO), as well as product lifecycle management (PLM) software seem to be catching up with the functionality of niche players. While SAP's hopes of selling these, as standalone point solutions is likely to face fierce niche competition, SAP can at least rely on cross-selling to an existing base of over 13,000 customers worldwide.

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, speaks in that regard, resulting in 27% of total software license revenue in 2000. In addition, SAP, traditionally regarded too unwieldy and costly for small or midsize enterprises (between $50 million and $ 200 million in revenues), has made significant penetration and visibility within the coveted market (for more information, see SAP Claims Big Gains In The Low-End Battleground). Look for its continued mid-market success in 2001, as the shakeout of smaller vendors is looming, and customers are turning to stalwart vendors.

Further, SAP, finally recognizing its US image problem of not being nimble enough, resorted to an internal restructuring and an external image renovation through much more aggressive advertising. Both of these moves contributed to SAP's recent success and positive prospects for the future (for more information, see SAP to Become Leaner, Meaner and More Organized and Has SAP Found Magic Formula (One) To Learn The Ropes Of Marketing?). The good news is also 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.

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, a modest 8% license revenue growth in the US is much less compared to recent reports from its direct competitors (e.g., Oracle, PeopleSoft, i2, Siebel, and J.D. Edwards), which should indicate a possible loss of market share.

Somewhat disappointing were the 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 mean that SAP's is increasingly relying on its consulting partners network, which is not necessarily bad. One should also account for the ongoing costs of cross training the 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. 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 the above-mentioned defections of a year ago.

User Recommendations

SAP's viability and the business applications market's leadership should not be put into question. The company remains strong 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.

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.

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