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
mySAP.com 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 mySAP.com products, with EUR
129M in mySAP.com sales, most of which was booked in December.
SAP said it would disclose mySAP.com 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 mySAP.com, 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 mySAP.com 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 mySAP.com
Marketplace, a business community portal, and the mySAP.com 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).