P.J.
Jakovljevic
- August
17, 2001
- Event
Summary
- Market
Impact
- User
Recommendations
Event
Summary
SAP AG (NYSE: SAP), the leading provider of business software solutions,
announced strong sales and profit performance for the second quarter ended
June 30, 2001. In Q2 2001, revenues increased 24% over the same period
last year from EUR 1.5 billion to EUR 1.85 billion (See Figure 1). Net
income in the quarter grew up 78% to EUR 424 million compared to EUR 246
million a year earlier. Although quite 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. SAP has also provided its extended
expectations for revenue and margin performance for the full year. SAP
expects revenue for the full year 2001 to grow by more than 20%, which
could be of immense importance for the competitive landscape given SAP's
size and the current state of the economy.
Figure
1.
In
the quarter, revenues in Europe, the Middle East and Africa (EMEA) region
increased 36% to EUR 962 million and in the Asia-Pacific region (APA)
revenues were up 15% to EUR 220 million. Revenues in the Americas region
rose 12% to EUR 671 million. However, at constant currency rates, revenues
in the Americas would have risen only 6%. License revenues grew 17% to
EUR 528 million while consulting revenues increased 35% to EUR 529 million.
However, it should be noted that license revenues in the important Americas'
region declined 11% (3% in the US), while at constant currency rates it
would have been an unpleasant 17% decline (12% in the US).
For
the second consecutive quarter, the company is providing additional information
on revenues from certain ERP adjacent software solutions. In Q2 2001,
software revenues related to mySAP CRM reached close to EUR 104
million up 55% from EUR 67 million in Q1 2001. mySAP SCM related
revenues totaled around EUR 150 million, up 46% from EUR 103 million in
Q1 2001. In the SCM solution market, SAP believes is has become the clear
market leader following disappointing results and the revenue decline
from i2 Technologies.
The
following are the most important events that occurred during the quarter
and that have been extensively analyzed in SAP
- A Humble Giant From The Reality Land?:
- More
than 18,000 delegates attended SAPPHIRE Lisbon and SAPPHIRE Orlando,
SAP's international e-business conferences. At the conferences, SAP
outlined its open integration strategy based on component integration
within the mySAP.com e-business platform, collaborative process
integration provided by public and private exchanges from SAPMarkets,
and user level integration through Portals provided by the SAP Portals
subsidiary. SAP also announced plans for SAP R/3 Enterprise,
the evolution of SAP R/3. SAP claims R/3 Enterprise preserves
customers' investments in existing information technology and enables
a more seamless evolution to mySAP.com Solutions. In addition, SAP announced
an expansion of the long-standing global strategic alliance with IBM
to cover the entire mySAP.com e-business platform.
- SAP and
Commerce One announced an expansion of their alliance
in which SAP has agreed to make a substantial additional investment
in Commerce One of up to $225 million. Including prior investments and
considering Commerce One's recent issuance of new shares, SAP will own
approximately 20% of Commerce One outstanding common stock. The investment
deal has already had a negative financial effect on SAP, though. On
July 23, SAP said it would cut its first-half year net profit figure
by EUR 90 million owing to whopping $2.06 billion loss Commerce One
incurred in its last quarter.
Market
Impact
In
the times of economic slump, one vendor's loss is another vendor's gain,
and SAP seems to be reaping the struggling competitors' missed opportunities.
During these times of risk-averse customers, SAP's aura of invincibility
becomes even more attractive and assuring both to its huge customer base
and to new prospects. However, it would not be fair to ascribe SAP's success
only to the misfortunes of the others given that its current posture is
also the result of over two years of a painstaking effort to radically
change its business philosophy and to reverse bad market perception.
On
a Positive Note
SAP
seems to have finally got its ducks in a row - it has embarked on making
its unwieldy R/3 product more granular, it has reorganized itself into
more logical and efficient entities, it has delivered attractive ERP-adjacent
components, and it has become more partner-friendly (even to a degree
of its revenue being driven by agreements with a direct competitor - see
It
Is Possible - SAP And Baan Strange Bedfellows).
In
addition to TEC's analysis of SAP's rationale to be more open to the best-of-breed
concept and interconnectivity to other systems (see SAP
- A Humble Giant From The Reality Land?), there is also the potential
benefit of SAP being perceived as being comfortable (rather than uptight)
and secure in its products capabilities, and of being able to admit that
the others can sometimes have something better to offer to customers.
It appears as though SAP's software solutions outside its core R/3 ERP
system can finally attract customers even beyond its humongous install
base on a stand-alone basis. After years of wavering, SAP's SCM and CRM
software seem to be catching up with the functionality of niche specialists.
The percentage of revenue coming from SCM (23%) and CRM (16%) speak in
that regard - SAP is taking ever-bigger slices of the SCM and CRM pies.
SAP
and its peer Tier 1 ERP vendors might have a head start over niche vendors
even if they are still not functionality on par - it may suffice to satisfy
the critical majority of current business requirements now. Conversely,
the CRM and SCM niche vendors' current value proposition of uneasy integration
to existing back-office systems can be much more than prospects are prepared
to digest at this stage. A healthy 48% growth of SAP's traditional back-office
products might also indicate that ERP has not said its parting comment
yet.
On
A Cautionary Note
On
a more down note, SAP's negative license revenues in the US might require
a scrutiny of forthcoming reports from its direct competitors (e.g., Oracle,
PeopleSoft, i2, Siebel, Manugistics, J.D.
Edwards and Baan), in order to discern a loss or gain of market
share in a likely declining market. Or, it might be due to much fiercer
domestic competition and the US customers' acceptance of 'the new SAP'
mantra. Also, the EMEA market continues to contribute a major part 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.
Some
caution also comes from the fact that service & support revenue grew much
faster than new license sales. This may indicate a slowing down of new
accounts creating activity, which could possibly backfire some time down
the track. Nevertheless, SAP is in a much better position to amortize
any pinch compared to most of its competitors.
The
challenge for SAP is also to get enough experienced people who can sell
point solutions CRM, SCM, etc, both within the realm of mySAP.com and
as stand-alone components that can be integrated with other products.
Since the longer term SAP sales people are accustomed to selling the monolithic
R/3 ERP product contracts and /or upgrades in 'the whole enchilada' manner
rather than selling ERP-adjacent point products, it will take time for
them to be retrained or cross-trained to sell the new components. The
result is when it comes to the new components, the entire sales force
is still learning. The lack of experienced sales resources in these new
areas may impede SAP's proficiency in selling these products outside of
its install base.
Therefore,
SAP's potentially unwieldy and scattered global organization, disparate
product components and their developments' coordination over different
continents, and the lack of sales focus may hamper the execution of its
otherwise attractive strategy. Not that its competition is in an easier
situation, though.
User
Recommendations
SAP's business applications market's leadership remains unscathed although
it will continue to be vigorously challenged by some. SAP seems to be
doing well in both perception and the wars on the ground. More important
will be how well the company will execute its impressive but highly ambitious
vision. The market has often in the past witnessed how long the road is
between the vision and execution, SAP huge resources notwithstanding.
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 application software
selection. The depth and breadth of mySAP.com's offerings should 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 migrating older instances of SAP R/3 to mySAP.com and/or
integrating mySAP.com components to other software will remain painstaking
for some time to come despite SAP's commendable initiative in easing that.
One
should also keep a close eye on the relationship between SAP and Commerce
One. Should there be continued bad performance of Commerce One and a potential
alliance collapse, this event could have more far reaching consequences
for all the parties (including users of joint products) than a mere net
profit adjustment for SAP.
More
comprehensive recommendations for both current and potential SAP users
can be found in SAP
- A Leader Under Reconstruction.