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?:
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.