On October 18, SAP AG (NYSE: SAP), the leading provider of business
software solutions, announced mixed financial results for the third quarter
ended September 30, 2001. In Q3 2001, revenues increased 16% over the
same period last year from EUR 1.42 billion to EUR 1.85 billion (See Figure
1). However, net income in the quarter dropped 55% to EUR 37 million compared
to EUR 83 million a year earlier. While product revenues in the third
quarter rose 9% to EUR 995 million from EUR 913 million a year ago, license
revenues were down 7% to EUR 447 million from EUR 480 million. Consulting
and training revenues saved the day by rising 30% to EUR 524 million and
19% to EUR 113 million, respectively.
the quarter, revenues in Europe, the Middle East and Africa (EMEA) region
increased 32% to EUR 841 million and in the Asia-Pacific region (APA)
revenues were down 6% to EUR 195 million. Revenues in the Americas region
rose 7% to EUR 613 million. However, at constant currency rates, revenues
in the Americas would have risen only 9%. Furthermore, it should be noted
that license revenues in the Americas' region declined 24% (34% in the
US), while at constant currency rates it would have been a slightly less
unpleasant 19% decline (32% in the US). Somewhat encouraging was the Japanese
market where the revenues grew 19% (34% at constant currency rates).
the third consecutive quarter, SAP is providing additional information
on revenues from certain specific software solutions. In Q3 2001, software
revenues related to mySAP CRM (Customer Relationship Management)
reached close to EUR 78 million, representing 17% of total software license
sales and a 25% drop compared to EUR 104 million in Q2 2001. Q3 2001 mySAP
SCM (Supply Chain Management) related revenues totaled around EUR
98 million, representing 22% of total software license sales and a 35%
drop compared to EUR 150 million in the previous quarter. The other SAP's
product lines showed similar dismal results. The license revenue decline
was the most pronounced in the Manufacturing industry -- Process industry
licenses dropped 9% while discrete markets declined 3%. There were bright
spots in Service industries (up 9%), Public Sector (up 2%), and Financial
Services (up 1%) though, while consumer industries remained flat.
said that it now expected 2001 revenue to be up 15% versus the 23% previously
expected because of the soft economy induced changes in corporate spending
timetables. Consequently, the Company is accelerating cost reduction measurements,
including the dreaded adjusting of the levels and mix of its employees,
particularly in the US. Staffing for the Americas was nearly 7,000 people
at the end of the quarter, and it will likely be lower by year's end.
The Company, however, continues to extend its infrastructure in certain
areas where SAP is growing its profile, such as CRM and SCM.
following are the most important events that occurred during the quarter:
- SAP concluded
additional investment in Commerce One: SAP received all necessary
approvals from U. S. antitrust authorities for its additional investment.
SAP now owns slightly more than 20% of Commerce One outstanding stock.
- SAP began
shipping the newest version of mySAP Customer Relationship Management
to customers worldwide in August: mySAP CRM reportedly provides breadth
and depth of functionality through a full suite of CRM functions. In
addition, mySAP CRM can also serve as a platform to openly integrate
with either SAP or non-SAP business applications such as supply chain
management, product lifecycle management and human lifecycle management
for flexibility that meets each business's unique needs.
- SAP AG
established a Global Professional Services Organization (Global PSO)
within SAP AG: The new business unit will work closely with the global
consulting partners of SAP and focus on high-profile SAP customers that
require consulting services for global e-business solution projects,
independent of geography and across industries.
it is not a surprise that SAP will have stalled to a degree, it is rather
surprising that its management has been caught off-guard, having to revise
its outlook only very recently. We have voiced our skepticism about SAP's
(unexpected) ebullience of only a few weeks ago amid competitors' negative
results and somber market vibes (see What's
With Oracle's And SAP's Differing Clairvoyance?). Even PeopleSoft,
which has meanwhile released stellar results, has wisely kept quiet instead
of borrowing trouble before the official results announcements.
the fact is that the service industries, that will have been hit the hardest
by the terrorist attacks, have even contributed with growth during Q3
2001 to SAP's top line, which means that the consequences of the events
will only be felt in forthcoming quarters. Conversely, the slump in manufacturing
sectors has long been noticed, and SAP management should have the results
into consideration and backed off from the previously stated optimistic
projections, before stating the preliminary results.
positive results may indicate that, despite the tough economy, companies
continue to invest in the most perceived cost effective solutions that
seemingly offer quick high returns on investment (ROI), broad functionality
and ease of integration. SAP has embarked on making its unwieldy R/3 product
more granular, it has delivered attractive extended-ERP components, and
it has become more partner-friendly and marketing saavy (by e.g., sponsoring
Formula 1 Grand Prix in Indianapolis).
Its new 'cool' tune has apparently not been resonating yet with the decision
makers. There is still lingering market confusion over mySAP.com's value
proposition to both existing and potential customers, and the proverbial
perception of complexity. SAP continues to evolve from functionally broad
ERP-centric processes and closed monolithic architecture, to processes
that encompass the entire value chain, with open architecture and vertical
focus and breadth. While indisputably a compelling proposition, the cost/benefit
of a transition to the still 'moving-target' new offerings is vague to
customers. This may likely cause customers to hesitate on an upgrade until
the benefits are clear and/or the economic climate improves.
software solutions outside the core R/3 ERP system, namely SAP's SCM and
CRM software, seem to be catching up with the functionality of niche specialists.
These new solutions might attract customers even beyond SAP's large install
base on a stand-alone basis, but SAP has failed to use them to fuel significant
growth by not offering a dramatically different value proposition. They
are still likely regarded as applications that should be implemented in
a leisurely manner during better times, rather than a quick results booster
during tough times.
On a more down note, SAP's continued license revenues drop in the North
America and a recent drop in the Asia-Pacific market, might indicate a
loss of market share against the backdrop of competitors' growth in these
markets (e.g., PeopleSoft, IFS, Intentia, Navision,
etc.). These vendors have also shown good results in SAP's stronghold,
the European market, which can cut into SAP's top line in the future.
Some caution also comes from the fact that SAP's service & support revenue
continue to grow much faster than new license sales. This indicates a
slowing down of new accounts creating activity, which should likely hurt
more some time down the track.
than being a slight embarrassment, the late profit warning will have cost
SAP by causing the market to feel SAP has been remiss in making the organizational
changes that have been implemented earlier by many competitors. By revising
the levels of management and sales force, and partnerships with systems
integrators, SAP may be aiming at reinvigorating sales but it still suffers
from long and complex sales cycles. The impending restructuring also magnifies
the challenge for SAP to get enough experienced people who can sell point
solutions for CRM, SCM, PLM, 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 piecemeal, it will take time for them to be retrained to sell
the new components.
conundrum is also the situation with ailing partner Commerce One, as SAP
has been so deeply involved in joint development of an e-commerce platform
with it that this might be a point of no return. While SAP still vehemently
denies its intents of taking over Commerce One, which would be a hefty
investment during not exactly the happiest times, something significant
has to happen to the SAP-Commerce One partnership. Some significant changes
of the alliance are likely, as SAP might be tempted to consolidate some
of its operations, like SAPMarkets, SAP Portals (and potentially acquired
Commerce One), into a single line of business.
SAP is in much better position to amortize any pinch compared to most
of its competitors. It is much more likely that SAP will fill any real
or perceived product and technology transition gap than its competitors
will close the market share gap. No other vendor can boast the leading
share in so many industries, which span from manufacturing to services.
Not many vendors can demonstrate the support for so many platforms and
integration standards, and the product scalability like SAP.
the recent OEM partnership with Crystal Decisions to bundle Crystal
Reports and Crystal Enterprise with SAP Business Information
Warehouse (BW), SAP stand the chance to address many reporting and
BW shortcomings that have long plagued SAP's offering and users' acceptance.
As current market success often revolves around perception, hype and/or
myths, SAP's competitors should not be lulled into complacency, since
"fortune is made of glass" has held many times in the past. Also, SAP
has proven its tenacity many times before.
SAP's business applications market's leadership remains unscathed although
many will apparently vigorously challenge it. Therefore, potential and
current SAP customers should not depart from their IT investment strategies.
Users should regard potential myths about SAP's complexity and deployment
issues only as one important factor among many others (e.g., functionality,
vendors' viability, technology) during product selection, instead of using
it as the major decision-making factor. 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's huge resources notwithstanding. One should
also keep a close eye on the relationship between SAP and Commerce One,
as the dynamic nature of it may impose some changes in the foreseeable
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, although one should question SAP's vertical capabilities by
region, by using references to validate localization capabilities.
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.
and existing SAP users should not reckon with having all components of
mySAP.com deployed before 2004. Existing SAP users should evaluate maturing
SAP CRM and SAP SCM functionality against their best-of-breed investments
notwithstanding. Enterprises should conduct a close scrutiny in calculating
the value of a mySAP component or full mySAP.com license based on potential
usage of each SAP module by end users in each part of their organization.
comprehensive recommendations for both current and potential SAP users
can be found in SAP
- A Humble Giant From The Reality Land? Part 5: Challenges and User Recommendations
and in 'Collaborative
Commerce': ERP, CRM, e-Proc, and SCM Unite! A Series Study: SAP AG.