|February 19, 2001|
SAP Thrives After Restructuring
Software vendor's willingness to change is paying off.
By William Schaff (firstname.lastname@example.org)
AP has been reinventing itself during the last year from a staid, monolithic enterprise resource planning company to a dynamic E-business company. It looks like the transformation is finally paying off for the world's third-largest software maker.
SAP's R/3 program was launched nine years ago to let companies control and monitor various finance and human-resource functions. One drawback was a lengthy installation process; another was its proprietary nature, which made R/3 ill-suited for a Web-based environment.
SAP, like many other ERP companies, suffered badly in late 1999 from a slowdown in spending on enterprise apps because of Y2K. Meanwhile, the Internet was taking the world by storm, and it became clear that SAP had little to offer in this new world order. Instead, the spotlight was on companies such as Siebel Systems Inc., with its customer-relationship management software, and i2 Technologies Inc., with its supply-chain management software. In response, SAP launched mySAP.com, but the effort lacked focus, leaving potential customers to conclude it didn't apply to them.
SAP could have retreated to its original market and slowly become another corporate dinosaur. Instead, it decided to leverage its customer base of 13,500 businesses and restructured its 6,000 software developers to focus on mySAP. The company concentrated on opening itself to other applications; changing the R/3 interface to be more Web-friendly; and developing applications such as CRM, supply-chain management, business intelligence, and knowledge management. SAP also has had to stop developing every application in-house. As a result, SAP invested $250 million for a 2% stake in Commerce One Inc., which develops E-marketplaces in competition with Ariba Inc. and BroadVision Inc. SAP now sells Commerce One's software to customers wanting to develop public and private exchanges.
While the old R/3 was monolithic, mySAP is truly modular. It lets companies purchase only one application and not the entire suite of products. A key benefit for customers is the ease of integration among the various mySAP products. Typically, the difficulty in integrating back-end and front-end systems is underestimated, and poor integration might keep a company from realizing the full potential of software. SAP and Oracle have an edge over foes such as Siebel and i2 on this front.
The competition is extremely intense in the E-business space. Competitors such as Siebel and i2 continue to produce best-of-breed products, and many companies are still willing to buy and integrate them.
Siebel and i2 report outstanding results this quarter and continue to sign new customers. I2 scored big when it signed Siemens to use its customer-management software, even though Siemens has already implemented SAP R/3.
While SAP's new products are heading in the right direction, many of its customers are already SAP clients. SAP must sign new customers to remain on the ERP throne.
Despite this, it appears that SAP's restructuring efforts are finally paying off. For the fourth quarter last year, SAP reported a year-over-year revenue gain of 31%.
Software sales, which account for 49% of total revenue, increased 30% from the fourth quarter of 1999. Perhaps more interesting, mySAP makes up 63% of all software sales, an indication that SAP's E-business products are gaining acceptance in the marketplace.
Sales of non-R/3 applications increased 286% in the fourth quarter of 2000 vs. the same quarter in 1999 to make up 32% of total software revenue. SAP also reported that earnings per share increased 15%.
Management expects revenue to grow more than 25% in the first half of this year. Earnings per share will likely grow slightly faster because of an expansion of operating margins.
However, with SAP trading at 64 times 2001 earnings-per-share estimates, much of the good news appears already to be factored into the stock price.
William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at email@example.com.
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