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Saturday, November 27, 2004

SAP Shall Be The Next CISCO -SAP's Moment(Part I)

Barrons magazine writes that SAP is likely to dominate the enteprise software market with a likely marketshare of around 70% shortly. Excerpts of the article to be published in two parts:

Henning Kagermann, chief executive of the German software giant SAP, on industry domination: "I think it is always a good position to be in." Good, indeed. SAP, with annual sales of nearly $10 billion, now accounts for a stunning 56% of the worldwide revenues of the top five players in business software -- and that figure looks headed to 70%. SAP has been grabbing market share hand over fist for sometime. SAP has positioned itself to thrive in a new era of Web-based computing, where corporate workers can exchange data across departmental, physical and geographical barriers. SAP's successes have lifted its stock nicely. They now trade at about 30 times estimated earnings for 2005, a premium of more than 25% to Oracle, Microsoft and some other competitors. But SAP may well be worth it. The fact is, Kagermann & Co. soon could hold sway over the corporate-software market to the same degree that Cisco Systems came to rule the Internet- router business in the 1990s. Cisco, after realizing it had become the preferred supplier of the most vital picks and shovels of the Internet gold rush, unleashed a sales and marketing blitz like few others, crushing the competition and becoming the predominant provider of networking gear.

The opportunity before SAP over the next two to three years is not very different. The overwhelming trend among corporations is to use fewer and fewer software providers to run all their main functions -- from payroll to manufacturing to customer relations. Once the client makes the decision that he has to consolidate with SAP or somebody else, 95% [of the time] we win," Kagermann says.As a result of such victories, SAP's licensing revenue, the key benchmark for software sales, jumped some 17% in the third quarter. And, even though the company has been spending heavily on product development, sales and marketing, profit margins are holding up well. Operating margins actually climbed in the third quarter, to 27% from 26% a year earlier. And SAP officials say 30% could be the norm in two or three years. Kagermann says,"The idea is first to look for market-share growth, And I think once we achieve this, [we'll] be sure to get a good margin." Margin growth, he added, "comes automatically" after market share, as incremental revenues pile up.

Challenges to SAP :– Many, SAP is heavily dependent on corporate tech spending, and that has been tepid lately. Some surveys show that outlays for this year will be up only 3% or 4%, no more than the economy as a whole. And 2005 may not be much brighter. SAP also must contend with the ever-rising value of the euro, which hurts profits since customers in the huge U.S. market pay in dollars. Finally, the company must shake the vestiges of a reputation for creating overly complex, difficult-to-use software. That image dogged SAP for years, and may be tough to bury for good.Kagermann appears to be handling all this adroitly. The company has been making enormous strides with its technology, winning accolades throughout techdom. "They've done an incredible job," says Marc Benioff, chief executive of Salesforce.com, which competes with SAP at the lower end of the business market. He goes so far as to hail Kagermann as "the smartest guy in software, except perhaps Bill Gates." Though not nearly as well known as Microsoft, SAP is unquestionably the first name in business, or enterprise, software. More than 24,000 companies around the world, including 49 of the 50 largest, use SAP software to manage their bookkeeping, supply chains, customer relationships, product planning and more. By contrast, Oracle, the No. 2 player in the enterprise field, serves just 13,000 companies. SAP also provides specialized systems for companies in more than 25 industries, from the oil patch to banking to the auto market. Stacked up against the makers of all types of software, SAP ranks No. 3, after Microsoft and Oracle (counting the latter's core database business, which is distinct from the enterprise market). And SAP is by far the biggest software maker based in Europe.
Right now, the company's most impressive growth is coming from the U.S. And SAP has told analysts it expects its U.S. share to surpass 50% reasonably soon and then head toward the company's global share. SAP may soon be the next Cisco, which now commands 70% to 80% of the router and switch businesses. Cisco split its shares eight times in the 'Nineties on the way to its current market capitalization of $130 billion.

(Part II Shall follow).
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