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Saturday, November 27, 2004

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

In Part I , we saw that SAP is likely to dominate the enterprise software markets with a likely marketshare of around 70% shortly. In this second part of this series, The Road Ahead we shall see the actions to come form SAP and its future growth areas. Excerpts for the second part:

SAP, WITH A MARKET VALUE of $55 billion, was founded in 1972 by five former IBM executives in Germany, including the legendary programmer Hasso Plattner, who stepped down as co-CEO in May 2003. Kagermann has been running day-to-day operations for several years, and Plattner has compared his stepping down to a similar move by Microsoft Chairman Bill Gates, who relinquished his CEO title CEO to Steve Ballmer in 2000. Today, Plattner remains chairman of the supervisory board, a non-management advisory panel unique to German corporate structure. Kagermann, has certainly been taking notice of Ellison. In fact, Ellison's bold bid for PeopleSoft nearly pushed SAP into the arms of Microsoft. With consolidation suddenly a front-burner issue in software, it was only natural that SAP and Microsoft should consider hooking up. Both Kagermann and Ballmer acknowledged that the companies were in serious talks, but the SAP chief says those discussions have since gone cold."We...thought it was a good idea," Kagermann says of the proposed union. And it's easy to see why: With Microsoft dominating the desktop and creeping into the lower end of enterprise computing, and with SAP supplying the corporate behemoths, the two companies barely overlap and would have created an unfathomable force had they tied the knot.While SAP and Microsoft haven't gotten married, they appear to have moved in together, the two have tightened their business ties and increased their technical and product integrations. More than 60% of new SAP installations are on Microsoft's Windows operating system, and SAP supports certain Microsoft programming tools for developing next-generation applications. That adds up to some of the benefits of a merger without the disruption. SAP's greatest opportunity lies beyond Microsoft -- in a change taking place in the buying habits of corporate technology chiefs.

Many of them no longer have the patience, or lavish budgets, for the costly wares of smaller, more specialized competitors. And they want "fewer necks to choke" when technology malfunctions. A report on tech spending released last week by Goldman Sachs noted that businesses are "still in the upswing part of the trend toward fewer, larger vendors." SAP has been able to gain market share by steadily increasing the breadth and depth of its offerings. That's attracted new customers and given existing ones reasons to order more software. Some companies have shown their allegiance by ripping out their specialized "best of breed" applications and replacing them with comparable SAP offerings.

SAP has hired some 2,500 people this year to take advantage of the trend, boosting its total headcount by 9%, to more than 30,000. Although costly, larger sales teams could prompt customers to spend more. The company hopes to wean customers from its proprietary offering for clusters of linked personal computers, known as R3, and sell them on the benefits of its Web-enabled mySAP system -- which lets workers in different locations tap into their companies' various business-software applications via the Internet. By using mySAP, companies also can implement a larger assortment of SAP's latest business applications.The other big new product is NetWeaver, which is a stack of software built on an application server-plus, as Kagermann describes it. Application servers allow different applications, or software flavors, to talk to each other via the Internet. While most of SAP's products in the past were written in proprietary code, NetWeaver uses a more open code that works with software from other companies. For example, PeopleSoft human-resource applications can interact with SAP accounting software. NetWeaver also provides Internet portals for accessing information, and data-warehouse and "business-intelligence" capabilities for analyzing trends.The stronger sales from transitions to mySAP and installments of NetWeaver should lead to greater application sales to big corporations. SAP is also making inroads into the wide-open middle tier by launching more affordable solutions for small and mid-sized companies. In all, Goldman's Sherlund expects SAP to increase its global market share among the top five enterprise vendors to 64% by the end of this year. Other than Cisco in networking, the only tech outfit with that kind of market dominance is Microsoft.

SAP harnessed the energy of the dot-com boom to improve its products and make them more user-friendly. SAP's e-business solutions weren't always as good as the others, but they were good enough -- and they continued to get better with every new version, at a methodical, steady pace that is a trademark of the German software maker. SAP kept plugging away through the technology downturn of 2000 through 2002, continuing to improve and market its new initiatives. Today, SAP's customer-relations management software outsells the products of Siebel Systems, which pioneered such software nearly a decade ago. SAP also has taken the lead in supply-chain management and other functional specializations once considered beyond its domain. Some analysts contend that SAP needs to go on an acquisition binge in order to expand into fertile new areas, such as business intelligence and perhaps even security. But SAP is likely to resist mergers, as it has in the past, and concentrate on internal growth. This is a key cultural trait that will be closely watched as the industry lurches toward consolidation.

Jeff Nolan recently wrote after SAP announced its q3 results that SAP is one of the best managed technology companies in the world with over 128 quarters of financial results and only 1 of them in the red. Jeff adds,

- The SAP market share is greater than Oracle, Peoplesoft, Microsoft, and Siebel combined.

- The maintenance revenue, which is a staggering $907m for the quarter, up 10%. By the way, maintenance and license revenue don't necessarily move in lock step because not all maintenance agreements come due in the same period of time, so while license revenue was up 13% it should not be expected that maintenance rev would be up by the same amount. In fact, because of natural attrition with customers taking old products off maintenance, it's not unexpected to see maintance stay flat during a period. What the maintenance revenue indicates is that customers are seeing value in their maintenance relationship with SAP, and that the support products the company is providing are comprehensive. Too many software companies look at maintenance as the ATM of the business model, they just make sure they have telephone support covered and do a few patch releases to cover the bases and it's golden.

- The product lines continue to fire well (especially in CRM where SAP has overtaken Siebel (rolling 4 quarter share is now at 135% of Siebel's revenue), vertical market focus is working well, and finally new markets in the SMB sector are showing results. Combine all of the above with expense containment and the results are going to be good, in fact the operating margin actually increased 1% to 26% Indeed an impressive juggernaut,that the SAP engine is.
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