Analysis: steady as she goes for SAP

Despite its ongoing battle royal with Oracle, SAP continues to perform well, reporting an 8 percent jump in its second-quarter net income, helped by a sharp increase in revenue from new software licences.

By Stuart Lauchlan, news and analysis editor

Net income for the quarter was €449m (£303m), up from €415m (£280m) in the second quarter last year. Revenue from new software licences climbed 18 percent to €715m (£482m), from €604m (£407m) last year. Total revenue, including maintenance fees, support and other services, climbed 10% to €2.4bn (£1.6bn), up from €2.2bn (£1.48bn) in the second quarter of 2006.

In SAP's biggest market – Europe, the Middle East and Africa – total revenue was up by 12 percent, to €1.27bn (£860m). Growth in the Americas, dragged down by the strong euro against the US dollar, was just 6 percent.

CEO Henning Kagermann said the company had "an excellent quarter."

Cornelia Wels-Maug, principal analyst at Ovum, said: “The set of results comes as a belated birthday present for CEO Henning Kagermann who turned 60 this mont.It mainly grew organically, as opposed to its rival Oracle who has been on the acquisition trail for some time. SAP claims to have increased its share of the global market for core enterprise applications and related services three percent points to 26 percent in 2006, still well ahead of arch rival Oracle's share of 15.5 percent, and Microsoft at 3.1 percent.
“While we are always suspicious of any single vendor's market share figures, because they're sometimes constructed to show that vendor in a favourable light, the relative shares of Oracle and SAP seem about right; however, the share of Microsoft is grossly under-estimated probably because of its indirect sales model.”
For its part, SAP is happy with its performance. Leo
Apotheker, president of customer solutions and operations, said: “Our customer satisfaction remains at an all-time high. We're very happy about that. You know we're putting a lot of focus on our installed base and we pride ourselves that we really want to provide to our customers the best possible service, and customer satisfaction is a key indicator.

“To be fair, our customers really show that also when I look at the renewal rates for maintenance, when I look at renewed buying from our installed base. Clearly, there is a return on investment in actually driving high customer satisfaction.

“The customer base in itself has grown to over 41,000 customers worldwide. That's a year-over-year increase of a little bit more than 7,000. And we had very strong contribution of the indirect channel in terms of order entry. We actually managed to grow the contribution of that channel by 42 percent, which is a very, very good number and shows that our partner network is really contributing to the overall health of the business.”

Apotheker said the firm was performing well against rivals. “We had, again in Q2, very good and strong win rates against our competitors. In fact, I believe that it's all coming from best-in-class solutions that we deliver to the market globally. We have very broad, very deep industry capabilities that our customers appreciate very much and the integrated product portfolio, based on our service-oriented architecture, gains a lot of traction with our established, as well as with new customers. And this is materialized by very strong ERP and NetWeaver adoption.”

He cited Colgate-Palmolive as a good example of an SAP customer. The firm has deployed almost the entire SAP suite. SAP cites the Colgate agreement as a "major milestone" of the second quarter adding that the "vast majority" of Colgate's business is being supported by SAP software.

“Colgate-Palmolive is an excellent example, and it should derive significant business benefit,” said Apotheker “It makes a lot of sense for companies like Colgate and others to enter into a long-term relationship with SAP, usually five years, that includes the following key elements. They get all of our technology, present and future, from that agreement. They get custom-designed services, be it the custom-designed maintenance, custom-designed support, custom-designed consultancy and, in certain case, custom-design CDP as well. And, therefore, we are able to create a special tailor-made relation for each one of those that is really geared towards their very specific and unique relationship with SAP.”

CEO Hennig Kagermann talked about the forthcoming AIS mid-market offering. “AIS is on track because you know what we did is we moved it in the new version to the new year P&L,” he said. “We will bundle a CRM, a lean CRM capability, in the third quarter. That was, I think, what we wanted to do. We will bring A1S as fast to the market as we can do it. The limit is not the money, the limit is our own brains and our own capabilities. So therefore this is an opportunity and I will not, as I have said several times, compromise on this trust to save a few millions. That's not good. Then we lose a lot of opportunities later. So the limiting factor on A1S is, at the end of the day, our own internal capabilities.”

Inevitably the topic of Oracle’s intellectual property law suit with the firm arose. Kagermann addressed this and the fact that a manager at the Tomorrow Now subsiduary has been suspended. “It has no impact on SAP's business,” he insisted. “It has a slight impact on Tomorrow Now's business because also we are not marketing it today too aggressively. But we continue to support our clients and we get new ones. We have so far enforced these policies which have been in place. It's not that they were the wrong policies in place. It was that people didn't act upon them.

“There have been a few terminations of employees, a few warnings. We suspended one manager. I think we have things under control. I would say what the next steps are depends on the overall next steps that happen in this case. It's too early for me to speculate. It's not under our full control what happens, but believe us that we will take always the right and appropriate actions to manage it.”

So overall, steady progress for SAP. “In spite of all the software market consolidation, technology changes, and major shifts in geographic and vertical industry demand, the SAP juggernaut continues on undisturbed,” noted AMR Research’s Jim Shepherd. “The company is embarked on an ambitious effort to double its addressable market to $75B by 2010. The major elements of the plan include increasing penetration into small and midsize businesses (SMBs); offering an extended set of “productized services”; growing the percentage of customer employees that use SAP products; and expanding sales of the NetWeaver-based platform and services.

“While it’s too early to gauge the success of these initiatives, SAP is clearly capitalising on the rapidly growing demand for enterprise applications in emerging geographic markets and non-manufacturing industries such as retail, public sector, utilities, and financial services.”