SAP turned in lower fourth quarter results than it had predicted earlier this year, claiming trouble in the Japanese market and a substantial currency impact from the Americas.
The enterprise resource planning (ERP) applications vendor confirmed earlier reports on Tuesday that its 1998 revenues were up 41 per cent to DM 8.47 billion, while its net earnings rose 14 per cent to DM 1.92 billion.
But Henning Kagermann and Hasso Plattner, SAP?s co-chairmen, say that despite the disappointing figures, they remain confident that 1999 will see a 20-25 per cent increase in revenues, with a ?slight? growth in net earnings.
However, the company still has major hurdles to overcome if it is to achieve its forecast doubling of revenues over the next three years. In order to understand its position, it is necessary to look at SAP?s figures and then relate them to what it says has and will happen.
SAP says that its shortfall was due to missed sales last quarter in Japan amounting to some DM200 million, and a DM40 million provision for economic instability in Russia.
However, it had not mentioned these problems before it issued its fourth quarter results, even though the management must have known in advance. Its sales cycles are such that SAP would at least have had strong indicators that trouble was afoot.
The company is also re-organising itself in a number of markets in the light of falling licence revenues as a percentage of overall growth. For example, it has brought its US and Canadian operations together and is refocusing its sales emphasis on vertical industry markets.
Rumours are circulating about certain levels of job cuts, but Kevin White, head of SAP America, says: "We have moved the consulting and pre-sales people ? we?ve effectively joined consultancy and sales, but there is no disruption to the sales force. We had an opportunity to be more efficient."
In Japan, there has already been a certain amount of blood letting, but again Kagermann smooths over the facts with talk of realigning the sales force along industry lines so that SAP can be more industry focused.
Depending on which territory is in question, this overall strategy is oddly flawed, however.
In Japan, analysts like Morgan Stanley believe SAP has penetrated about 70 per cent of the market, so realignment would seemingly only enable the firm?s more expert sales people to sell deeper into the same accounts.
And at a time when the Japanese economy is showing few signs of recovery, there are questions as to whether this could be put forward as a viable strategy.
In the Americas, on the other hand, SAP?s sales people have always sold into industry sectors, so if there is a general slowdown, no amount of staff re-jigging will persuade enterprises to bite at the line.
Plattner does not think this is the case, however. "I have a theory that once we get past the first quarter, IT will be looking for more projects as they will have done their year 2000 stuff," he says.
He is clearly viewing the reshuffle as an opportunity to start new sales cycles, presumably on the back of SAP?s business information warehouse and its Advanced Planner and Optimiser (APO) software initiative.
APO provides synchronised planning and collaboration among supply chain partners, and is central to the SAP Supply Chain Optimisation, Planning and Execution (Scope) initiative.
But even here, SAP is not without problems. Analysts such as Bruce Richardson at AMR Research believe the company is way behind supply chain specialists such as i2 and Manugistics.
And in a call with German press agency VWD, Kagermann also downplayed the possibility of making strategic acquisitions that would enable the firm to compete seriously in a growing market.
Elsewhere, while Kagermann declines to reveal the precise split between North American and European revenues for the fourth quarter, he says that growth was about 20 per cent in Europe and 28 per cent in the Americas.
However, in future, he believes there will be a slight decline in licence sales growth counterbalanced by a slight growth in other sales.
But the analyst consensus is that licence revenue growth in the Americas during the fourth quarter crashed to about 20 per cent from 50 per cent, which is why SAP is reorganising itself in that territory.
Kagermann counters this by saying that SAP will continue to sell its services deeper into existing accounts to continue its momentum, adding tellingly, that: "Margins will not be significantly affected."
This is an astonishing view when all the signs are that, like other maturing applications vendors, SAP will see margins decline as it moves towards being more service driven.
Jyoti Banerjee, managing director of Tate Bramald Consultancy, says: "Whenever a software company sells services, the revenues keep going, but margins fall."
And he does not see any reason why SAP should be different.
Kagermann, however, insists that: "We will have opportunities to sell product and services," and thereby protect margins.
While this would fit with SAP?s re-organisation scheme, it will also expose the supplier to competition from third parties such as Andersen Consulting, PriceWaterhouse Coopers, Cap Gemini and Druid, its traditional partners.
SAP?s management team is banking on aggressive pricing and the skills its sales and consultancy people have acquired while working with existing customers to outsmart its new competition.
If that doesn?t work, Plattner claims: "There is plenty of room for efficiencies," to reduce costs and so maintain the bottom line.
On the positive side, SAP claims it is beating the competition. Plattner says: "We have lost already one competitor with Baan and made significant win backs from Peoplesoft in Europe."
While it is true that Baan is retrenching into the mid market and has effectively withdrawn from the high end of the market, Plattner is referring specifically to a human resources applications deal that SAP won with Siemens.
According to Peoplesoft, however, it did not win the contract because Siemens reorganised itself in such a way that SAP was a better fit. Others say, on the other hand, that Peoplesoft lost because it still does not have adequate European payroll software.
And on this last point, SAP reveals its strongest card for long term growth - it is still the only package ERP vendor capable of delivering global backbone transaction processing systems.
In Europe, the company can also draw comfort from a recent IDC report.
Anne-Lise Wang, director of IDC's European software research, said: "Client-server did not die, it developed, and the same will happen to the integrated applications. Vendors will add new features and functions to their software to automate the front office, and will increase the vertical orientation of their products to penetrate several industries beyond manufacturing."
And SAP did report strong growth in sales to the public sector, which are now up to six percent of total revenues this quarter from four per cent in the year ago period. Growth in sales to the consumer goods and financial services markets were also evident.
While SAP has clearly signalled to the market that change is needed for the ERP market to sustain its growth, whether it has put the right mechanisms in place to achieve this remains to be seen, and for the time being its management is cautious.
As a result, Kagermann refuses to forecast first quarter growth figures for 1999. "It is a little early for us to say, we expect more homogenous growth across the regions," he says.
On the product front, Plattner also admits that, although the second version of the business warehouse is in development: "Like any other vendor, I?m never happy with the pace of development."
Overall, however, the market seemed satisfied with SAP?s explanation and analysis of its figures, and as a result, the company?s shares edged upwards $4.44 to $37.19 - although still well below the heyday price of $60.
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