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The SAP Turnaround – Finally Back on Track?

by Dr. Berg

September 27, 2011

After extreme expansion in the last two decades, has SAP lost steam? That is the question from many customers and investors. In this blog, we look at the mixed messages from the performance of SAP during the recession and explore may lie ahead for one of the largest software companies in the world.

by Dr. Berg

SAP Behind The Technology Leaders – Market Cap.

In an era with the largest technology companies being Google (473), Apple (377), Microsoft (215), IBM (213), Oracle (152), Amazon (102), SAP (61), HP (47), Ebay (24), Yahoo! (19) – in billions of dollars of market capitalization, has SAP run out of steam?

Some companies spent the last decade beefing up service organizations (IBM), others consolidated ERP and hardware capabilities (Oracle), or launching new technologies such as tablets and smart phones (Apple and Google). Some expanded their e-commerce marketplaces into SaaS and platform sharing (eBay and Amazon) while others expanded their offerings into new markets (Microsoft).

So what has SAP done?

SAP has been on a somewhat slow buying spree. In the 2000s SAP bought TopTier and improved their portal solution. This was followed by the acquisition of Outlooksoft (now BPC) when SAP went after the Hyperion financial consolidation (Hyperion was bought by Oracle). This was followed by acquisition of Sybase for in-memory capabilities and mobile solutions and the purchase of BusinessObjects for improved analytical tools.

It has been a mixed bag of results. In the last five years SAP’s revenues increased an anemic rate of 5.8%. Profits actually fell from $1.87 billion in 2006, to only $1.81 billion in 2010. However, this does not tell the whole story. There has been a turnaround at SAP that has received little press.

The SAP Turnaround

SAP’s revenue ‘exploded’ by 17% between 2009 and 2010 and the company seems to be ‘on-fire’.

This increase did not come from Sybase sales alone, even though those sales increased by over 9%. There were organic sales growth as well (over $600 million actually). Profits grew by 19% in the first quarter of 2011 (from 37 cents per share to 44 cents) and in the second quarter it grew by 28% (59 vs. 46 cents).

On October 26th, it will be interesting to see what SAP presents in its next quarterly earnings. I expect it to be an eye opener…

Not All is Rosy - the Need for a Faster Release Schedule

Right now SAP is rolling out HANA for in-memory processing and the BOBJ acquisition seems like a good one in hindsight (even though the price tag of $6.8 billion seemed steep at the time).

With revenues increasing and a good set of products in the pipeline, SAP may be poised to deliver value to both customers and investors who have been disappointed over the last decade (SAP shares traded at $61.50 ten years ago and today they trade 17% lower at $51.14).

I believe that the key to success now lies in a much more aggressive go-to-market release strategy. The wait for HANA has been too long, the rollout of the new BW 7.3 release was slow (7.2 was cancelled), making BI 4.0 generally available in the USA six months after the product was ‘released’ in Europe is inexcusable.

However, I take heart in seeing that SAP has increased R&D expenses by $394 million over the last five years, and SAP finally seem to get that mo bile technology, and the use of the Sybase tools they acquired, are key to the success in the near term. I cannot wait to see how they integrate this into the BI and BOBJ tool set.

Summary

SAP has been in the technology wilderness for a while, but I believe we finally are seeing cool products brought to the market and a possibility that SAP may gain its former glory as a technology innovator.

But the field is crowded; the ‘train has left the station’; and SAP simply has to compress its release strategy substantially to stay competitive...

More ponderings to come...

Dr. Berg

PS! The facts and figures in this blog are based on data from Yahoo finance and Scottrade and have not been verified. No comments in this blog should be construed as investment advice or recommendation of any kind.

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COMMENTS

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John Studdert

9/25/2013 8:58:02 PM

First off, we have to enter a CAPTCHA just to post on a blog even though we're already logged in? Really?

Secondly, thanks for an interesting blog. Totally agree in particular on the mobile market being a huge growth area. There's always a nitpicker I know but have to point out your list of market capitalisations is a bit off to say the least - Google are nowhere near that big (no company is!). Their market cap is currently ~US$163bn. You've also left out Intel (~US$115bn) who based on their size and also general impact on the IT industry are an odd omission.


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