Second-quarter results from the German software maker go a long way
toward restoring investor trust as it develops Internet-based software
SAP shares rose more than 6% after the company said that second-quarter
operating profits were up 10%, to $790 million on sales of $3.3
billion. The results reassured investors that the Walldorf (Germany)
maker of enterprise software can continue to maintain profit margins as
it spends $550 million over two years to develop software that will be
distributed over the Internet to business customers. "The company
managed to restore trust," says Knut Woller, analyst at Unicredit
Markets & Investment Banking in Munich.
But is the growth sustainable? SAP reported a 15.6% increase in
sales of software and software-related services in the quarter compared
to a year earlier. Much of the growth in that key indicator came from
customers upgrading to new products from SAP's warhorse R/3 software,
which companies use to automate business functions such as bookkeeping,
procurement, or logistics. However, Dan Sholler, analyst at market
researcher Gartner (IT), predicts that the upgrade revenue will tail off toward the end of 2008.
Huge Departure from Tradition
To keep the growth going, SAP is counting on its new Web-based,
software-as-a-service product, code-named A1S. The Web-based model
frees customers from having to invest in major computer infrastructure
and IT departments, and it makes SAP software more accessible to small
and midsize companies.
But the product, to be launched early next year, is also a huge
departure for SAP, which has traditionally sold software that companies
installed on their own computers. "[A1S] is not a product launch; it's
an entirely new business," SAP CEO Henning Kagermann told reporters on a conference call.
If all goes according to plan, the new product will generate enough
sales to compensate for a decline in upgrade revenue. If not, there's a
risk SAP growth could slow. "This whole A1S thing is a big bet that
they can get those revenue curves to cross," Gartner's Sholler says.
"If A1S doesn't go as they expect it to, there's a possibility that by
the end of next year they're going to be under some pressure" (see
BusinessWeek.com, 5/18/07, "SAP Caught Between Two Worlds").
Dominant in Enterprise Software
There's no question that SAP is one powerful company that has proven it
can master extremely complex software launches. "Everything is going
according to plan," Deputy CEO Apotheker says of the A1S development,
which cost SAP $69 million in the first half of 2007 (see
BusinessWeek.com, 5/16/07, "SAP's Tough Guy Ready to Rumble").
SAP continues to dominate the market for enterprise software. According
to company figures, SAP built its share of the $48 billion market for
so-called core enterprise applications to 26% in the last quarter from
23% a year earlier, compared with 15.5% for Oracle and 3.1% for
Microsoft. "They are a very good engineering company," Sholler allows.
And SAP has other growth areas. For example, Asia has become SAP's
fastest-growing region, with sales rising 20% in the second quarter to
$417 million, or 12.5% of total sales. India also is seeing
particularly good growth, Apotheker says, as companies there strive to
become as well-managed as their international peers. "They have high
ambitions for the future," he says.
Still, in a sign of caution, SAP executives did not raise their
forecast for the full year, despite the unexpectedly strong quarter.
"It's realistic guidance," Apotheker says, adding, "We feel we can
continue to perform very well."
Ewing is BusinessWeek's European regional editor.
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Beside he is writing some others blogs for notebook computer , computer training , computer software and personal computer
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