SAP AG, after a less-than-stellar second quarter, rebounded nicely in its third quarter of 2006 with a 16 percent increase in new software license sales.
In the third quarter, announced Oct. 19, SAPs new license revenues rose to $866 million. But while SAP beat analyst expectations of $848 million in new license sales the company put a damper on its full-year software earnings expectations.
SAP is sticking to its guns with expected license revenue increases between 15 and 17 percent for the year, but said that the company is unlikely to reach the upper end of its guidance.
“From todays perspective, it appears less likely that product or software revenue growth will reach the upper end of the aforementioned ranges,” said SAP Chief Financial Officer Werner Brandt, during the companys Q3 earnings call with analysts and press.
Despite the cautious gesture—which some analysts suggest stems from increasing pricing pressure from main rival Oracle—SAP did say that it is likely to exceed its earnings-per-share guidance for 2006 of $7.32 to $7.54.
SAPs third revenues of $2.84 billion were in line with analyst expectations.
SAPs CEO Henning Kagermann said pricing is “tough but its stable.”
During the earnings call, SAP pointed to some strong metrics for growth in the quarter. In the midmarket the companys channel partners grew 22 percent and customers grew 36 percent.
NetWeaver, SAPs integration and development platform, took in $526 million for the quarter, with 21 percent of earnings from stand-alone sales.
SAPs ecosystem also continues to grow, with about 1,500 companies now “powered by” or certified on NetWeaver, and a growing software developer network with one half million registered developers.
“Our market share stood at 22.6 percent at the end of the third quarter,” said Henning Kagermann, during the Oct. 18 call. “That compares to Oracle at 9.9 percent and Microsoft Business Solutions at 4.9 percent.”
Kagermann said SAPs market gain is driven by the companys strategy to grow the company organically, rather than by acquisitions. “In a nutshell our organic strategy has allowed us to win,” he said. And for the most part, Kagermann is right.
In the face of Oracles double-digit billion dollar spend on software acquisitions over the past two years, SAPs several technology buys—A2i, for example—look tiny in comparison.
And the company has continued to deliver on its Enterprise Services Enterprise strategy, announced three years ago, on a timely basis.
But one thing is clear, Oracle has SAP running—maybe not for market share, but for market perception. Some analysts agree.
“While SAP clearly holds the lions share of the enterprise applications market, Oracles aggressive marketing and interpretation of data seem to have put SAP on the defensive,” wrote Software Business Quarterly senior analyst Stuart Williams in a research note released Oct. 19.
“While SAP forced Oracle to spend $20 billion to aggregate a competitive applications portfolio, Oracle is forcing SAP to refute a continuous string of claims of customer defection, of market share losses, of missed product deadlines and broken product roadmaps.”
During the Q3 earnings call, both Kagermann and Leo Apotheker, president of customer solutions and operations, refuted a recent claim by Oracle that it had nearly 100 recent market wins over SAP.
Expect SAP to Buy
“We looked at the claim—Oracle claimed 88 head-to-head wins against SAP—and they only identified certain names, which we analyzed. Our analysis is that we chose not to compete in one deal; six were not competitive deals; 12 we had no record of, we were not in the game; seven were not a win against us; and four were losses to us.”
Apotheker said that to put those numbers in perspective, out of 247 competitive head-to-head deals against Oracle, SAP won 209.
“That is an 85 percent win rate,” he said.
Last month, SAP spent a significant amount of time fending off Oracles claims that its software license grew 80 percent, while SAPs grew eight percent.
SBQs Williams believes that for SAP to increase growth it may have to modify its organic growth strategy and buy some companies.
“With more than $1.3 billion in free cash flow and $3.5 billion in cash and marketable securities, TBR believes SAP may attempt a string of smaller acquisitions to continue to fill in its portfolio with products it can directly leverage for revenue growth, such as compliance, analytics and vertical industry expertise,” wrote Williams.
“Should the scope of potential acquisitions expand to acquiring market share, SAP may find itself bidding against Oracle.”
Oracle, which has amassed more than 20 acquisitions over the past two years, has said recently it will continue to buy companies.
Despite its ongoing row with Oracle, SAP said its on target to with its 2010 aspirations of generating 40 to 45 percent of order entry from the midmarket—a big area of focus for SAP and Oracle as the enterprise deals shrink ever smaller.
The growth is evidenced by SAPs customer and channel partner growth in the quarter—22 and 36 percent respectively—and is predicated on the introduction of new products in the next two-year time frame, according to Kagermann.
“At the end of 2005, we will enter the first pilot customer testing of our enhanced midmarket platform, our next All-in-One version delivered on the mySAP ERP 2005 platform [SAPs new services-enabled ERP suite],”said Kagermann.
“[SAP will also introduce] a new midmarket product featuring new deployment models with a flexible architecture that helps customers better compete.”
During the Q&A session of the Q3 earnings call, when pushed for more specifics on the timeframe of the product with a new delivery model, Kagermann said more clarification would be provided during a December analyst event in Las Vegas.
But he hinted just a bit at what SAP is up to.
“This will not have a normal ramp up, thats the reason I mentioned alternative deployment models,” said Kagermann.
“If it were just on premise, it would be a normal ramp up, but that is not the case. There is some embedded IT service in it, so from that point it will be a different type of launching to the market. In this case we will do it carefully and do everything right.”
Again, Kagermann hinted: “Give us a little time … because we will not stay in CRM only. We are working on that and will give more indication later in the year.” On-demand ERP for the mid-market, perhaps?