SAP Forecasts Double-Digit Growth for 2004
SAP reported solid results for FY03, but then shocked everyone by predicting 10% growth in license revenue for 2004. This is particularly surprising, given that license revenue declined by 6% in 2003, and, for the last several years, the company has been unwilling to provide any revenue guidance because of market unpredictability. On this earnings call, the SAP executives were optimistic about the recovery of the applications market and the size of their current sales pipeline. In recent quarters, SAP has seemed largely focused on improving profitability, but Chairman and CEO Henning Kagermann declared unequivocally that in 2004, “license growth is priority No. 1.”
The Bottom Line: Going after a variety of company types and sizes to reach this goal will require SAP to communicate with its customers better and be much more flexible.
What It Means: SAP, like many of its competitors, has survived the economic downturn by farming its installed base rather than hunting new accounts. The management team believes that the market is growing again in North America and beginning to recover in Europe, and it intends once again to be very aggressive about pursuing new business. While this upbeat forecast bodes well for the entire market, SAP’s rivals won’t be happy to hear that SAP is hiring more salespeople and increasing its already massive Research and Development (R&D) investment. But existing and potential customers can only benefit from the fight.
The Numbers:
- Total Revenue: EUR 7.0B, down 5% from 2002 (up 3% at constant currency)
- Software Revenue: EUR 2.1B, down 6% from 2002 (up 1% at constant currency)
- Net Income: EUR 1.1B, up 112% from 2002
- Earnings Per Share: EUR 3.48, up 112% from 2002
SAP America had the most impressive results, with a 23% increase in license revenue (in U.S. dollars) from 2002. While the U.S. economy is leading the economic recovery, the results are also a reflection of the excellent job that Bill McDermott and his management team have done in rebuilding and motivating the U.S. field organization. SAP Germany also came back with excellent results in the second half of the year, including a 17% increase in license revenue in Q4. SAP management believes that this is an early indication that the European economic situation will improve in 2004.
SAP’s business has changed substantially. The company’s average deal size fell 23% in 2003, while deal volume rose 13% for the year and 21% in the fourth quarter. Part of the reason is the increasing number of midmarket sales, but it is also a strong indication that even large companies are buying application software in much smaller increments. Such phased commitment by customers is likely to continue for a long time, and it will change the way software vendors package, price, and sell their products.
Conclusion: SAP is coming into the year with a great deal of momentum and a commitment to start growing again. It has consolidated its market share among large companies, assumed the leadership in Customer Relationship Management (CRM) in Manufacturing and Supply Chain Management (SCM) segments, and is making real progress in the midrange and low-end markets. A customer base of more than 20,000 companies is certainly an enormously valuable asset, but it is also a major hurdle for SAP. The company still doesn’t do a great job of communicating product information and strategy to all those customers, and it has not been very adept at creating specific messages, contracts, and products for the different types and sizes of customer. These companies as well as prospective customers have an increasing variety of needs, expectations, and priorities. If SAP is going to serve organizations of many sizes and across different industries, verticals, and geographic areas, both its products and its policies must become much more flexible.
AMR Research originally published this article on 8 October 2003.