Sleek SAP Is Primed For Recovery – US-FOREX.US
When the economy recovers, some companies will come back with a bang and others will arrive with a calm “hello.” SAP seems content to go with the latter. The world’s biggest maker of business software surprised the market on Wednesday when it showed just how well it had done to keep a lid on costs in the midst of the recession: its operating margin for the second quarter came in at 27.7%, versus the 24.4% expected by analysts, compensating for a 40% slide in software sales. SAP’s American-Depository Receipts ticked up 0.8%, or 35 cents to 44.84 in New York on Wednesday morning. Its ADRs have risen by 8.30, or 23% since start of 2009. Yet for all the good SAP is doing with cutting costs, does have what it takes to revive sales? Jochen Klusmann, head of equity research at BHF Bank, thinks it does, and that SAP’s shares have further to climb. He raised his price target for the company’s Frankfurt-listed shares on Wednesday to 35 euros from 32 euros , after seeing the latest figures, and thinks SAP is making “great progress” in cost-cutting. The firm has already cut around 2,800 of the 3,000 jobs it had planned to remove this year. As, expected, most of those cuts have been in sales and marketing, leaving the company’s research and development division relatively sheltered. That should allow SAP
to launch innovative products once the economy recovers, but the job cuts also don’t herald a difficult recovery in sales. “The sales execution at SAP has historically been excellent,” said Rajeev Bahl, a senior research analyst at Piper Jaffray. In difficult economic times, such as from 2001 to 2003, SAP was able to protect its earnings growth through cost cutting, and then “were able to recover revenue growth quite quickly.” Still, that may only be small comfort to investors when comparing SAP’s 40% drop in software license sales with Oracle’s, which have only fallen by 13% in the corresponding period. When announcing its results on June 23, Oracle’s president, Charles Philips, said his company had taken market share from SAP “in every region around the world,” with its software business growing 5% in Europe while SAP’s contracted by 27%. Klusmann agrees that SAP has had a harder time than Oracle in keeping up sales during the recession. “Up until 2007, SAP has been gaining at the expense of Oracle
. But in the last two to three quarters, that has turned around,” he said.
Meanwhile, Oracle has a flashy new software product in the works, Fusion, which comes out next year and will link together the handful of different technologies the company has taken on through acquisitions in the last few years including PeopleSoft and Sun Microsystems. Fusion will essentially act as a successor to its existing products and, hopefully for Oracle, convince the thousands of customers it has taken on through acquisition to stick around. But Klusmann doesn’t see Fusion as being a big challenge to SAP. Rather than translate into substantial new business for Oracle, he believes the new software will only help maintain a steady flow of high-margin maintenance contracts for the company and compensate for the 30 billion or so that it has spent on acquisitions in the last few years. Fusion, he suspects, is also “not a visionary new product.” While Oracle has a bigger R&D team overall than SAP, only about a quarter of it is focused on business applications; pound for pound, SAP appears to have been putting more money into software applications research than Oracle anyway. Even if Fusion turns out to be the big new product that Oracle’s customers really want, it will be difficult to dent SAP’s 25-30% share of the global market for business software. Oracle still trails with half that, leaving about 60% of the market to capture from other players, either organically or through acquisitions. That’s where SAP could come in to play Oracle’s acquisition game. SAP’s chief executive, Leo Apotheker, was quoted as saying Wednesday that his company may spend as much as 5 billion euros on acquisitions to win market share from competitors. in cash on its books as of June 30, so asset sales or share swaps may be in the cards.) The tech industry has been awash with speculation in the last few days that that International Business Machines’
1.2 billion purchase of software maker SPSS will spark a wave of merger and acquisition activity in the software and computer sector. If SAP wants to fill its gap in banking software, some good targets might be British software company Misys, which produces the Midas software system used by lenders, and Teminos of Switzerland. But don’t expect SAP to make any big moves in that direction till around next year-its focus is still on keeping lean and mean.