Except among investment analysts, no news is good news. For investment analysts, no news brings out the worry beads. So it seems with SAP (SAP). Investment analysts were all over on-target Q3 results and slightly improved full year guidance from SAP at an October 18 quarterly conference call. They peppered SAP executives with number-crunching questions, picking apart changes in expectations by row and column. For example, compare license revenue in the Americas but back out last year’s $31M reversal? What about Business ByDesign (BBD) capital expenses vs. milestones announced two years ago? Wasn’t Germany soft? (Yeah, it was summer in the Northern Hemisphere in Europe.) But if full year 2007 is going to be x-metric better than 2006, doesn’t that mean Q4 2007 is going to be softer than Q4 2006? One analyst wanted SAP to release local costs in local currencies.

To be fair, the analysts are nervous about the information technology (IT) market overall, and SAP is more likely to give out more useful detail than other IT suppliers. So there is a tendency to ask SAP questions that if answered help analysts fill in cells in overall IT market models.

But the net-net for SAP at the end of Q3 2007 is threefold. SAP said it will grow faster in 2007 than in any of the last three years. Key revenue metrics are growing at the same rate as key competitors adjusted for currency. (SAP gets a negative effect from the Euro appreciation vs. the dollar whereas U.S. based competitors gets an extra bump.) User counts—the metric SAP wants to be measured by—continues its upward trend.

Basically, nothing has changed positive or negative since many of the same questions were asked and not answered at last week’s TechED, the announcement about acquiring Business Objects (BOBJ) a couple of weeks ago, last month’s BBD announcement, and last quarter’s conference call. So naturally the non-answers haven’t changed either. SAP would not comment on Oracle’s (ORCL) bid to acquire BEA (BEAS). In fact, it wouldn’t even comment much about SAP’s bid to acquire Business Objects.

Investors do still have to cut through SAP’s possibly misleading core enterprise applications vendor share claim as well as the statement that “we would have made more money if we weren’t rolling out BBD but we’re investing in the future.” The latter statement isn’t very actionable for investors because presumably every successful company is investing in the future. As for the former, is NetWeaver growth somehow included in SAP’s “enterprise applications” calculation? Are Netsuite and Salesforce.com (CRM) considered competitors? Still, the SAP market share claim is no more egregious than Oracle’s claim about its place in the middleware market as Oracle defines it.

In both cases, the companies do not release the numbers needed to verify the claims. So ignore them. Do not invest in SAP simply because you think it is gaining ERP market share; it is not gaining share in ERP vs. Microsoft (MSFT) and Oracle.

But the rest of the news is that there was no new news.

–Dennis Byron

Tags: SAP, Oracle, NetWeaver, middleware, ERP

Back in July, I read the IBM (IBM) and SAP (SAP) Q2 conference call transcripts and said it was a time to just lay back and enjoy the sun. The two company’s quarterly financials made for good beach reading. There would be plenty of time when the leaves turned here on Cape Cod to dig deeper, I said.

Hello Columbus Day!

In response to that post, dolphl2man wrote in and said, “Hi Dennis I agree with your feelings on IBM and SAP. There has been chatter regarding these two companies getting together. Any thoughts?” I responded, thinking of comments by SAP founder Hasso Plattner made a year earlier, that it’s always fun to “what if” but I really don’t believe IBM wants back into the “ERP applications” game (having exited in 1991). There are multiple reasons but the most important are channel conflict and IBM’s strategy of becoming almost totally a services provider. Happy and peaceful coexistence.
Then after SAP’s Business ByDesign (BBD) announcement, I thought about dolphl2man’s question some more. Rather than getting together, I think SAP might be in for a fight with IBM. At BBD time, I noted that BBD puts SAP right up against its long-time partner Microsoft as well as Inuit (INTU), and salesforce.com (CRM). I noted that SAP also needed to build a BBD ecosystem from among Microsoft, Intuit, Lawson (LWSN), Infor, and so forth partners.

Now I realize that in Lawson, and Infor and that “and so forth,” and after all these years, IBM is still the one. IBM is actually SAP’s biggest competitor in its strategic move into the small/medium enterprise (SME) market with BBD. (For SAP, by the way, SME really means just “M,” the medium enterprise.) Although IBM does not directly “own” the applications intellectual property in this segment, it partners heavily with all those that do. That includes not only the Intentia and heritage wings of Lawson but as many as 10 pieces of Infor, including the original IBM Mapics ERP software buried within Infor. There are also dozens of small industry-specific application suppliers, especially in all types of wholesale distribution, and even the JD-Edwards (JDE)-heritage portion of Oracle (ORCL). These suppliers have dominated the mid-market for decades. To be successful in its goal of doubling its customer count by 2010 with Software as a Service (SaaS)-paying BBD customers, SAP has to “unhook” thousands of IBM AS/400s (iSeries, or whatever).

Of course, ERP is not just MRP-plus anymore but most of these AS/400-heritage application suppliers have kept up by adding supplier and customer relationship management (SRM and CRM) modules that approximate the freestanding SRM and CRM suppliers’ products in functionality. This is the same functionality that BBD touts as superior to Microsoft, Intuit and other more “S” oriented BBD competitors. And as a group the IBM partners cover industry-specificity at almost the four-digit SIC level.

All these suppliers are already moving or will be moving to a SaaS delivery methodology if BBD and Microsoft market dynamics force them. And more good news for IBM and bad news for SAP; these long-time partners will use IBM to help them make that move. IBM WebSphere middleware will underlay much of the necessary software re-engineering to make it happen and IBM’s services groups can even provide the hosting. Looked at as a group, the IBM ERP lineup is much more functionally capable to serve the mid-market than the multiple Microsoft (MSFT) ERP offerings grouped under the Dynamics brand. (Note: Oracle management said as recently as its most recent conference call that it did not want to get into this space, deftly dodging the point that it is already heavily into the space because of JDE.)

–Dennis Byron

Tags: SME, ERP, CRM, SRM, SaaS, AS/400, iSeries, SAP, IBM

In acquiring Business Objects (BOBJ), the conventional wisdom is that SAP (SAP) has given in and adopted Oracle’s growth strategy. I actually think the acquisition was still more tactical (what SAP calls “tuck-in”) than strategic. It’s just that the tuck requires letting out more than a few holes in the belt. But, without changing strategy, SAP has bought into many of Oracle’s technical problems. That might be more an issue than if SAP had simply changed acquisition strategy.

First, did the acquisition represent a strategy change or a tactical move consistent with the already announced tuck-in strategy? At the conference call, Henning Kagermann confirmed that this was not a change and checking past conference calls, I agree. Because of SAP’s own presence in business intelligence (BI) and analytics, the acquisition only slightly increases the “addressable market” SAP is aiming at for 2010 (from $70 billion to $75 billion). But it does allow much faster penetration of what SAP calls the enterprise “business user” role, in the first leg of the strategy stool, growing SAP’s business process platform business. Kagermann estimated that the acquisition accelerated time to market relative to the business-user role by at least a few years. SAP made the analogy that this acquisition increases business user penetration in the same way that the earlier Versa, Pilot and Outlooksoft acquisitions did.

The acquisition does not change SAP’s other two strategic legs: entering the small/medium enterprise (SME) ERP market with Business ByDesign (BBD) and growing SAP’s middleware business (already over $1B annually and on target to overtake Oracle). These second two objectives are actually bigger pieces of SAP’s 2010 growth objective than the business-user role expansion enabled by the Business Objects acquisition.

But the bigger issue is that SAP now faces many of the same incompatible architectural challenges faced by Oracle with its many acquisitions. At the conference call, the talk was all about keeping Business Objects independent and only leveraging synergies in business infrastructure. For example, Business Objects might drop salesforce.com (CRM) and become a BBD user.

But product infrastructure was also mentioned with some tantalizing hints that the two entities are already thinking about things like incorporating BI Accelerator into the Business Object suite for example or having the Business Objects suite use SAP’s master data management NetWeaver functionality. The Oracle-like analogy is that Business Objects was only just beginning to normalize the four separate architectures in its suite, and SAP had not yet integrated Pilot and Outlooksoft into BW. The whole line-up is a mishmash of products that were not scheduled to come together for four-six more months even when the companies were separate. Assuming this mishmash can be decomposed into true services and re-hosted in a services oriented architecture (SOA), this will be a good test of NetWeaver’s enterprise SOA capability.

There was also talk of a joint portfolio of industry-specific BI products, which Business Objects lacks as discussed here last month. There was also a lot of talk about that old term, Operational BI, combining SAP’s ERP with BI.

Although not mentioned in the conference call, there was also a lot of blather in the blogosphere about this being some kind of EU play. Let’s see what Neelie Kroes of the EU Competition Commission (EU CC) thinks of the deal? If the EU CC fails to look at this acquisition after squashing GE and Honeywell a few years ago, it will prove that the EU is not anti-competition, just anti-American.

–Dennis Byron

Tags: business intelligence, ERP, services oriented architecture, NetWeaver, EU

Tags: business intelligence, ERP, services oriented architecture, NetWeaver, EU

Sorry, SAP (SAP), I am a great admirer but Business ByDesign (codenamed A1S) has a few problems. The name is too long, the beta set of users is too small, the price is too high, the reference implementations and demos are too much old SAP, and the channel strategy is too 20th century. The name issue is no big deal; let’s just call it BBD. The others will require a lot of work to overcome because BBD is the linchpin of SAP’s objective of 100,000 users by the end of CY 2010. SAP doesn’t consider BBD to be in “volume availability” until 2008 so there are a few months left to work out the kinks.

SAP says the small/medium enterprise (SME) BBD solution is already helping “an inaugural group of 20 live customers” in the United States and Germany. I’ll have to dig out some old notes but I think SAP had more beta users when it brought Pandesic to the same market with the same delivery-model/channel strategy10 years ago. Given SAP’s estimate of 1.5 million prospects in the 100-500 employee market band (60,000 in the U.S. and Germany alone), 2000—not 20—is the reference threshold it needs to shoot for. SAP BBD is available today for selected early customers in the United States and Germany, with the “opportunity now opening for early customers in China, France and the United Kingdom.” Hopefully there is multiple-thousand-client business in that pipeline given the test marketing that has been ongoing this year. During 2008, BBD is planned for expansion to countries such as Australia, Canada, India, Italy, Mexico, the Netherlands, the Nordic region, South Africa and Spain.

There is good news in the fact that the solution was built from the ground up on SAP NetWeaver. Its host in the Software as a Service (SaaS) delivery model will reportedly use SAP’s own MaxDB open source software database and Unix. But do companies with 100-500 employees even have someone that can use SAP BBD Business Designer?

The indirect channel is of course key to the SME market and the eventual success or failure of BBD. That is not the same as saying it will be sold indirect (such as via telemarketing). SAP needs to and says it will “rely significantly on its partner ecosystem strategy” to drive the SAP BBD offering. The only ecosystem member announced or on SAP’s website as of noon ET 9/19 is ADP. Some of its All-in-One-brand partners were shown on videotape at the press event but that makes channel overlap (SAP used the word “cannibalization” in the Q and A session) a real concern.

And most important, a minimum $4000-5000 per month price tag just does not feel “affordable and easy to adopt.” I am not even sure per-user pricing is even the way to go but I need to do a little more research on that issue. I am guessing SAP’s current SME installed base might be part of the pricing equation. SAP has a lot of customers in the 100-500 employee market band, especially outside of the U.S. That base could be used to build the BBD reference base quickly. But what would extensive customer migration from All in One to BBD do to the revenue flow from those current customers?

As Research 2.0 has discussed in its annual review of SAP, SAP BBD complements the existing Business One, Business All-in-One and SAP Business Suite (nee R/3) solutions. Business One is designed for the small business segment, while SAP Business All-in-One is built “specifically for midsize companies that need deep industry-specific functionality,” what SAP calls microverticals (of which it has hundreds).

The offering puts SAP right up against offerings from its long-time partner Microsoft (MSFT) as well as Inuit (INTU), salesforce.com (CRM) and many others. It will not be just a matter of competing for customers, as SAP is used to. SAP will have to get its BBD ecosystem from Microsoft, Intuit, Lawson (LWSN), Infor, and so forth as well.

–Dennis Byron

Tags: SAP, midmarket, ERP, CRM, SaaS, NetWeaver

Not everyone knows SAP like they think they do.  Our senior analyst, Dennis Byron, released a 14-page report to our clients earlier this week that delves into some of the details behind the SAP evolution in functionality and architecture, the market, and the competitive environment.  SAP is a larger player in middleware and tools than most realize and can sit at the same table with IBM, BEA, and Oracle.

Here is the full summary:

SAP is focusing on growth in mid-market and smaller companies by grappling with the related industry trends of both architecting its next generation service oriented architecture (SOA) and deploying the resulting software as a service (SaaS). The complexity of that two-pronged task makes 2007 a building year in Waldorf. SAP has emphasized publicly that it will not reach “volume readiness” in SaaS (and implicitly SOA) until 2008. There appears to be little if any optimism built in to the current share price regarding SAP’s ability to leverage these recent industry trends. SAP stock has dramatically underperformed both Oracle and Salesforce.com by a wide margin over the past few years.

We want to be clear however that SAP’s dominance of large enterprises is quite secure and profitable owing in major part to its comprehensive industry-centric application functionality. Our analysis suggests that the strategy SAP has for long-term growth is credible but that it will take some time to be reflected in operating results. The current company valuation appears to underestimate the value of the SAP franchise, its dominant market share in applications, and its current strong financial position. Our long-term valuation methodology suggests a share price of $52 if the company can be moderately successful in executing its plans.

– Kris Tuttle

Tags: SAP, IBM, Software, ERP, Microsoft

It’s summer time (at least here in the northern hemisphere), and the living is easy here on Cape Cod. And the quarterly earnings announcements from leading information technology (IT) suppliers SAP (SAP) and IBM (IBM) make pleasant beach reading.

In looking at their reports, I am going to do my best not to rain on anybody’s beach or boat or golf bag. There is nothing I heard this week that changes my past opinions, which were generally favorable already on these two leaders in their sectors. The yellow flags and foreseeable downsides are already factored in.

Here are the good things I heard:

• IBM had its best revenue growth quarter since 2001. IBM made it clear the “tough compares” start in 3Q and 4Q, so for now sit back and read that beach book.

• SAP software and related revenue was strong for 1H and stronger for 2Q, going into the European slow period. Yes, consulting is flat but that’s not new news. It’s just that no one’s really using the new R/3 stuff yet—just licensing it at great prices. So cut the engine and drift with the current (You’re not in a major shipping channel are you?).

• The IBM problem in the Americas in 1Q must have just been ice storms in March or something because the boys on the company softball team hit a home run in 2Q.

• SAP lifted the kimono a little more on A1S. Keeping with my summer “good times” theme, I will not mention that the first thing that came to mind when I read “A1S appliance” in the transcript was Pandesic (but I think Henning said that was what some customers in Europe wanted—the customer is always right). More important, countering one of my major criticisms of SAP, I now believe there is a supervisory board member with “channel” on his forehead; it’s Henning himself.

• IBM’s plan to almost double EPS by 2010 was prodded and probed by the mainstream financial analysts six weeks after it was implemented the same way the mainstream U.S. consumer press is prodding and probing the U.S. armed forces about its surge plan in Iraq six weeks after they got there. At least give it the summer to work guys.

• SAP’s customer base was up 3,000 in the first half, including some 400 R/3 customers so the core is growing again whereas it had been almost flat in 2006. And SAP counted 800,000 Duet users (upsells today) and almost 2,000 Business One customers (upsells tomorrow).

• IBM says organic growth in the branded middleware segment is beginning to account for “over half” of branded middleware growth. There’s a little overparsing of a “the glass is half full” philosophy in this claim (it’s the flip side of upcoming “tough compares” after all) but these numbers are definitely going in the right direction.

• SAP talked about its pending 1B euro year in middleware revenue. As I detail in our new report on SAP, it could have really rubbed Larry’s nose in it in terms of how quickly SAP reached the $1B level. But discretion is the better part of valor given the Tommorow lawsuit. Also, I must have missed this earlier but it is also good news that Sungard will be a NetWeaver Inside application supplier. I am a little leery of the use of the term “hub concept” by anyone developing modern middleware, but it’s summer time, so I’ll wait for the first leaves of fall to dig into that line.

• IBM says it can meet its EPS goals via selling more new software products (in proportion to older software products I guess) and virtualization. I’ve already disagreed with the former and agreed with the latter so “play away.”

• SAP added two GEA contracts. It’s not SaaS, but it’s real money in the bank even if not recognizable revenue this past half.

• Finally, despite my concerns in the spring based on both company’s 1Q reports, macroeconomics looked good according to both. SAP was seeing a little bit more robustness in Europe than in the U.S. and both see boom times in A/P.

So sit back, and breath the salt air. The snow will fly soon enough.

(And for all of you readers in the southern hemisphere, most of you have nice weather all year round anyways so forgive my geographic incorrectness.)

–Dennis Byron

Tags: IBM, SAP, middleware, ERP

Back when Oracle (ORCL) vs. SAP (SAP) hit the fan in late March/early April, I said some quiet settlement would occur on some day when no one was payiring attention to information-technology (IT) news such as Christmas Eve or July 3rd. Well I was half right. Today is that slow news day in the U.S. As a result, there were only hesitant questions from journalists and investment analysts at the initial SAP press conference on this subject (another will be held at 11:00 AM EDT on July 3). SAP’s answers were equally tepid, mostly the standard “can’t comment on ongoing litigation” or wording almost identical to the court filing. Neither SAP’s oral or written responses were the mea culpas they should have been.

In its response to the District Court, SAP admits on the first page: “certain downloads… may have erroneously exceeded (its) customers’ right of access.” On page 13 of the filing, SAP admits that it ripped off the daylight-savings-time booklet that someone at Oracle wrote. Every other word on this case by SAP and Oracle (and me) is wasted breath.

Disturbingly in its filing SAP did not really concede wrongdoing. It wasn’t grand theft according to SAP, it was just petty larceny. SAP says it denies Oracle’s claims of “heavy downloads,” using the Bill-Clinton defense that it does not know what the definition of heavy is. SAP says only Oracle knows if SAP downloaded 10,000 documents it shouldn’t have so it denies the allegation. Similarly dancing on the head of a pin, SAP makes a distinction between TomorrowNow and corporate headquarters that is likely legally correct but ethically defective. SAP apparently even denies that Oracle software includes databases, middleware and applications.

Coincidentally, a related case has been opened by the United States Department of Justice. Unfortunately from an SAP and Oracle investor’s point of view this is starting to get expensive. Once SAP knew that even one document had been taken inappropriately, it should have used the court system to aggressively reach a settlement. SAP indicated that it would negotiate according to U.S. court regulations but did not want to concede anything at this point because most of Oracle’s allegations were unfounded. Admittedly most of Oracle’s narrative reads like a dime novel but the key allegations appear to be spot on.

Meanwhile companies such as Rimini Street reap the benefits of Oracle reminding users that third-party options exist out there. Rimini, one of the leading independent maintenance and support providers and founded by the guy that sold TomorrowNow to SAP I believe, announced Monday that both 2007 new client sales exceeded plan with strong consecutive quarter-over-quarter growth and expansion. Rimini Street officially began serving the Canadian market in Q2.

Rimini says “Thanks Larry.”

–Dennis Byron

Tags: SAP, Oracle, Rimini, maintenance

Barring a last-minute overnight settlement, the Oracle (ORCL) vs. SAP (SAP) law suit concerning the shadowy third-party software maintenance market and copyright infringement goes to court this morning June 6, 2007, in San Francisco. Based on my years of watching Law & Order, I was betting this petty case would get quietly settled out of court on July 3 or December 24. But based on Oracle’s amended complaint, filed at midnight June 1, this is going to be more like the Florida election “hanging chad” case than any episode of Law & Order.

And like the hanging chads, the allegedly missing Oracle/PeopleSoft/JDE maintenance manuals may end up in the Supreme Court if you are to believe the PR spin from both sides. (I predict that, unlike with the Law & Order district attorney, Larry Ellison won’t end up running for president.)

The case is already on its third judge, because SAP declined to deal with a magistrate and the next judge assigned recused herself. The third judge set a case management conference for August 7, blowing one of my key dates out of the water. All of which means this could go on for a while.

Oracle is going to court to ask that SAP be ordered to preserve the evidence of its wrongdoing. That’s all the June 6 court date is about. Oracle has enlisted Kevin Mandia as an expert witness to point out the obvious: Disks get erased in the normal course of business. SAP’s “internal investigation” might even inadvertently cause a problem—wink wink.

SAP seems indignant about the charges (pending that “internal investigation”) not to mention the implications that it might destroy evidence. SAP implies (according to Oracle filings) that Oracle is on a fishing expedition—wink wink.

So just as a reminder, what is this all about?

Primarily, Oracle says SAP went on its (actually PeopleSoft’s) Customer Connect web site using the login/password of new SAP/former Oracle customers and took copyrighted material. Misusing (such as plagiarizing) copyrighted material is bad but reading it isn’t, especially if you have the login/password. Users and vendors I have talked to say this sort of thing is common. When IT users switch maintenance vendors they typically still have a valid contract with the previous maintenance vendor during some cut-over period. If the contract had ended, it is unclear why Oracle did not shut off its former customers.

Oracle’s amended complaint leads with the copyright infringement charge among its 10 allegations, whereas the initial complaint filed in March did not claim copyright infringement among its 11 allegations. That appears to me to be a bit of backing off from the original complaint that led with fraud allegations but to be clear, the use of the word “whereas” in the previous sentence is the extent of my legal expertise. Nefarious things such as unjust enrichment and doing something that sounds obscene to chattels are still in the complaint. Really nasty charges like aiding and abetting and conspiracy have been dropped. One thing I didn’t understand—Any lawyers out there who can help us out? —is that in Oracle’s copyright infringement claim listing copyright registration dates all the dates listed were after the original lawsuit was filed.

So I’m back to where I was in March. I wonder how widespread this bailout by JDE and PeopleSoft users is.

Oracle says the alleged theft occurred not back when the acquisition was pending in 2003/2004 (when, theoretically, the users being “acquired” were rightly concerned about Oracle’s intentions) but just a few months ago (when we’ve been told the acquired users were all happy as can be with the acquisition). The list of customers in the complaint reads like one of Oracle’s quarterly “new customer” press releases. Merck and Honeywell are called out specifically in terms of showing pre-2006/2007 patterns and comparing them with the last few months, and Yazaki has been added.

–Dennis Byron

Tags: Oracle, SAP, software maintenance, copyright infringement,

]]> http://blog.research2zero.com/2007/06/oracle-vs-sap-an-episode-of-law-order/feed/ 1