SAP: Financials Are Rosy, But Trouble Is Brewing in the Ecosystem

For a company that generates a dearth of media attention outside of tech circles, SAP has generated a fast and furious string of exploits as of late.

There's been no shortage of intrigue: corporate scandal and embarrassing lawsuits (courtesy of Oracle and Waste Management), outrage from SAP's own customer base (sparked from maintenance fee increases), failings in new business models (see TomorrowNow debacle and Business ByDesign troubles), drastic need for SAP skillsets in the ecosystem (related to classic supply and demand talent shortages) and the near constant marketing wars with No. 1 competitor Oracle.

That's all been the bad news. And it's significant.

The good news to SAP executives and shareholders has been SAP's recent financial success. On July 29, the German software giant reported solid second-quarter financial results and brightened its overall outlook for 2008. That sent its shares up more than 6 percent that day, despite the fact that SAP reported a net profit of $641.6 million for the second quarter, which was down 9 percent from the same time in 2007.

No matter, said top SAP execs: Business remains strong.

But that quarterly financial snapshot is far too short-sighted to serve as an accurate assessment of SAP's overall health. When taken together, all of the aforementioned and seemingly disconnected problems point to looming, significant challenges on the horizon, adding up to more uncertainty than I'm sure SAP executives are willing to let on in those canned conference calls.

Business ByDesign, for example, was supposed to show that SAP understood customers' desire for software-as-a-service products and that it could offer both on-premise and on-demand ERP applications to small, midsize and large enterprises. So far, "the product has been set back by a variety of issues resulting in reduced ramp-up projections and funding," notes Forrester Research analyst Paul Hamerman in a recent report. SAP execs have told Hamerman that the Business ByDesign product has yet to be "operationalized in a profitable manner."

In the meantime, while SAP works out its "mega-tenancy" issues with Business ByDesign, competitive threats are coming from NetSuite, Workday and Fujitsu Glovia Services, which are looking for a piece of the emerging SaaS ERP opportunity, notes Hamerman in the report. SAP Co-CEO Henning Kagermann said during the quarterly conference call in July that a strong deal pipeline was one reason for SAP's confidence. That pipeline could dry up, however, if those competitors nipping at SAP's heels continue to tap into key pieces of its disheartened customer base.

The next problem: SAP's operating margins are still lower than Oracle's and even Microsoft's. In announcing its second-quarter results, SAP forecasted margins of around 29 percent for the full year. Oracle made a 36 percent margin last quarter, and Microsoft, which is becoming more of an enterprise player with each passing quarter, took home a 31 percent operating margin, according to a article.

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