SAP Triumphant?
At the moment this is written, SAP's market capitalization
is $37 billion. Is a company with sales of $8 billion
really worth 4.5 times revenues or 19 times EBITDA?
Three of us weigh in on the question. I start off with a positive
outlook. Our EC takes a largely negative view. And Madame Rosa weighs
in by e-mail from the parking lot behind Il Fornaio, where there's
a really fast Wi-Fi connection.
How Can SAP Justify $37 Billion?
DD Speaks Optimistically
What does a company worth $37 billion today look like in 2008? Here's
one scenario.
Revenues: $15 billion
EBITDA: $3.0 billion
Market Share: 33%
EBITDA/Revenues: 20%
For reference, the numbers in 2002 (using the annual report) were
$7.7 billion, with EBITDA of $1.1 billion, a market share of 22%,
and EBITDA/Revenues of 15%.
These numbers are the bare minimum, I think; much
less revenue or margin, and it's hard to see today's valuations.
Are they achievable? Well, it requires a very substantial sales
effort. Assuming that license revenue will be roughly 25% of total
revenue five years from now (very moderate), that means that they'd
have to sell $15 billion worth of seats and engines in the next
five years. At, say, an average of $1500/seat (including engine
revenue), that's 10 million seats. Currently, SAP has roughly 3
million seats.
Assuming the current distribution of new customer
and old customer license revenue, that means that
SAP will triple the seat count in its
installed base, plus
find as many new customer seats as it has
found so far.
Change any of these assumptions (higher seat price, lower targets
for revenue, lower margins, increased service revenue, higher growth
rates, etc.), and the task becomes easier.
But you don't make these numbers if any of the following happens:
- The market doesn't grow by 50% in five years.
- Seat prices don't fall.
- New modules (CRM, PLM, SRM, Netweaver) don't experience
green field growth.
It's a lot. It's not impossible. But it will take either perfect
execution or else even better than stated performance in one of
these areas: either much lower expenses or new sources of revenue
or higher prices or very substantial market growth.
Our European Correspondent Replies:
I do not think this is possible, but I don't want to argue numbers
with you. Instead, I want you to look at the problem in a different
way.
Last year, you published an interesting way of looking at the problem.
You said that a $37 billion valuation means that people will have
to spend aroud $150 billion on innovation in that period, and that
means they expect $300 billion in economic benefit over the life
of their investment. (These are rough numbers.)
Is this amount of economic benefit available from the automation
that SAP now provides or will provide in the next year or so? (The
time delay from product announcement to significant economic benefit
is about 5 years at SAP.)
If it is, there is no evidence to suggest it. There isn't any verdammte
$300 billion in new GL and inventory management systems. It has
to come from the sales side (CRM) or technology side (Netweaver).
These are as yet unproven modules (and, for my money, unproven markets).
Even if all the new SAP products could in principle generate that
much benefit, SAP has historically had a very hard time actually
getting customers to derive this benefit.
Take, for instance, the mySAP.com innovations. The statistics
on this do not suggest a high penetration or
high benefit rate, at least so far. Consider
these figures:
- 40% of the German SAP installed base
are on versions that are out of regular
maintenance or will be by the end of this year.
- So far, mySAP.com has not become fully operational
even among early adopters. Siemens, for instance,
has 80 installations on version 4, but only
20 mySAP installations, most of which are not yet
live. SAP reports the entire Siemens usage of SAP
as a mySAP installation, which masks the problem.
- Despite claims about reduced cost of hardware
ownership, mySAP Enterprise still requires
most users to buy new hardware.
- So far, the latest version of SAP R/3 (version 4.7)
has shipped about 4000 CDs. SAP is managing
200 upgrade projects. Only 50 installations are
productive, and of these, only half use the new 4.7
features.
There are 50,000 SAP installations.
Perhaps these modules
could produce the staggering level of
economic benefit that's required
if the SAP installed
base were up to installing and using the
new innovations. But they are still
busy digesting and/or upgrading what they have.
Unless SAP can improve its time-to-value, so
that all these new modules get into the customers shops
and start creating value far faster than
has ever occurred historically, I cannot
see this valuation.
Madame Rosa Has the Last Word
The crystal ball is murky. All I see is
tortured, wounded men--aha, they are CFOs--
saying "Spend less on IT, spend less on IT."
Hanging over them is a winged creature--it
looks like a multi-colored Window--saying
I want, want.
What does this mean? My children, I will
tell you. IT spending will pick up. But
prices will go down, as CFOs
decide to spend less on new and
unproven software and prices come under pressure from
some newcomer company.
Aha, the clouds are clearing. I see
a crowd of people in rags. They're in a field of mud
strewn
with dimes. Just beyond, there are sunny fields where
gold
coins and new clothes hang from the trees.
But only a few people are over there. Everybody else
is
busy picking up the dimes.
What does this mean? My children, I will tell
you. Installed IT systems today are so messy,
and their data is so dirty that little benefit
can be gained from new installations. Unless
the new data is clean and the new operations
make a clean sweep, little will be
done about IT TCO. Alas,
IT these days is filled with cheapskates who
don't want to invest the needed money.
They are willing to settle for used software and
minor victories. And I can see no end to it.
Looking up from the ball, I stare into the clouds.
I see a man being lifted into the sky by angels.
They are singing--I cannot hear--Has.., Has...
What does this mean? It means
that the age of the visionaries has passed. Today
we live in a fallen age, where
old visions have become commonplace or ridiculout,
but no new vision takes its place.
The Challenges for SAP
Can SAP become a $15 billion company that rakes
in $3.0 billion a year? They can, but only
if they do the following things:
- Get their customer base to upgrade
and then buy new products at a much
faster rate than they've achieved so far.
- Reduce the time-to-value for all new products
to far less than they have achieved so far.
The time to value is the time from conception
of the product to the time that a significant
number of customers have actually realized value.
- Improve the talent pool. Is SAP a good
place to work? Are the people there really
the best? Is the right percentage of work
outsourced to India? Knee-jerk reaction,
no. SAP people need to be a cut above,
and while some are, some are not.
- Resolve questions about leadership. Lingering
doubts remain about Henning, Leo, Bill, Shai, in fact,
everybody but Marty Homlish.
- Move Netweaver into the customer base and
generate value from it at a rate that is simply
unheard of, given prior experience with EAI
applications.
- Create a delivery paradigm which gets customers
to pay for the faster time to value. This means
collecting more of the consulting dollar (and also
developing software that can genuinely produce
value faster).
- Hope that the markets favor SAP. Hope pricing
goes up, spending goes up, systems improve,
and willingness to innovate increases.
It's a lot. I wish them luck.
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