Software Giant SAP Is Spending Money to Make Money

SAPSAP (SAP) recently announced its first quarter 2011 earnings results, in which it showed a healthy revenue growth of 26% compared to the same quarter last year. However, operating profits increased by only 7%, meaning that SAP's operating margins declined to 19.7% from 22.2% during the same period.

We believe the dip in margins could be temporary, as SAP's core business remains robust. SAP competes with Oracle (ORCL), Microsoft (MSFT), Salesforce.com (CRM) and IBM (IBM) in the applications software market.

We currently have a $64.16 price estimate for SAP stock, roughly in line with market price.

SAP's Expenses Increase Could Be a Minor Blip

In the past few quarters, SAP has introduced a few new and innovative products. These innovations have come through higher spending on selling, general & administrative expenses and R&D. These expenses constitute a larger portion of the company's gross profits, and hence play an important role in the overall valuation of the company. For example, SG&A as a percentage of gross profits was around 35% as of 2010, and we expect it to increase to 37% in 2011.


Although we expect the expense growth to moderate over the long-term, SAP could benefit if it is able to further control its operating expenses.

SAP's Focus on Long-Term Growth

These expenses are made by the company with a view to grow long-term business prospects. Some of the innovations that the company has brought in the recent past are the introduction of products like HANA (High Performance Analytic Appliance) and Business ByDesign. HANA leverages in-memory technology, which speeds up data storage and retrieval. See our earlier note on HANA titled SAP's In-Memory Technology to Shake Up Database Market, in which we discussed how HANA could benefit SAP and compete with Oracle's Exadata machines.

Business ByDesign is on-demand software from SAP, and its features have a few advantages over products offered by competitors. Other players typically provide a piecemeal solution while SAP's offering is an integrated solution. We discussed Business ByDesign's growth prospects in our earlier note titled Optimistic Outlook for SAP's On-Demand Market Prospects.

See our complete analysis for SAP stock here

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10 Comments

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Neil Lamb

Hmm , I wonder how many of the posters on here work in the Oracle sales dept

May 23 2011 at 12:38 PM Report abuse rate up rate down Reply
niraj

SAP is so powerful, but without proper traing it may be hard to get a complex system like that to do what you expect. Get trained and prosper!

May 23 2011 at 12:30 PM Report abuse rate up rate down Reply
Douglas Lynn

The main problem with SAP is that for many users it is like going to the grocery store in a 747. It is often impractical, very labor intensive, and very expensive to use. Users of extremely complex, one-size fits all (best practices) software products like SAP are caught in a catch-22. They can gain huge efficiencies by heavily customizing it, which is done by all the largest organizations, but with each customization the process of upgrading to the next release is much more expense.

Implementing the software forces the business to restructure their procedures and processes to fit the software designer's best-practices image of the world. This results in the death of process innovations developed within the business that may be key to its competitiveness.

May 23 2011 at 6:07 AM Report abuse rate up rate down Reply
Thomas

As a user of their products, all I can say is I don't see how they stay in business. I have never used ANYTHING any less user friendly than SAP. My BP goes up every time I use it!

May 22 2011 at 8:41 PM Report abuse rate up rate down Reply
kb1rfd

SAP (Slow &ss Program) worst system i ever used! always getting booted off server, always freezes up, and the most labor intensive piece of crap i ever used!

May 22 2011 at 2:12 PM Report abuse rate up rate down Reply
ashaanil

SAP is a classic example of big business "fooling all the people all the time" Often SAP systems are implemented from top down because SAP generally is incahoutes with Board of Directors of companies. Whether the software is good or not, useful or not it is forced down the throat of an organization. Organizations whose annual revenues have been under $1 Billion and not more than 20000 invoices have had to spend over $200 Million to implement teh SAP systems. Ultimately only a small part of the system is used for affiars of teh organization. What a scam!!!!

May 22 2011 at 12:39 AM Report abuse rate up rate down Reply
jmnascarnut

SAP system products only work as well as the people who use it (or are supposed to). Good luck getting your average "Joes" to comply each and every time. And yes, it IS very time consuming. One hell of an accounting tool at best, but a pure nightmare for everyone else to use. It has added to the stresses of my job (maintenance) because the others in my field do NOT use it properly, if at all.

May 21 2011 at 4:02 PM Report abuse rate up rate down Reply
aboutthewoods

The SAP system is a nightmare in use. The companies I worked for spent millions of dollars on this system to replace a good system that worked. For the people who had to use it , is was time consuming, labor intensive, waste of time and product to try and make work. We scrapped thousands of pounds of inventory because is could not be found, was suspose to have shipped months before, counld not be indentified, or could not be shipped because of an error in the processing. It was good for the clecrial, shop workers, and supervisors all who were paid overtime to try and make it work. All I can say is I would never recomend the SAP system, if you want to keep your business running.

May 21 2011 at 11:50 AM Report abuse +2 rate up rate down Reply
1 reply to aboutthewoods's comment
atx888

SAP did not get to be the number one software giant for producing sub-standard products. You either don't know how to use the product or more likely am an employee of a competitor about to lose your job, simply because SAP make better products.

May 21 2011 at 4:03 PM Report abuse rate up rate down Reply
1 reply to atx888's comment
gregrobsn

They don't call it SAP for nothing!

May 21 2011 at 5:22 PM Report abuse rate up rate down