A German software pioneer focused on businesses that is expanding into cloud computing.
January 2020
Who hasn’t heard of ‘real-time computing’? It’s the achievement that became prevalent in the 1970s that meant computers could process to a deadline rather than be queued for batch processing at a later time. Among those that exploited the development was a German company called Anwendungen und Produkte in der Datenverarbeitung that was started in 1972 by five men who foresaw the value that business would place on technology.
Systems Applications and Products in Data Processing, as the name translates into English, or, better still, SAP, has come a long way since its founders, spearheaded by current chairman Hasso Plattner, developed software for real-time data processing that could be sold to many businesses as their central system.
SAP, based in Walldorf near Frankfurt, which earned 25 billion euros in revenue in fiscal 2018, is now one of the world’s leading providers of software for businesses. The company’s ‘enterprise resource planning’ software forms the nerve centres of businesses because it runs core ‘back office’ processes. SAP software manages analytics, customers, financials, human resources, payrolls and supply chains and brings in more than 80% of revenue. A recent focus of SAP’s has been to steer clients to cloud-based software. So successful is SAP, the company’s software is used by more than 425,000 customers in more than 25 industries and over 180 countries.
Nearly 50 years after its founding, SAP is well positioned for the future for five reasons. The first is that the company enjoys entrenched market positions in core enterprise applications and business intelligence software, especially among large companies in developed countries. These companies are likely to stay with SAP – the company enjoys low annual customer attrition rates – because switching costs are high. Businesses can’t easily change software providers because it is tightly coupled with their business processes, often through customisation, and switching to a different software provider is risky and costly.
A second advantage is that SAP software products are world-beaters. They have been honed over time so they can work across departments within a company, throughout industries and in any location. A third advantage is that SAP has built a global sales and support network that few can match. Another plus is that the company enjoys economies of scale in research and development.
Lastly, SAP is well positioned to benefit from the accelerating uptake in cloud computing. These reasons help SAP generate significant excess returns and regular dividends for shareholders. The company, first listed in 1988, is likely to keep its shareholders happy for a while yet.
Challenges remain, of course. SAP faces strong competitors such as Oracle, Workday and Salesforce.com. The company has expanded its cloud portfolio largely through acquisition rather than organically. Executive turnover has been high recently. This was highlighted when CEO Bill McDermott resigned unexpectedly in October after 10 years in the role during which time he effected the drive into cloud computing. (McDermott was replaced by two co-CEOs, which is not an uncommon practice at SAP.)
But SAP didn’t become Europe’s most valuable tech company by market value without reason. The company has sustainable competitive advantages in growing IT segments that position it well to deliver for investors in coming years.
The cloud spree
SAP enters 2020 with myriad goals. The company wants to push its users onto its next-generation enterprise-resources planning software (called S/4HANA), expand the adoption of its broader software suite, triple its cloud business by 2023 and expand margins. On the latter point, the company is hoping to increase its operating margin, which stood at more than 30% in the second quarter of fiscal 2019, by 100 basis points a year until 2023.
To jumpstart the formation of a formidable cloud business, SAP has spent more than US$25 billion buying cloud-related companies since 2011. Companies bought include the first target, human-resources-based SuccessFactors for US$3.4 billion, expense-management firm Concur Technologies of the US for US$8.3 billion in 2014 and US$2.4 billion on sales-performance management provider Callidus Software in 2018. The most controversial purchase was the US$8 billion acquisition in 2019 of Qualtrics International, a US firm that sells customer ‘experience-management’ software, which SAP hopes will augment its back-office software as well as help it compete with the likes of Salesforce.com.
While SAP faces a challenge in integrating these assets, SAP’s cloud computing business is thriving judged on sales numbers – revenue rose 38% (before currency impact) last year to five billion euros.
An added impetus for future sales is that in October SAP announced a new three-year partnership with Microsoft. In this arrangement, the company started in 1975 by Bill Gates and Paul Allen becomes a SAP preferred hyperscale partner and will resell SAP Cloud Platform alongside its Azure portfolio.
The tie-up is appropriate in the sense that it links two computing pioneers founded in the 1970s that are still giants of the IT world today.
Sources include company filings and website, Bloomberg and Hoover’s, a Dun & Bradstreet Company.
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