SAP fails City expectations

Enterprise applications vendor blames predicted shortfall on weakness in Asia and Japan operations.

SAP, the largest enterprise applications vendor, surprised analysts last week when it revealed its results were likely to be well below City expectations.

Profit growth for 1998 was only 15 per cent, instead of the 30-35 per cent previously indicated by Henning Kagermann, joint chief executive of SAP. Overall, the vendor earned DM8.4 billion, a rise of 40 per cent on the previous year, but profit only rose to DM1.96 billion as the vendor released preliminary figures.

SAP blamed weakness in its Asian markets and Japan in particular, where there was a fourth-quarter shortfall of about DM200 million, along with prudence in providing DM40 million against instability in the Russian economy. However, even if those identified problems were not counted, SAP's results would still have been at the low end of expectations.

The full results will not be released until 26 January, but some analysts are already concerned that there may be long-term problems for SAP, especially in its crucial US markets. Revenue in the Americas grew by 50 per cent for the year, but the fourth quarter may have been much lower - in the range of 20-25 per cent - according to finance house Morgan Stanley.

Bruce Richardson, vice president of research strategy at enterprise technology analyst AMR Research, said: 'SAP is being affected by the law of large numbers. When you've got one product line it gets really hard to keep the momentum going.' He added that there had been specific problems with the company's Japanese operation, but a reorganisation had already been started.

Richardson insisted that the latest results were a good reason for SAP to buy out troubled supply chain vendor Manugistics, which strongly hinted at the end of last year that it was looking for a white knight to bail it out.

'If this was a US company, SAP would have done it already and stripped two years off the product-to-market timescale,' Richardson told PC Dealer.

According to analysts, the vendor is suffering because the pack has moved away from backbone enterprise resource packages (ERP) to more immediate value focused products, such as supply chain and customer relationship management.

SAP's offerings in these markets are in their infancy, while recently established vendors such as i2 are rocketing ahead, mounting a potential challenge to traditional ERP vendors including SAP. In the meantime, the shock of the results sent SAP shares spiralling down $3 on the day to $31.56.