SAP's New Target: Small Biz

The software maker is launching a new product designed to meet the needs of small to midsize businesses. Will it be able to retain its large customers, too?

By Aaron Ricadela

SAP's first-quarter earnings on Apr. 20 calmed skittish investors—mainly by avoiding any more bad news. Now, the German software company hopes to ride the tailwind into its biggest customer conference of the year, where it will present a new plan for growth: helping smaller companies get more organized and bigger ones move faster—attributes not traditionally associated with stolid SAP.

The company plans to pour as much as $520 million into launching several new products, so investors and customers are hanging on every shred of information.

At its Sapphire conference in Atlanta, which runs Apr. 22–25, SAP will detail a delivery schedule for A1S, new software to help small and midsize companies manage operations, accounting, and sales. Some companies will be able to start using the products this year, and the software will be generally available starting in early 2008. SAP also will announce a software package aimed at helping big companies move faster when they merge, introduce products, or sign partnership deals—a reflection of companies' desire to use technology to set themselves apart from competitors, SAP Chief Executive Henning Kagermann said in an interview. "You see the impatience CEOs have these days. People don't want a bunch of different systems."

What a Relief It Is

The moves come at a critical juncture for SAP (SAP). First-quarter sales rose 9%, to $2.07 billion, and earnings were up 10%, to $421.6 million (see BusinessWeek.com, 4/20/07, "SAP Gives Doubters Soothing News"). Those numbers didn't surpass analysts' expectations, but after a string of bad news including weak fourth-quarter sales, the Mar. 28 departure of key executive Shai Agassi, and a corporate espionage lawsuit filed by archrival Oracle, the results didn't have to. "They needed to stop the bleeding," says Peter Kuper, a vice-president and research associate at Morgan Stanley (MS). "Investors feel relieved that the worst is over, perhaps."

Shares of SAP closed $1.21 higher Apr. 20, to $50.39. Among the first-quarter bright spots: New license sales rose 10%, rebounding sequentially from disappointing fourth-quarter growth. License sales are a key indicator of future revenue from consulting services and technical support. SAP also reported 12% revenue growth in the U.S., Canada, and Central and South America, just days after tech-industry bellwether IBM (IBM) reported sluggish U.S. sales in March (see BusinessWeek.com, 4/18/07, "No Touchdowns for Tech Bellwethers"). Kagermann says the companies are in "different phases," with demand for applications software stronger than for technical services, IBM's stock in trade.

Targeting New Markets

The biggest maker of corporate applications for accounting, inventory, orders, and manufacturing schedules, SAP is locked in a fierce battle for market share with Oracle (ORCL). Microsoft (MSFT) also is expanding its presence in the market. To keep growing, SAP needs to prove that it can sell new products tailored to small and midsize companies and serve customers in China, India, and Brazil that historically haven't bought its software. U.S. sales of business applications to firms with $250 million to $1 billion in annual revenues will grow 10% between 2005 and 2010, vs. 5% growth in sales of software to large companies, according to industry consultancy AMR Research.