| According to an SAP strategy document obtained by Reuters a few days ago, the German software giant is targeting a 35% operating margin by 2014 while hoping to double its revenue by then.
And while an SAP spokesman told Reuters that the strategy paper was still being discussed and shouldn’t be viewed by the market as earnings “guidance,” it does lead you to wonder how SAP expects to double its sales within five years and increase its profit margin by about 10% from its fiscal 2009 target of between 24.5% and 25.5%.
It’s hard to imagine SAP doubling its sales over the next five years purely through organic growth. While the company has historically relied upon internal growth, CEO Leo Apotheker told French newspaper Le Figaro last month that the company may be looking at possible acquisitions throughout the remainder of the year. SAP’s last big purchase was BusinessObjects in 2007.
If SAP wants to keep pace with Oracle and stem its recent market share losses, it may have little choice but to jump on the acquisition bandwagon. That could be good news for SAP shops looking for new features and functionality beyond the modules they’re currently using.
When Oracle reported its quarterly earnings last week, it announced that its own operating profits had risen 2.4% from the same period a year ago to a 51% operating margin. Oracle President Safra Catz told analysts during a conference call that much of the increase was due to revenue growth in its extremely lucrative software maintenance business, which rose 8% compared to the same quarter last year.
It’ll be interesting to see whether and to what degree SAP and Oracle’s extremely profitable maintenance businesses are affected by shifting market dynamics. Last month, Forrester released a report on enterprise software detailing how vendors have become much more flexible with customers on licenses and agreements as a result of the soft economy. Even SAP and Oracle, which historically haven’t budged much on the terms of their maintenance deals, are now privately permitting some customers to defer maintenance payments until after they’ve deployed the software, according to analyst Ray Wang.
Of course, once the economy improves and customer demand for enterprise software ticks up again, these types of concessions are likely to evaporate. But over the next few years, both SAP and Oracle will also become more active in the Software-as-a-Service and on-demand software space. Whether either vendor will be able to command the same level of operating margins or higher is a big question mark.
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