SAP Chief: Strategy Meets Strategy

Henning Kagermann, in an interview with <I>TheStreet.com</I>, says his company will respond to changes in IT spending.
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Henning Kagermann, the CEO of SAP (SAP) - Get Report, told the TheStreet.com in a interview not to expect further merger talks with Microsoft (MSFT) - Get Report.

The world's largest vendor of software applications for large businesses, SAP reported quarterly results on Thursday. The German company earned

$347 million on sales of $2.5 billion.

Hours after his company posted those numbers, I spoke with Kagermann about SAP's plans for Linux (don't expect the company's penguin to speak with a German accent anytime soon); the Microsoft chatter (don't hold your breath); and the struggle with

Oracle

(ORCL) - Get Report

.

TheStreet.com: What are customers telling you about the outlook for spending on software and other IT items for the balance of 2006?

Henning Kagermann

: Large clients are investing in two directions: Some are spending to consolidate around one vendor; others are looking ahead and want to gain competitive advantage by being an early adapter of service-oriented architecture, where SAP is leading. Even smaller companies are investing heavily.

Is the spending climate improving?

The climate is improving in the sense that people view IT as strategic. It is cautious in the sense that they are not driven by technology hype. If you (the vendor) don't have a business case -- if you can't show them they'll get a return in two years -- they will not invest.

Is the spike in the price of oil, or fears of a confrontation with Iran, leading customers to be more cautious about IT spending?

No. No. I haven't heard this. So far, people are not concerned. This has not been a topic in any of the customer discussions I've been part of.

NetWeaver, SAP's software platform, was introduced with a great deal of fanfare. It seemed to gain ground slowly at first; is it finally getting some traction in the marketplace?

Yes it is. Revenue grew by 20% in the first quarter to 107 million euros.

Are those all stand-alone sales?

No. I add up the stand-alone sales and then add a certain percentage of package sales that include NetWeaver. Some of the packaged applications we ship wouldn't run without NetWeaver, so we bundle it; if those sales aren't counted in the NetWeaver total, it would be very

unfair.

You offer the so-called Safe Passage program to win Oracle customers to SAP. How is it doing?

At the end of last year, 200 companies had taken the offer. At the end of the first quarter it rose to 240; that's an increase of 40 companies.

Why did they leave Oracle?

They are not really leaving Oracle. They are leaving PeopleSoft or J.D. Edwards or others in the portfolio of acquired companies. They now find themselves in Oracle's camp and many do not want to be.

Mendocino is a product of yours that will allow customers to access SAP application data via Microsoft Office applications. Is this running on schedule?

Yes. We shipped to selected partners and customers in December. It will be available generally in June.

Speaking of Microsoft, we were all surprised when it was announced during the Oracle antitrust hearing that your company and Microsoft had held merger talks. With competition and consolidation in the marketplace hotter issues than ever, is there any chance those talks could resume?

No. We said at the time there were only a few talks, and we have no intention of resuming.

The Linux world is in flux. Red Hat (RHAT) bought JBoss after Oracle failed to buy it, and Oracle has made a number of small, open-source acquisitions. It is also rumored that Oracle may ship its own version of Linux. Is this something SAP is considering?

You have to understand that SAP is an applications company that sells solutions on a business-process platform. This is where our borderline is. We are proud that we can run on different operating systems and databases including Linux and MySQL, the open-source database. We feel that this is what our customers want.

So, no SAP Linux?

No. If we engaged more with open source our customers would become concerned that SAP is not going to support Unix for much longer, or the Microsoft stack for much longer. We run on an open-source operating system and databases but have no intent to influence

open source directly.

Soaring executive compensation in the U.S. has become a hot-button issue; the ratio of CEO pay to employee compensation has never been higher. Is this an issue in Germany as well?

It is, but on a lower level. Our pay in Germany is much lower than in the U.S. But it is public, and shareholders watch it carefully. If our performance is good, they tolerate it; if not they get quite upset. And I think that's very fair.