SAP Stumbling in North America

Analysts worry the top enterprise software company is losing its edge in the U.S. after missing key deals.
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SAN FRANCISCO -- Just when the enterprise-software industry is showing signs of thawing out, German software giant SAP (SAP) - Get Report is encountering another big problem: It's letting some big software-installation deals slip through its mighty fingers.

SAP, which makes software that automates back-office and administrative tasks, has been seeing its strongest growth in the North American market. Last year, sales grew 52% in the Americas and 44% in Europe, Africa and the Middle East while falling 5% in Asia-Pacific. Now SAP's North American business is hitting some bumps, a trend that has some analysts and investors concerned about the company's near-term outlook.

"My concerns are near-term execution," says Charles Haney, buy-side analyst at

Masters Capital Investments

. With the visibility of SAP's future contracts cloudy, Haney said the stock "looks overvalued to us" -- despite the fact that SAP has lost nearly half its value since July 1998.

The first signs of trouble emerged last month, when

The Wall Street Journal

said

Waste Management

(WMI)

and

Allied Waste

(AW)

would abandon SAP R/3 installations worth $250 million and $130 million, respectively, in favor of software systems that were largely designed in-house.

That was just the beginning. More recently, SAP recently lost an applications deal with storage software firm

EMC

(EMC)

to Redwood Shores, Calif., rival

Oracle

(ORCL) - Get Report

, EMC told

TheStreet.com

.

"Apparently, SAP felt they had the deal, but Oracle came in and snagged it away," says

Credit Suisse First Boston

analyst Brent Thill. The deal helped boost Oracle's fiscal fourth-quarter earnings to 36 cents a share, four cents higher than

First Call's

consensus estimate. CSFB has not underwritten for SAP and has a hold on the stock. SAP shares closed Monday up 7/8 at 33 3/4.

Now SAP has fumbled a piece of business from the largest U.S. company in terms of revenue,

General Motors

(GM) - Get Report

. Though GM's financials run on SAP software, when the time came to choose software for its manufacturing line, GM opted for

Oracle

(ORCL) - Get Report

, say a couple of sources close to the situation. GM is currently negotiating final contract details with Oracle, they say. No one at GM was available to comment.

SAP CEO Kevin McKay admits that SAP lost the GM deal. But he plays down the loss because large corporations like GM don't necessarily want to be tied to a single vendor for all their software and because he doesn't believe the deal was huge. He notes that SAP manufacturing software is being used in some individual GM plants and spinoffs.

But when it comes to EMC, McKay admits the lost deal, worth between $5 million and $10 million, was disappointing, though not entirely surprising. He attributes the highly-publicized Allied Waste deal to the change in management due to the acquisition but believes that the company will eventually come back to SAP.

"EMC was disappointing, but that may have been that our own expectations were a little too high," he says. But he notes that storage companies like EMC have tended to go with Oracle because storage is inherently linked with databases, Oracle's main business. "Some businesses line up that way," he says.

Though McKay couldn't comment specifically on SAP's current business before the company releases second-quarter earnings on July 20, he says he remains comfortable with full-year forecasts of 20% to 25% year-over-year growth.

But some analysts aren't feeling as confident as McKay. They say these lost deals could point to more tough times ahead.

"Oracle is gaining significant traction against all the ERP vendors -- including SAP -- in the U.S.," says Thill.

Those dents particularly hurt when there are fewer and fewer deals available. The market for business software continues to feel pressure from oversaturation in the back-office space. At the same time, IT budgets are being squeezed as companies focus on preparing for the year 2000 changeover.

"All the low-hanging fruit at the high end of the market has been picked," says Neil Herman, analyst at

Salomon Smith Barney

, which hasn't underwritten for SAP. That has caused a shift in SAP's U.S. sales strategy. "Instead of trying to sign big deals, they're trying to sell new products into their huge installed base," Herman says. "That's really where the market opportunity is for them." He says SAP has a huge installed base of about 20,000 cutomers to sell new products into. Herman, who rates SAP an outperform, believes the stock bottomed when it dived to 23 3/4 in March, which marked a steep drop from its high of 62 1/4 last July.

But the company seems short of new products. Its customer relationship management software, for example, isn't expected until later this year, Herman says. "SAP has a lot of important products that aren't here yet," he says.

SAP's biggest draw remains its sheer bulk. It's "the King Kong of the space and will eventually come back" as new products turn into revenue next year, Herman says. In the meantime, he adds, "I don't have a lot of confidence in the earnings for the next few quarters."

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