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Shift in spending taxes software makers

Analysts say this week's dismal quarterly financial results reported by SAP and PeopleSoft indicate a shift in spending to simpler, faster software projects promising a better investment return.

If the enterprise resource planning software market isn't dead, it's certainly in critical condition.

Analysts say this week's dismal quarterly financial results reported by both SAP and PeopleSoft are yet another indicator that Fortune 1000 spending is shifting away from complicated back office installations to simpler, faster software projects that promise a better return on investment.

Both companies, which make back office software systems that automate corporate human resources, financial, and inventory management needs, have watched profits and license sales plummet over the past several quarters, and growth rates dive from 45 percent to below 20 percent.

"With all due respect, these guys have run a great race and have done a great job with client-server [applications], but they aren't the guys to push [companies] into the Internet age," said Bert Hockfeld, a financial analyst at Josephthal & Company. "Their technology isn't a compelling and differentiating factor."

Although enterprise resource planning (ERP) companies' executives insist that potential customers are delaying big software purchases until the Year 2000 passes, that argument doesn't explain why software makers such as Siebel Systems, which sells corporate sales and customer service software, and i2 Technologies, which makes software that automates the purchasing cycle between buyers and sellers, are having such stellar years.

While No. 1 ERP software maker SAP today disappointed investors with third-quarter profits that fell 62 percent to $48.6 million from nearly $135 million a year ago, Siebel's results, announced yesterday, were happily met, with net income doubling to $30.1 million and revenues jumping 87 percent to about $195 million. PeopleSoft, the No. 3 business-management software maker, reported yesterday that its profits fell to $5.2 million from $44.2 million a year ago.

Playing catch-up
As niche market players surge ahead in procurement, supply chain management, and customer sales, ERP firms are scrambling to catch up with development of new Internet-enabled products to sell to their huge installed user base. The question, analysts ask, is whether customers will wait to buy from their ERP vendors--and whether these companies are just arriving too late to the game, trying to sell in too many new higher-growth markets.

AMR Research expects the customer relationship management software market, for one, to expand to $16.8 billion by 2003, up from $2.3 billion last year--a 50 percent compound annual growth rate, compared to 32 percent for ERP software.

SAP plans to ship a full suite of Web-enabled customer relationship management products by the middle of next year. PeopleSoft just bought No. 3 customer relationship management software maker Vantive to boost its front office offerings, but still needs to integrate and jointly market the product line. And J.D. Edwards recently bought supply chain software company Numetrix.

SG Cowen Securities analyst Rob Schwartz said he believes that the $16 billion ERP market is saturated and has lost momentum, partly because so many salespeople and executives have left during the market downturn.

"There's confusion about what they need to do to get back into the market," he said.

An ace up the sleeve
SAP today said it also expects that its new mySAP.com product, which allows users to integrate its applications with Internet services, and stronger fourth-quarter sales to help the company meet 1999 sales goals.

"With the overwhelmingly positive reception of mySAP.com as well as our overall Internet strategy, we are moving quickly to seize the leadership in business-to-business e-commerce," SAP's chief executive Hasso Plattner told Bloomberg.

But Hockfeld said he doubts SAP will be able to compete effectively.

"They'll sell some [software] to their user base, no doubt about that," he said. "But to say they'll have the same leadership in this era is, to put it politely, naive. I can't see them competing with Siebel in Internet-enabled [customer relationship management]."

Although she criticized SAP for not warning Wall Street of its huge shortfall, JP Morgan analyst Devika Malik said she expects 28 percent revenue growth next year, as SAP increasingly relies on software services and its new Internet-enabled product line.

"The year 2000 will be a phenomenal year for the software industry as a whole," she said. "We're convinced that [SAP's] pipeline is strong and orders will come through."

Morgan Stanley analyst Chuck Phillips said SAP has made strides over the past six months with its Internet-enabled product line, but it will take time to change the market's perception of the company.

"We're expecting a modest rebound for the ERP market in the next year, but it'll never be the same as it once was," he said.