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SAP, Sage ride Web wagon
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February 2, 2000: 10:30 a.m. ET
Business software publishers defy 'dull' image with Net-based systems; shares soar
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LONDON (CNNfn) - In a corporate world increasingly reliant on specialist software to manage its administrative functions, the battle to sell the necessary applications can hinge on giving potential customers access to software via the Internet.
Europe's business software providers, aiming to keep pace with their U.S. rivals, are waking up late to this fact - and their price-earnings ratios are skyrocketing as investors welcome their new Web strategies.
The prospect of offering customers Web-based business software has transformed the stock market views of companies such as Germany's SAP and U.K.-based Sage Group. While leaders in their respective fields, investors had filed both in the dull-but-worthy category.
However, both stocks are now riding high on a wave of interest fuelled by their starkly different approaches to the promise of e-commerce. SAP has jumped in with all guns blazing and believes half of its revenue this year will be from Net-based software sales.
Sage, which has risen from relative obscurity to the ranks of London's blue-chip FTSE 100 index, is taking a more cautious approach. But the stock market loves both.
Shares follow Net talk
Last year's launch of mySAP.com -- a portal that allows SAP customers to access and operate software through the Web -- helped the company's shares to recover from the negative impact of a profit warning last October. It has also silenced critics who claimed SAP was too late to arrive to the Web party.
MySAP.com was rolled out in April 1999 and officially launched in October last year. "You can map the share price based on these announcements," said Peter Robertshaw, SAP's manager for product marketing.
SAP built up Europe's largest business software operation by developing tools to assist what the company calls enterprise resource planning (ERP). That means knitting together companies' back-office functions such as payroll, accounts purchasing and human resources by supplying integrated software packages. SAP's R/3 ERP system has become a global benchmark in the field.
The mySAP.com portal makes these packages available from the Web. Buying SAP software from the Internet, a corporation can either manage the necessary applications via the Web, with information stored by SAP's servers -- known as application hosting -- or download individual software items as required.
SAP says its full range of ERP applications will be available online in May, but sales of a more limited product line reached 127 million euros ($127 million) - 16 percent of the company's total sales -- in the final quarter of last year, helping total revenue to surge 40 percent in the three-month period.
"They wouldn't have been able to achieve these growth rates without some contribution from mySAP.com," adds Davika Malik, technology analyst at JP Morgan in London.
Analysts believe the Web-based approach offers two advantages over existing systems which promise to boost total revenues and margins. First, by being able to access individual software packages on a pay-as-you-use basis, companies are thought likely to take more software to make use of the cost-saving advantages which ERP systems offer. "SAP's [fourth-quarter sales] demonstrate the strong demand for the roll-out of Web-based applications to more employees within an organization," says Coleen Kaiser at Merrill Lynch.
The second advantage of the Web approach is that it lets companies like SAP and Sage develop their sites as electronic marketplaces, aimed at specific industries and providing opportunities for business-to-business marketing and purchasing. Companies signing up to the portals are charged for the service and for transactions carried out through the site, generating a new revenue stream. "We believe the portal business will drive growth in the second half of 2001 and 2002, making SAP one of the largest B2B plays available," said Kaiser.
JP Morgan's Malik adds that while SAP was seen to be "slow off the mark" in developing Web-based products - lagging behind archrival Oracle (ORCL) -- it is now starting to be viewed as an Internet share, prompting a premium rating on the stock, which has almost doubled since Dec. 31. SAP, one of just two technology stocks in Frankfurt's Xetra Dax index, now boasts a market value of 32.7 billion euros.
The rise of Newcastle, England-based Sage Group similarly owes much to its Internet ambitions, even though its Internet foray has been far more modest so far. The company vaulted into the blue-chip FTSE 100 in December as its market value hit 9.2 billion pounds ($15.2 billion) after a four-fold surge in its shares over the past year. The stock started 1999 at 200 pence a share and ended January 2000 at 791 pence.
Despite the less aggressive style of Sage's Web campaign compared with SAP's frontal assault, the approach successfully gave the U.K. company the Internet lustre that investors crave. "If we'd gone out to the market with a full product line [online], nobody would have picked it up," says Andy Atkins, head of e-commerce at Sage.
The company specializes in accounting software for small and medium-sized businesses, and Atkins said existing clients would not have the resources to take all of the new services being offered over the Web in one shot. Instead, it has sought to lure clients into the e-commerce marketplace, offering through its own portal a simple, free program used to build corporate Web sites.
Atkins said interest has grown steadily, with the site now receiving 1 million hits a week.
The acid test for the company's strategy comes in February when it launches two new web tools and will, for the first time, introduce charges for the Internet service. The next stage will be the integration of its existing desktop systems with Web-based versions accessed through the portal, which, like SAP's, contains an electronic marketplace to encourage business-to-business activity. However, Atkins is cautious about the take-up among users.
"We are not going to say that we are reliant on [the Web-based] model, and we're not looking to supplement the existing model to enhance market share," he says. "We are putting our toe in the water."
Sage boosted its Web capabilities earlier this month when it paid $445 million for Virginia-based Best Software, which already operates a Web-based platform, Imperative. 
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