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SAP case study.

Extracts from this document...

Introduction

1. Company Profile SAP is the world's leading supplier of business software, and the world's third-largest independent software company, with over 19,300 customers, 10 million users, 60,100 installations, and 30,000 employees worldwide. The company consists of SAP AG and its network of 91 operating subsidiaries and has a presence or a representation in more than 120 countries. With annual revenues of more than $7 billion, the company provides industry and cross-industry solutions, services and infrastructures, along with related consulting, education, and support services, and has a dominant 35% market share in the global software industry1. The SAP solutions improve virtually every aspect of business, government, and education. What is more, these solutions are tailored to meet the specific requirements of 23 different industry categories, giving SAP a competitive advantage that no other company can match. 2. Executive Summary This study uses ratio analysis to work out how profitable SAP is during the last five years (1999 - 2003) and also compared to the figures of some of the main competitors and of the software industry as a whole. The study aims to answer the following questions: 1. Has SAP made a good profit compared to its turnover? 2. Compared to its assets and capital employed, has SAP AG made a good profit? First, a brief analysis of the company's operations and resource effectiveness is done by reviewing the income statement and the balance sheet. Then, selected combinations of ratios are used to illustrate the trends and patterns of the changes in profitability over the last 5 years. The profitability ratios implied use margin analysis and show the return on sales and capital employed. Further, the profitability trends for SAP for the last years are compared to the same period for Oracle and Siebel, which are one of the main SAP competitors. These data is then compared to the trend for the whole software industry during this period. ...read more.

Middle

This can be explained either by problems maintaining its cost structure, or by implementing a new pricing strategy which sometimes results in lower profits. But what is more likely is that with the increase of its revenues SAP has increased its expenses for R&D (Research and Development) thus trying to be more innovative and to keep its leading position on the market. More evidences supporting this theory can be found in the Consolidated Income Statement where it is evident the constant increase of the R&D expenses from $749 million in 1999 to $1,254 million in 2003. If this is the case, this indicates management's ability to operate the business with sufficient success. Success in this case means not only recovering the cost of the merchandise or services, the expenses of operating the business (including depreciation), the cost of borrowed funds, and leaving a margin of reasonable compensation to the owners for putting their capital at risk, but furthermore, developing innovations that will lead to significant increase in revenues and market presence in the future. Operating Profit Margin This ratio measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted. It represents the "pure profits" earned on each sales dollar. Operating profits are "pure" because they measure only the profits earned on operating and ignore interests, taxes, and preferred stock dividends. It is calculated as follows: Operating Profit Margin = Operating Profits / Turnover The table below presents how the operating profit margin for SAP varies for the last 5 years (1999 - 2003): There is a positive trend for SAP to constantly increase its operating profit margin, which means that the company generates more money from its own operations (it does not include income from investments in other businesses, for instance) and improves its management efficiency each year. Therefore, it can be stated that the "general health" of the core SAP business is continuously improving. ...read more.

Conclusion

What waits still to be done is for the company to exercise a stronger control on its expenses in order to increase the value of its net profit ratio, which is still far behind the average ratio for the industry. However, compared to Oracle, SAP has still a lot to do all over its financial landscape in order to reach the Oracle's profitability. After a closer look to the above data it can be stated that Oracle is one of the software industry leaders in terms of profitability. Its average operating margin ratio is higher than the industry's average, which means the company tends to have lower fixed costs and a better gross margin, which gives its management more flexibility in determining prices. This pricing flexibility provides an added measure of safety during tough economic times. Comparing this with the ratios SAP has, it can be said that SAP is close behind Oracle in terms of price flexibility. 6. Conclusion During the last 5 years the business priorities for companies worldwide included pressures for better corporate governance; focus on core business, primarily cost controls, lean operations, and efficiency. Following this trend SAP sought to increase profitability by running its businesses more effectively. And as its financial results showed the company demonstrates a strong and gradually increasing profitability results for the last 5 years. The results also showed that the business is being managed in a systematic and very stable way, which is extremely important for the software industry in which SAP operates. This industry is changing and growing so quickly, that only companies with wise financial management can survive and generate profits. What SAP has still to improve is not to pay so much attention to increasing its revenue, but to decreasing its costs thus generating a higher profit. Only with such financial stability and increased profitability SAP can remain among the world most powerful software vendors. ...read more.

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