Market Analysis: A Review of the Overall (Economic ... · Market Analysis: A Review of the Overall (Economic) Position of the Top 6 ERP Vendors All materials within are a copyright

Market Analysis: A Review of the Overall (Economic) Position of the Top 6 ERP Vendors


Disclaimer

The information contained within this whitepaper is the opinion of the author and in no way represents the opinion of The Rand Group, LLC. The information contained within should not be taken as legal or binding, and should be referred to as an opinion piece by a subject-matter expert. All materials within are a copyright of the author and The Rand Group, LLC, 2014 respectively. Infor, Sage, Epicor, Oracle and SAP are either registered trademarks or trademarks of their respective companies in the United States and/or other countries. Microsoft and Dynamics™ are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries.


Table of ContentsOverview ....................................................................................................................5

1.0 Epicor ....................................................................................................................5

1.1 Market Focus ................................................................................................................................... 5

1.2 Cloud Threat & Opportunities ....................................................................................................... 5

1.3 Management ................................................................................................................................... 6

1.4 Financials ......................................................................................................................................... 6

1.5 Margins ............................................................................................................................................ 7

1.6 Legal ................................................................................................................................................. 7

1.7 Overall Assessment ........................................................................................................................ 7

2.0 Infor ......................................................................................................................7

2.1 Market Focus .................................................................................................................................. 7 2.2 Cloud Threat & Opportunities ...................................................................................................... 8

2.3 Management ................................................................................................................................... 8

2.4 Financials ......................................................................................................................................... 9

2.5 Margins .......................................................................................................................................... 10

2.6 Legal ............................................................................................................................................... 10

2.7 Overall Assessment ...................................................................................................................... 10

3.0 Microsoft ............................................................................................................10

3.1 Market Focus ................................................................................................................................ 10

3.2 Cloud Opportunities & Threats .................................................................................................. 11

3.3 Management ................................................................................................................................ 11

3.4 Financials ...................................................................................................................................... 12

3.5 Margins ......................................................................................................................................... 13

3.6 Legal .............................................................................................................................................. 13

3.7 Overall Assessment ..................................................................................................................... 13

4


Table of Contents4.0 Oracle .................................................................................................................14

4.1 Market Focus ................................................................................................................................ 14

4.2 Cloud Threat & Opportunities ................................................................................................... 14

4.2 Management ............................................................................................................................... 14

4.3 Financials ..................................................................................................................................... 15

4.5 Margins ......................................................................................................................................... 16

4.6 Legal ............................................................................................................................................... 16


5.0 Sage.....................................................................................................................16

5.1 Market Focus ................................................................................................................................ 16

5.2 Cloud Threat & Opportunities .................................................................................................... 16

5.3 Managment ................................................................................................................................... 17

5.4 Financials ....................................................................................................................................... 17

5.5 Margins ......................................................................................................................................... 18

5.6 Legal ............................................................................................................................................... 18


6.0 SAP ......................................................................................................................19

6.1 Market Focus ................................................................................................................................ 19

6.2 Cloud Threat & Opportunities .................................................................................................... 19

6.3 Managment ................................................................................................................................... 19

6.4 Financials ...................................................................................................................................... 20

6.5 Margins ......................................................................................................................................... 21

6.6 Legal .............................................................................................................................................. 21


Summary ..................................................................................................................21

Appendix A – Financial Comparison Table ...........................................................22

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All materials within are a copyright of the author and The Rand Group, LLC,

Overview

Your search for Enterprise Resource Planning (ERP) solutions will inevitably lead you down a path that includes companies like Epicor, Infor, Microsoft, Oracle, Sage, and SAP. And while sales professionals will attempt to convince you that theirs is the best solution, rarely will you come away feeling like you understand the ins and outs of what makes one solution better than the other; nor will you leave with any in-depth knowledge of the financial position of the company – knowledge many would agree is important when deciding whether to purchase such a large solution from a software vendor.

But with quarterly reports, financial statements and other company speak being difficult to understand, taking hours to wade through, and oftentimes not showing a company’s true position in the marketplace, how do you effectively evaluate these software companies? This whitepaper attempts to help answer this question by cutting through the noise to provide a high-level, objective overview of each of the six leading business software companies. Focusing on the financial and organizational strengths and weaknesses of each, this report will aid you in better evaluating your investment – both from a financial and software perspective – of any one of these companies.

1.0 Epicor

1.1 Market Focus

Epicor Software Corporation (Epicor) provides industry-specific solutions to midsize companies in the manufacturing, distribution, retail, professional services and hospitality sectors. Their fully integrated systems primarily include license, hardware, professional services, support services and some hardware products. Their software is available in 30 languages and is implemented or sold through over 400 partners in 150 countries, with the majority of revenue coming from North America, followed by the U.K. and Australia.

Facing major competition from Oracle, SAP and Infor, Epicor focuses on its flagship Epicor ERP product which uses technologies including MS SQL, Progress (old) and SaaS.

1.2 Cloud Threat & Opportunities

Epicor initially tested the SaaS market with Epicor® Express, launched in 2010. As of 2012, Epicor made a bigger play into cloud-based ERP software with a full multitenant SaaS offering to the mid-market. This better positions the company to compete with on-demand manufacturing ERP from the likes of NetSuite and SAP® Business ByDesign™ solution. Whether its cloud offers can make up for its recently large annual losses, however, has yet to be seen.

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1.3 Management

The CEO, Pervez Qureshi, was replaced on October 7, 2013 when Epicor Software Corporation announced that Joseph (Joe) L. Cowan was appointed President and Chief Executive Officer. Cowan brings executive management experience in software and technology to Epicor. Moreover, Qureshi will also step down from his position as a director on the Epicor Board of Directors.

On April 29, 2013 Epicor received an SEC comment letter regarding its 2012 10-K (Annual Financial Report). Ms. Caruso, CFO, was required to add significant disclosures omitted from the company’s original filing.

1.4 Financials

($ millions unless noted) GBP=1.59USD

COMPANY INFOR SAGE EPICOR ORACLE SAP MICROSOFT

As of: 31/05/2013 9/30/2012 9/30/2012 5/31/2013 12/31/2012 6/30/2013

Annual Revenue ($mil.) $2,718 $2,131 $855 $37,180 $21,455 $77,849

Employees 12,700 13,509 4,000 120,000 64,422 99,000

HQ Location NY, NY United Kingdom Dublin, CARedwood City,

CAWaldorf,

GermanyRedmond,

Washington

Net Income ($76) $379.9 ($39.9) $10,925 $3,707 $21,863

Non-GAAP Op Income 719 $583 $178.0 $17,363 $5,328 $27,481

Non-GAAP Inc. (%) 28% 27% 21% 47% 25% 35%

Operating Margin % 17% 26% 5% 39% 25% 34%

Selling Margin % 82% 94% 58% 64% 68% 79%

R&D $352 $253.4 $83.3 $4,850 $2,990 $9,811

R&D (% of Revenue) 12.9% 11.9% 10% 13% 14% 13%

Sales & Marketing $460 N/A $147.4 $7,328 $3,039 $15,276

G&A 210.0 $1,448.5 $75.7 $4,850 $5,271 $5,149

Cash $421.9 $97.9 $130.7 $14,613 $3,275 $77,022

Assets $6,591.0 $3,932.5 $2,430.1 $81,812.0 $34,789 $142,431

Debt $5,232.9 $366.5 $1,307.9 $18,494 $6,580 $15,600.0

Liabilities $7,155.0 $1,749.5 $1,877.3 $37,164 $16,109.0 $63,487.0

Equity ($563.9) $2,183.1 $552.7 $44,648 $18,680 $78,944.0

Revenue/Employee $214.02 $157.72 $213.85 $309.83 $333.04 $786.35

Revenue Growth (YOY)% 7% 10.40% 2 0.2% 16% 5.6%

Cash Flow -Operations $282.40 $610.20 $133.59 $14,224 $5,156 $28,833

DEBT/EQUITY (-) DUE TO DEBT>EQ. 16.8% 236.6% 41.4% 35.2% 19.8%

EPS N/A $0.37 N/A $2.20 $3.37 $2.58

1 Organic growth was 2% before acquisitions.2 Began Ops. 5/11/2011 with acquisition of llegacy Epicor.

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Epicor is experiencing annual and quarterly losses with $1.3 billion of debt. The company’s high debt to equity ratio is worrisome as it indicates a dangerous amount of leverage – it is taking on debt at more than twice the rate that its owners are investing in the company (238%).

1.5 Margins

Epicor has net losses on both the quarter and fiscal year to date. Revenues are down on license revenue, offset by increased professional services revenue and hardware revenue. 1.6 Legal

At the time of our analysis, the company faced a class action lawsuit in California related to a breach of fiduciary duty with respect to the acquisition of legacy Epicor by Apax Partners L.P. The plaintiffs’ complaint alleges that the former directors of Epicor breached their fiduciary duties of loyalty, good faith and full disclosure owed to Epicor shareholders. The class action lawsuit is in connection with the sale of Epicor to Apax, where Epicor is accused of engaging in self-interested conduct to the detriment of Epicor’s shareholders at large, failing to maximize shareholder value, and issuing statements and documents to the public in connection with the Acquisition, which are alleged to contain materially false and misleading information and material omissions.

1.7 Overall Assessment

Epicor’s quarterly and annual losses, coupled with its high interest debt load leads us to recommend that some consideration to Epicor’s ability to finance itself should be explored when conducting your own due diligence. This, combined with future interest rate increases, could adversely affect Epicor’s ability to impact R&D and maintain its position against larger rivals.

2.0 Infor

2.1 Market Focus

Infor Global Solutions, Inc. (now a private company) develops and delivers enterprise software solutions for medium to large customers in 37 countries. Infor targets micro-vertical segments of broader industries included within the manufacturing, distribution, healthcare, automotive, and food & beverage sectors, receiving 57% of its revenue from North America, with the remaining from Europe and the Asia Pacific.

($ MILLIONS)

EPICORProfitability Cash Flow Debt to Equality R &D

($39.90) $133.59 236.60% $83.30

8



Best known for its ERP software packages such as Lawson M3 ERP Enterprise and Infor 10 ERP Process (Adage), Infor aligns itself with numerous technology platforms.

Its major competitors are SAP and Oracle, as per Infor’s public filings. 2.2 Cloud Threat & Opportunities

Infor’s software packages are comprised of a number of applications that have been in the market for many years. To date, these legacy technologies have proven difficult to quickly and successfully migrate to a cloud environment. Given this difficulty and Infor’s acquisition oriented business model, our assessment is that this company may be challenged in the cloud space. Infor has entered the cloud market with their Infor CloudSuite offering, which although deployable in the cloud on Infor’s servers or through a hybrid deployment, is not a pure play Cloud platform. Despite this offering and with cloud sales delaying revenue both for near-term profitability and cash flow, Infor’s business may be negatively impacted.

2.3 Management

CEO Charles Phillips joined Infor in October 2010 after leaving an executive position at Oracle, and taking several other executives with him. Infor is controlled by a group of investors led by Golden Gate Capital and Summit Partners. The current organization is made up of a number of acquisitions, many of which were smaller, formerly independent software companies.

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2.4 Financials

The company has high debt levels with legacy technology. As of May 31, 2013, it was operating at a net loss of $76 million, had accumulated $5 billion in debt, and had negative shareholder equity of $563 million.


As of: 31/05/2013 9/30/2012 9/30/2012 5/31/2013 12/31/2012 6/30/2013


Employees 12,700 13,509 4,000 120,000 64,422 99,000


CAWaldorf,

GermanyRedmond,

Washington

Net Income ($76) $379.9 ($39.9) $10,925 $3,707 $21,863


Non-GAAP Inc. (%) 28% 27% 21% 47% 25% 35%


Selling Margin % 82% 94% 58% 64% 68% 79%

R&D $352 $253.4 $83.3 $4,850 $2,990 $9,811

R&D (% of Revenue) 12.9% 11.9% 10% 13% 14% 13%


G&A 210.0 $1,448.5 $75.7 $4,850 $5,271 $5,149

Cash $421.9 $97.9 $130.7 $14,613 $3,275 $77,022

Assets $6,591.0 $3,932.5 $2,430.1 $81,812.0 $34,789 $142,431

Debt $5,232.9 $366.5 $1,307.9 $18,494 $6,580 $15,600.0

Liabilities $7,155.0 $1,749.5 $1,877.3 $37,164 $16,109.0 $63,487.0

Equity ($563.9) $2,183.1 $552.7 $44,648 $18,680 $78,944.0





EPS N/A $0.37 N/A $2.20 $3.37 $2.58



($ MILLIONS)

INFORProfitability Cash Flow Debt to Equality R &D

($76) $282.4 (-) Due to Debt>Eq. $352.00

10



2.5 Margins

Infor’s license margin continues to decline. The company is attempting to rectify this by increasing prices and margins on its annual maintenance fees from licensed customers.

2.6 Legal

Patent infringement suits exist and are on appeal related to S3 Procurement, Requisition, EDI and M3 Procurement products.


Given Infor’s high debt load and legacy technology, we recommend exercising caution in making any substantial investment into Infor or its products without first conducting your own due diligence into the company’s financial viability and performance. Signs of financial stress include:• 5 Consecutive years of losses• Software License fees are under pressure due to cloud/SAAS adoption• Current Liabilities exceeded Current Assets as of August 31st, 2013 • Net income in Q1 of fiscal 2014 was barely positive due to non-operating items• Interest carrying cost is still high even with the refinance, and this drains resources from R&D or other

value creating activities • Operating cash flow was negative• A strategy to grow market share by acquisition of legacy software and varied technologies is risky for

both customers and investors

3.0 Microsoft

3.1 Market Focus

Microsoft Corporation (Microsoft) is one of the leading providers of software and hardware products and services. The company maintains a competitive position in the industry through its diverse product portfolio and competes globally with Oracle, SAP and other smaller competitors with its line of Dynamics products, Office, Exchange and SharePoint. Considered the world’s largest software maker by revenue, Microsoft’s Dynamics ERP products are geared toward midsize organizations as well as subsidiaries and divisions of larger organizations in the communications & media, financial services, manufacturing and retail industries.

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3.2 Cloud Opportunities & Threats

Microsoft continues to design and deliver hybrid cloud solutions, enabling customers to use both cloud and on-premise platforms in a way that best suits their needs. For example, a company can choose to deploy Office or Dynamics on-premise, as a cloud service, or as a combination of both. Microsoft also deploys Windows Server 2012, Windows Azure, and System Center infrastructure in their data center, a partner’s data center or Microsoft’s datacenter. These hybrid capabilities allow customers to fully harness the power of the cloud so they can achieve greater levels of efficiency and tap new areas of growth. Microsoft continues to bring products into the cloud, with three of four ERP products expected to be available in April, 2014. Dynamics AX 2012 R3 is the latest product to be scheduled to be available as a hosted platform on the Windows Azure platform. Microsoft made Dynamics GP and Dynamics NAV products available in June 2013 on the Windows Azure hosted platform. Dynamics CRM is also available for use on iPhones, Androids and Windows phones.

3.3 Management

On October 24, 2013, Steve Ballmer announced his retirement from Microsoft. During his reign as the second CEO, he witnessed a share price drop from $60 to below $40, but took Xbox to a $7 billion per year business. He leaves a cash rich organization that must contend with its flagship product, Windows, now only on 19% of devices, putting Microsoft at a competitive market disadvantage relative to its mobile device market share. The Business Division enjoys ample resources and cross pollination from Microsoft’s other divisions. Cloud computing is driving the future in the industry and Microsoft will be a likely survivor of this next wave.

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3.4 Financials

Microsoft has a globally powerful balance sheet with five years of consecutive revenue growth. The Microsoft Dynamics’ business had 9% growth over the prior year, which suggests a share increase relative to competitors. Given the perceived weakness in some other competitors, Microsoft is likely to see continued increases as clients shift to the cloud and weaker competitors fall further behind under debt service and margin compression.


As of: 31/05/2013 9/30/2012 9/30/2012 5/31/2013 12/31/2012 6/30/2013


Employees 12,700 13,509 4,000 120,000 64,422 99,000


CAWaldorf,

GermanyRedmond,

Washington

Net Income ($76) $379.9 ($39.9) $10,925 $3,707 $21,863


Non-GAAP Inc. (%) 28% 27% 21% 47% 25% 35%


Selling Margin % 82% 94% 58% 64% 68% 79%

R&D $352 $253.4 $83.3 $4,850 $2,990 $9,811

R&D (% of Revenue) 12.9% 11.9% 10% 13% 14% 13%


G&A 210.0 $1,448.5 $75.7 $4,850 $5,271 $5,149

Cash $421.9 $97.9 $130.7 $14,613 $3,275 $77,022

Assets $6,591.0 $3,932.5 $2,430.1 $81,812.0 $34,789 $142,431

Debt $5,232.9 $366.5 $1,307.9 $18,494 $6,580 $15,600.0

Liabilities $7,155.0 $1,749.5 $1,877.3 $37,164 $16,109.0 $63,487.0

Equity ($563.9) $2,183.1 $552.7 $44,648 $18,680 $78,944.0





EPS N/A $0.37 N/A $2.20 $3.37 $2.58



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In July 2013, the company reported debt levels of over $15 billion, an increase by over $3 billion compared to 2012. Microsoft registered debt-to-equity ratios of 19.8%, compared to 18% in 2012 and 12.8% in 2012. Microsoft also has $77 billion of cash, which creates financial stability and acquisition or strategic opportunity that competitors may not be able to match.

($ MILLIONS)

MICROSOFTProfitability Cash Flow Debt to Equality R &D

$21,863 $ 28,833 19.8% $9,811

3.5 Margins

Overall margin increased due to an impairment charge in the prior year. The margin of the Dynamics product line is masked by its mix with Office and other products. Revenues were up 9%, but it is difficult to determine even directionally how the Dynamics product line fared, given its inclusion within the Microsoft Business Division reportable segment.

3.6 Legal

The company is a defendant in a number of unresolved legal proceedings. These include legal proceedings related to product design, manufacturing and performance liability, and other contract, employment and IP rights litigations. In early 2013, Microsoft was fined $733 million from the European Union for Microsoft’s failure to promote a range of Web browsers, not just Internet Explorer . In 2012, the company was ruled against in a patent infringement case against Motorola. The company was also ordered to pay $500 million for patent infringement in a litigation case with Alcatel-Lucent.


Microsoft’s Business Division is about a $24.7 billion division of which we estimate 10% is the Dynamics business. As an organization, Microsoft is one of the most successful software publishers ever. Its strong balance sheet and continuously solid performance leaves no immediate financial challenges or concerns. If considering becoming a customer of Microsoft, we would still strongly advise that exploration be given to your particular product of interest and its position in the Microsoft product portfolio.

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4.0 Oracle

4.1 Market Focus

Oracle Corporation focuses on global selling of its computer hardware and enterprise software products, especially its database management systems. Its revenue split is 53% from the Americas, with software providing 74% of revenue and services 12% of revenue. Oracle competes with all major software vendors, but more heavily with SAP. In 2013 it claimed itself to be the “world’s largest provider of enterprise software and a leading provider of computer hardware products and services that are engineered to work together in the cloud and in the data center” ii . Best known for its Oracle Database products, Oracle Fusion Middleware, ERP platforms and servers, Oracle’s technology is focused around Oracle Linux, Windows® operating system and third party UNIX products, among others.


New software licenses and cloud subscriptions grew just 1% from Q4 Fiscal 2012 ($3.9B) to Q4 Fiscal 2013 ($4.026B). Oracle is very dependent on their on-premise business and this limited cloud growth may suggest that the company is finding it difficult to change their revenue mix. This could be a reason for recent announcements by Larry Ellison concerning potential cloud partnerships with other vendors, including Salesfore.com, Microsoft and Netsuiteiii.

4.2 Management

Oracle is headed by CEO Larry Ellison who co-founded the company in 1977.

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4.3 Financials

Oracle is a strong performer and part of “the big three” of Microsoft, SAP and Oracle. It is a financially stable organization, allowing it some economies of scale that some smaller publishers may have difficulty achieving. We still recommend that prior to purchasing any product, including Oracle’s, an independent assessment of the company’s R&D contribution and overall performance be undertaken, along with an investigation into the product cost of ownership and fit with your individual organization.

($ MILLIONS)

ORACLEProfitability Cash Flow Debt to Equality R &D

$10,925 $14,224 41.40% $4,850


As of: 31/05/2013 9/30/2012 9/30/2012 5/31/2013 12/31/2012 6/30/2013


Employees 12,700 13,509 4,000 120,000 64,422 99,000


CAWaldorf,

GermanyRedmond,

Washington

Net Income ($76) $379.9 ($39.9) $10,925 $3,707 $21,863


Non-GAAP Inc. (%) 28% 27% 21% 47% 25% 35%


Selling Margin % 82% 94% 58% 64% 68% 79%

R&D $352 $253.4 $83.3 $4,850 $2,990 $9,811

R&D (% of Revenue) 12.9% 11.9% 10% 13% 14% 13%


G&A 210.0 $1,448.5 $75.7 $4,850 $5,271 $5,149

Cash $421.9 $97.9 $130.7 $14,613 $3,275 $77,022

Assets $6,591.0 $3,932.5 $2,430.1 $81,812.0 $34,789 $142,431

Debt $5,232.9 $366.5 $1,307.9 $18,494 $6,580 $15,600.0

Liabilities $7,155.0 $1,749.5 $1,877.3 $37,164 $16,109.0 $63,487.0

Equity ($563.9) $2,183.1 $552.7 $44,648 $18,680 $78,944.0





EPS N/A $0.37 N/A $2.20 $3.37 $2.58



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4.5 Margins

Software license margin has held steady between 86% and 88% for the last three years. When combined with support the margin increases to around 95%. The hardware support margin is projected to increase in fiscal 2014 as hardware sales rebounded in the quarter that ended in November 2013. Customers may be able to use this as a negotiating point before signing a support contract. Service revenue and margin declined from 2012, mostly driven by emerging markets, and within the US. Growth rates are expected to rebound to around 4% for license revenue in fiscal 2014.

4.6 Legal

Oracle is engaged in costly and protracted litigation against SAP for copyright infringement by one of its former subsidiaries, TomorrowNow, which had illegally downloaded Oracle’s intellectual property.

Oracle is also engaged in litigation with HP over failure to continue development of software that runs on HP servers. The second phase of the trial, where HP reportedly is seeking $4 billion in damages, is on hold with no expected trial date set.


From publicly available information it appears Oracle is performing well in spite of fiscal year end (May 2013) software license weakness. Despite no immediate inherent financial concerns, we would still encourage any company considering an engagement with Oracle to review their financial commitments and performance of products before making a decision.

5.0 Sage

5.1 Market Focus

Sage provides business management software to small and medium sized companies in 24 countries, with 60% of revenue coming from Europe. In 2011, Sage sold its US health care unit to a US private equity group for $320 million as it attempted to divest some business lines and refocus on its core business efforts. Sage took a $92 million loss on the acquisitioniV.

Its major ERP products are Sage 100 ERP (Sage ERP MAS 90) and Sage 300 ERP, with a focus on technology platforms including SQL Server®, Oracle Database and SaaS.


Sage’s cloud play, Sage One is expected to yield $47 million in revenue between 2011 and 2014. However, it has not met previously published expected growth, contributing to losses in its cloud business unitsV.

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Sage remains at risk from cloud competitors such as Xero, which is making a play into the UK market. Analysts suggest Xero’s cloud offering appears more developed than Sage’s in all areas, and Sage’s 3%-4% growth rate for Sage One is materially smaller than other cloud providersVi.

5.3 Managment

CEO Paul Walker stepped down in 2010 providing the company with an opportunity to receive a fresh perspective and be taken in a new direction. Guy Berruyer, former head of Sage Group’s mainland Europe and Asia operations, was appointed as its new chief executive in 2010. This move disappointed some analysts who had hoped for a more radical changeVii.

5.4 Financials


As of: 31/05/2013 9/30/2012 9/30/2012 5/31/2013 12/31/2012 6/30/2013


Employees 12,700 13,509 4,000 120,000 64,422 99,000


CAWaldorf,

GermanyRedmond,

Washington

Net Income ($76) $379.9 ($39.9) $10,925 $3,707 $21,863


Non-GAAP Inc. (%) 28% 27% 21% 47% 25% 35%


Selling Margin % 82% 94% 58% 64% 68% 79%

R&D $352 $253.4 $83.3 $4,850 $2,990 $9,811

R&D (% of Revenue) 12.9% 11.9% 10% 13% 14% 13%


G&A 210.0 $1,448.5 $75.7 $4,850 $5,271 $5,149

Cash $421.9 $97.9 $130.7 $14,613 $3,275 $77,022

Assets $6,591.0 $3,932.5 $2,430.1 $81,812.0 $34,789 $142,431

Debt $5,232.9 $366.5 $1,307.9 $18,494 $6,580 $15,600.0

Liabilities $7,155.0 $1,749.5 $1,877.3 $37,164 $16,109.0 $63,487.0

Equity ($563.9) $2,183.1 $552.7 $44,648 $18,680 $78,944.0





EPS N/A $0.37 N/A $2.20 $3.37 $2.58



18



The company has reduced the number of public disclosures it provides regarding its financial position. This lack of transparency should be a consideration as part of your software selection process. Globally, the company has allocated approximately 12% of its annual revenue to R&D or approximately $253 million (at the time of writing). On the surface this amount appears to be sufficient; however, Sage has over 250 products on 70 platforms, which means this allocation converts to an average of less than a $1 million a year commitment to one particular productViii.

Low Earnings per Share (EPS), flat profit margins and pressure on license revenues have given the company a generally cautious analyst sentiment.

($ MILLIONS)

SAGEProfitability Cash Flow Debt to Equality R &D

$379.90 $610.20 16.80% $253.40

5.5 Margins

Sage’s license margin is under pressure. The Americas were the only region that showed a small increase in margin. All other areas declined year over year.

5.6 Legal

Present legal trouble includes patent infringement suits in Luxemburg and Texas claiming unauthorized use of software, including Sage’s product activation system within their Sage Peachtree First Accounting 2011 software package.

Sage also recently settled lawsuits for implementation failure.


Sage has a nearly flat revenue trend, Pre-Tax earnings and EPS. An increased dividend rate has been necessary to retain investors, but the dividend cover rate is at its lowest level in the last 5 years. Investor conference reports indicate an emphasis to subscription (SaaS); a move away from the traditional license model. Sage is also engaging in a share buyback program with some of its cash. Had it not engaged in this program the share underperformance relative to its peer group would have been further negatively impacted.

At the time of writing, many analysts were giving Sage an average recommendation of “Hold” ix. Given their perceived financial stresses, we would recommend conducting your own due diligence into this firm prior to purchasing their software.

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6.0 SAP

6.1 Market Focus

SAP AG (SAP) is a global enterprise software corporation that competes with Oracle and Microsoft for the medium to large enterprise market. The company provides software solutions and related services to more than 232 million customers worldwide. It offers a wide range of business software and enterprise applications to companies in Europe, the Middle East and Africa, the Americas and the Asia Pacific. Manufacturing, process, and energy clients make up over half of its revenues, with retail and consumer products contributing to the next largest components of its business.

The company’s best known software products are its enterprise resource planning systems (SAP ERP) and the rest of its Business Suite of products (CRM, PLM, SCM, SRM). Other products include cloud offerings Ariba® and SuccessFactors™.


SAP’s acquisitions in recent years position it well in the cloud space. In the January through September 2013 period SAP witnessed a 4% decline in on-premise new license revenues. During the same period, cloud subscription revenues increased 238% to €488 million ($666 million) x.

Moving forward we anticipate a strong play by SAP into the cloud market, driven by its leadership position in application software and increased integration into its HANA in-memory platform.

6.3 Managment

The Supervisory Board of SAP AG has appointed Luka Mucic as Chief Financial Officer of SAP, effective July 1st, 2014. Luka Mucic is the successor of Werner Brandt, who will, as planned, withdraw from the Executive board. Luka Mucic currently is a member of the Global Managing Board of SAP and responsible for Global Finance. Mucic grew up in Walldorf, Germany and will continue to work at the German Headquarters of the company.

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As of: 31/05/2013 9/30/2012 9/30/2012 5/31/2013 12/31/2012 6/30/2013


Employees 12,700 13,509 4,000 120,000 64,422 99,000


CAWaldorf,

GermanyRedmond,

Washington

Net Income ($76) $379.9 ($39.9) $10,925 $3,707 $21,863


Non-GAAP Inc. (%) 28% 27% 21% 47% 25% 35%


Selling Margin % 82% 94% 58% 64% 68% 79%

R&D $352 $253.4 $83.3 $4,850 $2,990 $9,811

R&D (% of Revenue) 12.9% 11.9% 10% 13% 14% 13%


G&A 210.0 $1,448.5 $75.7 $4,850 $5,271 $5,149

Cash $421.9 $97.9 $130.7 $14,613 $3,275 $77,022

Assets $6,591.0 $3,932.5 $2,430.1 $81,812.0 $34,789 $142,431

Debt $5,232.9 $366.5 $1,307.9 $18,494 $6,580 $15,600.0

Liabilities $7,155.0 $1,749.5 $1,877.3 $37,164 $16,109.0 $63,487.0

Equity ($563.9) $2,183.1 $552.7 $44,648 $18,680 $78,944.0





EPS N/A $0.37 N/A $2.20 $3.37 $2.58



SAP’s Q3 sales grew 9% from the year prior in constant currency, 3% below analysts’ forecasts and the Capital IQ Consensus Estimate . Organic constant currency growth rose to 6% from 5% in Q2. Cloud subscriptions grew 35% organically, but traditional on-premise software orders fell 13%. SAP posts Q2 sales 3% below the Capital IQ Consensus Estimate and EBIT 4% below. Sales forecasts for 2013 to 2014 are cut by 3%, on average, on soft demand from Asia and currency headwinds. On-premise software orders fell 17%. SAP cut its software and maintenance sales growth forecast from between 11% and 13% to approximately 10% due to a soft Japanese economy and rapid transition to cloud, which has precipitated depressed license sales.

6.4 Financials

2120



($ MILLIONS)

SAPProfitability Cash Flow Debt to Equality R &D

$3,707 $5,156 35.20% $2,990

6.5 Margins

2012 operating margins declined significantly from 2011. Increased headcount, sales expenses, and cloud computing caused the margin to fall a full 9.2% from 2011.

6.6 Legal

SAP is currently engaged in litigation with Oracle over the “TomorrowNow” saga, with a judgment against SAP of $1.3 billion. SAP has recorded provisions totaling $1.6 billion related to this matter. Additionally, SAP faces action in Africa, Germany and from the U.S. Department of Justice on various legal matters.


SAP is in a strong position with a robust product. It is recommended that potential customers still evaluate the cost of ownership, and investigate the specifics of the products to determine whether it is a fit for their organization.

Summary

Selecting and implementing an ERP system is a large capital expenditure that comes with inherent risk associated with the long term reward. With the lifespan of an ERP system lasting seven to fifteen years, selecting a business software solution is a major business decision that should not be taken lightly. Prior to choosing a software provider we highly recommend your organization conduct a thorough process of due diligence in order to determine the financial and product viability of the software provider and its software packages.

Given the significant commitment and investment required to implement a successful ERP system, it is imperative that your business undertake an independent evaluation to determine cost of ownership and fit for your organization. Failure to do so could create project cost overruns, the risk of a failed implementation, or potentially leave you with a product from a financially challenged company.

If you require assistance with conducting a software evaluation, we urge you to visit us at www.randgroup.com or call us at (713) 850-0747. At Rand Group, we pride ourselves on offering unbiased software selection services and would be happy to discuss your particular needs to help you determine what product is the best fit for your business.

http://www.randgroup.com

22



Appendix A – Financial Comparison Table

i http://www.technewsworld.com/story/77460.htmlii http://www.oracle.com/us/corporate/investor-relations/financials/10k-fy2013-2021362.pdfiii http://www.forbes.com/sites/louiscolumbus/2013/06/23/how-oracles-cloud-strategy-is-turning-into-a- lesson-in-humility/iv http://www.ft.com/intl/cms/s/2/a41b6204-e4ae-11e0-92a3-00144feabdc0.html#axzz2lDR8Zho7v http://www.accmanpro.com/2012/05/09/is-sage-cloud-strategy-working-h1-results-suggest-no/vi http://www.theguardian.com/business/marketforceslive/2013/sep/25/sage-competition-concerns-xerovii http://www.reuters.com/article/2010/07/16/sage-idUSLDE66F0FH20100716vii http://www.zdnet.com/sage-on-the-road-to-nowhere-7000001213/ix http://tickerreport.com/banking-finance/183792/the-sage-group-plc-given-average-rating-of-hold-by- brokerages-lonsge/x http://www.trefis.com/stock/sap/articles/216249/hana-integration-and-smb-cloud-adoption-to-boost- saas-revenues-for-sap/2013-11-21xi Standard & Poor’s SAP AG SP Analyst Report

http://www.technewsworld.com/story/77460.html

http://www.oracle.com/us/corporate/investor-relations/financials/10k-fy2013-2021362.pdf

http://www.forbes.com/sites/louiscolumbus/2013/06/23/how-oracles-cloud-strategy-is-turning-into-a-lesson-in-humility/

http://www.forbes.com/sites/louiscolumbus/2013/06/23/how-oracles-cloud-strategy-is-turning-into-a-lesson-in-humility/

http://www.ft.com/intl/cms/s/2/a41b6204-e4ae-11e0-92a3-00144feabdc0.html#axzz2lDR8Zho7

http://www.accmanpro.com/2012/05/09/is-sage-cloud-strategy-working-h1-results-suggest-no/

http://www.theguardian.com/business/marketforceslive/2013/sep/25/sage-competition-concerns-xero

http://www.reuters.com/article/2010/07/16/sage-idUSLDE66F0FH20100716

http://www.zdnet.com/sage-on-the-road-to-nowhere-7000001213/

http://tickerreport.com/banking-finance/183792/the-sage-group-plc-given-average-rating-of-hold-by-brokerages-lonsge/

http://tickerreport.com/banking-finance/183792/the-sage-group-plc-given-average-rating-of-hold-by-brokerages-lonsge/

http://www.trefis.com/stock/sap/articles/216249/hana-integration-and-smb-cloud-adoption-to-boost-saas-revenues-for-sap/2013-11-21

http://www.trefis.com/stock/sap/articles/216249/hana-integration-and-smb-cloud-adoption-to-boost-saas-revenues-for-sap/2013-11-21

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