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  • Financial Services Rebound Could Propel SAP’s ERP Software Business

    SAP’s (SAP) stock could see an improvement as a result of rising demand for Enterprise Resource Planning (ERP) software in the financial services sector.  SAP and its competitors Oracle (ORCL), Microsoft (MSFT), Infor and Sage have recently benefited from rising demand for IT services in the financial sector.  SAP’s ERP revenues improved significantly in the last quarter of 2009 due in part to the increase in revenue from SAP’s financial services customers.

    We have updated the Trefis price estimate for SAP’s stock from $41.03 to $43.19 (versus market price of $42.77) based in part on the outlook for a stronger global ERP software market over our forecast period.

    Below we highlight the significance of the ERP business for SAP and how growth in the financial services sector can lead to a stronger ERP market that would benefit SAP.

    Enterprise Resource Planning Software 40% of SAP’s Value

    We estimate that Enterprise Resource Planning (ERP) software constitutes about 40% of the Trefis price estimate for SAP’s stock.  ERP software is used by businesses to integrate separate data repositories and processes into one single system.

    For example, a bank might use SAP’s ERP software to integrate the data from its a credit card business with that of its savings account business.  By doing so, the bank will be able to better find opportunities for cross-selling products (credit cards, savings accounts) to its existing customers.

    SAP makes money by selling software licenses for its ERP software to businesses, and by providing support and maintenance services to its customers.

    Financial Services Sector to Boost ERP Software Market

    SAP’s ERP revenues for the last quarter of 2009 grew significantly, with the majority of the growth driven by the financial services sector.  SAP’s ERP revenues from financial services grew by 37% year on year, which includes growth of 46% in banking and 14% in insurance.  In comparison, SAP’s ERP revenue from the telecom and public sector rose by 21% and 14%, respectively.

    SAP recently won a multi-year arrangement with Deutsche Bank to run its software for Deutsche’s core banking platform. SAP’s major customers in the financial services market include Achmea/Rabobank, Talanx, Credit Agricole and the National Australia Bank.

    We believe a rebound in the financial services sector will drive demand for IT and that demand for ERP software will increase as a result.  We expect the Resource Planning Software market to grow from $21 billion in 2009 to nearly $34 billion by the end of Trefis forecast period.

    You can modify our forecast here to see how SAP’s stock would be impacted if growth in the ERP market were to be higher than our forecast due to the improvement in the financial services sector.

    Feb 12 5:07 PM | Link | Comment!
  • Avatar Has Minimal Impact on News Corp Stock

    News Corp’s (NWS) Avatar film has earned more than $2 billion in worldwide ticket sales.  The impact of Avatar’s success on News Corp’s stock, however, is minimal.  Below we discuss the total potential profits that News Corp can earn from Avatar and similar blockbuster films, as well as how Avatar’s impact on the $17.78 Trefis price estimate for News Corp’s stock is small.

    More than $500 million in Avatar Profits for News Corp

    For News Corp, we estimate that Avatar will bring in $1.5 billion of box office net revenue, $500 million of DVD revenue and combined box office plus DVD profits of about $500 million.

    $1.5 billion of Avatar Box Office Revenue for News Corp

    We estimate that Avatar will take in about $2.5 billion in gross box office revenue by the time it stops running in movie theaters.  The average film studio share of box office revenue is 60%, meaning that News Corp will earn close to $1.5 billion in net revenues from Avatar.

    $416 million in Avatar Box Office Profits for News Corp

    The total production and marketing costs for Avatar were about $460 million implying slightly more than $1 billion in profits for the film.  However, a group of private equity investors helped finance the film for a 60% stake, which implies that News Corp is entitled to 40% of the profits (or about $416 million) from Avatar movie ticket sales.

    $500 million in Revenue and $100 million in Profit from DVD sales

    In addition to the box office, we expect that 20 million DVDs of Avatar will be sold worldwide, generating revenue of roughly $500 million.  With a 50% margin on DVD sales and a 40% share of profits for News Corp, we estimate that the company could earn a profit of about $100 million from Avatar’s DVD sales.


    We estimate that Fox Studios (owned by News Corp) will have 7.5% market share amongst the 570 million DVDs that are sold in 2010, implying about 43 million DVDs sold.  You can modify our forecast here to see how an additional 3% market share in 2010 attributable to the sale of 20 million Avatar DVDs could impact News Corp’s stock.

    Impact on News Corp Stock

    Box office and DVD sources combined, News Corp could earn a total profit of over $500 million from Avatar.  Even if Fox Studios were to produce and release a blockbuster film like Avatar every year for the next 10 years, all of these movies combined would cumulatively add $5 billion on a nominal basis or about $3.2 billion in discounted free cash flow (DCF) to News Corp using a discount rate of about 9%.

    Given our $46.5 billion (or $17.78 per share) estimate for the value of News Corp, a $3.2 billion increase in News Corp’s value would impact the Trefis price estimate for News Corp’s stock by only $1.20 per share (less than 7%).

    Within the Fox Studios division of our analysis of News Corp, you can see our forecasts for the key drivers related to News Corp’s movie business:


    Feb 12 4:52 PM | Link | Comment!
  • EMC Storage Market Share Will Increase to 24%

    EMC (EMC) had strong demand for its storage systems across all product categories in the past quarter and we expect EMC’s storage market share will continue to grow as a result of high demand.  The company has also benefited from a revival in IT spending by large businesses that has helped other industry players like NetApp (NTAP) and SanDisk (SNDK).

    We have updated the Trefis price estimate for EMC’s stock from $23.43 to $24.50 in part to reflect higher EMC storage hardware market share.  Below we explain the significance of the storage business for EMC and why EMC’s share in storage hardware should grow over our forecast period.

    Information Storage is 63% of EMC’s Stock

    EMC makes money by selling storage hardware, storage software and storage services to medium and large businesses. We estimate that the storage business, including software, hardware and services, generates close to 63% of EMC’s value.  Interestingly, the storage hardware that EMC is known for constitutes only about 13% of the company’s value compared to 45% for the storage software.  This difference is attributable to the much higher profit margins associated with software.

    EMC’s Storage Hardware Market Share to Increase to 24%

    We estimate that EMC gained market share in high-end storage hardware systems during the last quarter of 2009.  We expect EMC’s storage hardware market share to continue to increase as a result of the superior software that it offers for storage hardware systems.

    Better Storage Software Gives EMC an Edge

    In Q4 of 2009, EMC introduced a new approach to high-end data storage by integrating V-Max and FAST software technology into Symmetrix, the company’s flagship storage hardware product that targets large businesses.  Both software suites are designed to improve the performance (speed, capacity) of storage hardware and help make EMC’s storage and hardware combination an attractive choice for storage customers.

    Better software technology helped EMC post a 13% rise in Symmetrix revenues in Q4 over Q3 of 2009.  We expect EMC’s Symmetrix revenues to continue to grow and we expect EMC’s storage market share to be positively impacted from Symmetrix.  We forecast that EMC’s Market Share of Storage Gigabytes will increase from about 22% in 2010 to nearly 24% by the end of Trefis forecast period.

    You can modify our forecast here to see how EMC’s stock would be impacted if its share within the storage hardware market were to remain stagnant rather than growing as we have forecast.

    Feb 12 4:41 PM | Link | Comment!
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