SAP (NYSE: SAP ) , the world's largest developer of enterprise software, had a tough second quarter in which a variety of deals failed to close -- and the stock dropped 7% to $46.83 as a result. Well, in the third quarter, the company was able to get things back on track, and the stock price is now above $49. Yet SAP is probably going to continue to plod along because of the increasing pressure from its archrival, Oracle (Nasdaq: ORCL ) .
In third-quarter results released last week, SAP's sales increased 11% to $2.8 billion, thanks in part to strength in markets across Europe, the U.S., and Asia. The company also enjoyed a 17% increase in software license sales. This should help with future revenue growth because of ongoing maintenance and service revenues.
Essentially, SAP's focus is on enterprise resource management (ERP) software. This is critical technology that helps companies deal with a myriad of functions, such as human resources, budgeting, invoicing, and inventory management. However, the company has expanded its offering to other areas, such as customer relationship management (CRM).
Over the past few years, though, SAP has had to deal with new competitive threats. Upstart companies such as Salesforce.com (NYSE: CRM ) and NetSuite, for example, use the Internet as a way to deliver software. This approach tends to result in a lower cost for customers, as well as greater ease in implementation and maintenance.
But the biggest threat is Oracle, which has spent $19 billion on mergers and acquisitions to build an ERP powerhouse. What's more, its database franchise provides a lot of synergy; after all, this is a core technology for any major enterprise.
And the strategy appears to be working. In the third quarter, Oracle posted 32% in revenue growth to $3.2 billion and 24% earnings growth to $0.18 per share.
But this really didn't faze SAP's CEO, Henning Kagermann. He made it clear that his company does not plan to trigger "massive acquisitions." He firmly believes that if his company is to provide quality technology, it needs to be built in-house.
This may be true. But the fact remains that customers also want competitive pricing on new technology. And it looks as though Oracle is putting that kind of pressure on SAP.
Basically, for the company the size of SAP, it's extremely important to generate enough organic growth to interest shareholders. But instead, it looks as if investors will mostly see SAP duke it out with Oracle for market share.
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Fool contributor Tom Taulli does not own shares of companies mentioned in this article.
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