SAP Headed For $71 On Cloud, Mobile And HANA Growth

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SAP AG (NYSE:SAP) announced its financial results for Q1 2012 on April 25. It reported its 9th consecutive quarter of double digit growth with total revenues growing 11 percent to Euro 3.35 billion ($4.46 billion). It attributed this to strong growth in cloud and mobile business as well as in-memory computing platform SAP HANA. [1] It also saw strong demand for its cloud business with a 69% growth in new billings from SuccessFactors, the human resource solutions company acquired by SAP. It competes with players such as Oracle NASDAQ:ORCL), Salesforce.com (NYSE:CRM), IBM (NYSE:IBM), and Microsoft (NASDAQ:MSFT).


Check out our complete analysis for SAP

Highlights of Q1 2012

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Cloud subscriptions and support business grew by 625% y-o-y to Euro 29 million ($ 38 million). This is expected to become a bigger part of its revenues going forward as it is pushing for cloud and mobile service adoption. Support services business grew by 14 percent y-o-y to Euro 1.96 billion ($ 2.6 billion). The operating margin however was down slightly to 18.8 percent compared to 19.7 percent y-o-y due to increasing competition, the slowdown in Europe and costs related to acquisition of SuccessFactors. Profit after tax gained a healthy 10 percent y-o-y to Euro 444 million ( $ 586 million). [2]

Revenue from the Asia Pacific business grew 22 percent y-o-y to Euro 440 million ($ 581 million) and this is due to growth driven by China, Japan and India. Revenue from the US was lower than expected and grew by about 12 percent y-o-y to Euro 946 million ($ 1,250 million). Europe, Middle East and Africa revenue was Euro 1.23 billion ($1.63 billion) and grew by 10 percent. This is mainly due to reduced IT spending in Europe due to the Eurozone crisis.

We expect emerging markets such as Brazil, India, China and other Asian countries to drive the cloud based business as it is a more cost effective way to adopt ERP and CRM and these economies tend to be more price sensitive.

Outlook For 2012

SAP expects full year revenues to increase in the range of 10-12 percent y-o-y and this includes contribution from SuccessFactors. Revenue for 2012 is expected to be around Euro 12.5 to 12.7 billion ( $16.5 to $16.7 billion). It also expects operating profit to be in the range of Euro 5.05- 5.25 billion ($6.7 to 7 billion). This is up by about 7 percent y-o-y. In addition it released an outlook for Q2 and expects software revenue to increase 15- 20 percent y-o-y and expects it to be in the range of Euro 964 million to Euro 1 billion ($1.27 to 1.32 billion).

Cloud, Mobile and HANA to drive 2012

SAP is increasing its focus on the mobile, cloud and HANA businesses. These are likely to drive revenues for 2012 as it diversifies its business mix. It is targeting revenue from HANA to be at least Euro 320 million ($ 422 million) for 2012 and mobile revenues of about Euro 220 million ($ 290 million). The cloud business will put it in direct competition with Salesforce.com which is the leader in cloud based CRM. It will also change its reporting structure to show revenues from the cloud business and this is due to expected growth in this revenue line.

The cloud business will be driven mainly by small and medium size businesses in the short term as it offers a lower price point for these consumers. An added benefit is the ease with which they can integrate their businesses with the new systems as it would not involve legacy ERP and CRM systems. Larger businesses would take much longer to fully move to the cloud as this would involve migrating a lot of legacy systems. So we expect a lot more revenues coming in from large businesses in the longer run and revenues are likely to be exponential. Most large businesses will keep a mix of both systems, with critical systems still being maintained in house and not on the cloud. The mobile services can be sold as an add on to the existing services as employees demand access to business data on their mobile devices and there is a large opportunity to tap the existing customer base. This is less likely to be adopted in an environment of low IT spending.

We expect HANA to be the largest growth opportunity. It is essentially SAP’s take on solving the Big Data problem. It is a platform on which analytics applications can be built to process large amounts of data faster than the current systems. Its in-memory computing is the key innovation and data can be processed at a much faster rate than traditional methods. It is also cheaper as it runs on inexpensive hardware and is SAP’s best bet in the analytics space. We expect this to be the biggest source for growth in the coming years.

We currently have a $71 Trefis Price Estimate for SAP which is about 10 percent more than the current market rate.

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Notes:
  1. SAP Investor Relations, www.sap.com, April 25, 2012 []
  2. SAP Investor Presentation, www.sap.com, April 25, 2012 []