SAP AG (NYSE:SAP) will release its first quarter earnings report on April 19. In FY 2012, revenues grew by 14% y-o-y, to €16.2 billion (~$21.2 billion), driven by a growth in software revenues that increased by 14% y-o-y, to €4,658 million (~$6,100 million). This growth includes a 10% increase from changes in volumes and prices. Its software and software-related service revenue increased 16%, to ~€13.2 billion (~$17.2 billion ) while operating profit decreased by 17%, to €4 billion (~$5.3 billion).
Over the past two years, SAP has moved from running its applications in an old-school on-premise fashion to offering them both, in the cloud and on premises. The new HANA product which was instrumental in the transition moves business data into memory chips and off spinning hard drives, thus making access to them more immediate. SAP HANA contributed Euro 392 million to software revenue in 2012, and we expect it to become a significant contributor to the company’s revenues in the long term. Its popularity is expected to support growth in the popularity of the company’s cloud services and mobile applications.
SAP competes with software giant Oracle (NASDAQ:ORCL), as well as with certain cloud-based software companies including Netsuite, Salesforce.com (NYSE:CRM) and Workday. We highlight some of the key factors affecting its business and what our expectations about their impact on the company are.
HANA, Cloud And Mobile To Drive Performance In 2013
SAP’s increasing focus on the mobile, cloud and HANA businesses is already paying off as these are the divisions that have been driving revenue growth. These divisions are likely to drive revenues for 2013, as it continues to diversify its business and moves to the cloud.
1. Big Expectations of HANA
HANA has about 1,000 customers on it now and is growing fast. The company estimates that it could be half a billion U.S.-dollar business, making it one of the the fastest-growing software product in the world.  For 2013, the company has lofty expectations of the product. It estimates that software revenue from SAP HANA will range between €650 million to €700 million. Its expectations are supported by the completion of the transition of entire SAP ERP (Enterprise Resource Planning) suite onto the HANA platform in January. This will put it in direct competition with Salesforce.com which is the leader in cloud based CRM. We will look for the performance of HANA business in the earnings call and expect it to define the company’s 2013 performance.
2. Continuing Adoption of Cloud Services
SAP’s performance in 2012 was helped by the company strengthening its position in cloud computing, by acquiring two leading cloud providers – SuccessFactors and Ariba. Businesses looking for simplification and cost-savings took advantage of cloud solutions and moved core processes on to the cloud. As a result, the company ended 2012 with over 6,000 customers and more than 20 million users in the cloud. The company is aiming to have a €2 billion cloud business in the long run.
We expect continuing adoption of the cloud-based services by small and medium size businesses as the software as a service (SaaS) model makes it cheaper to adopt and deployment on the cloud makes it easy to integrate. The absence of legacy enterprise resource planning (ERP) and customer relationship management (CRM) systems makes the cloud model more viable as there are no integration issues. Larger businesses would take much longer to fully move to the cloud as this would involve migrating legacy systems. So we can expect revenues coming in from large businesses in the longer run and the growth is likely to pick pace.
3. Growing Mobile And Internet Penetration To Aid Mobile Revenue Growth
In 2012, SAP’s revenues from mobile applications increased 71% to €222 million, successfully meeting its own growth target. This growth was helped by the continuing adoption of mobile devices as Internet touch points. Currently, 15 billion of the world’s mobile devices are connected to the Internet. With trends like “bring your own device” gaining a stronghold, we expect SAP’s mobile offerings will see increased adoption, as companies try and connect their employees with with real-time information.
We currently have a $73 Trefis Price Estimate, which is 5% below the current market price.
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