Software manufacturer SAP AG (NYSE:SAP) will be reporting its third quarter results on October 21. The past two quarters saw revenues grow by 6% from a year ago. SAP reports revenues under two business divisions – On-premise and Cloud. Non-IFRS revenues for the on-premise division increased 2% h-o-h to €7.27 billion (~$9.55 billion), while its cloud division increased approximately 226.5% h-o-h to €457 million (~$600 million). The huge growth rate seen in the first half of FY2013 is supported by the acquisition of Ariba in October 2012. Excluding the added revenues resulting from the acquisition of Ariba, non-IFRS revenues for SAP’s inherent cloud business showed a growth of 79% at €233 million in H1 2013 compared to €130 million a year ago.
Non-IFRS operating profits for the on-premise and cloud divisions stood at €3.545 billion (~$4.656 billion) and €51 million (~$67 million). Operating profit margins for both the divisions were approximately 49% and 11% respectively. SAP’s own cloud business had an operating loss of €9 million, with Ariba accounting for €60 million in operating profits. However, these figures were stronger from what the company posted during the same period a year ago. Overall, operating margins were 27.4% during the period, down 20 bps over H1 2012 due to the acquisitions made in 2013. The company ended H1 2013 with 10% earnings growth at €1.31 (~$1.72) per share over H1 2012.
In the current quarter, we expect revenue growth from the continued strength in SAP’s cloud business. Additionally, we expect increased integration of its HANA platform across its product offerings. The company recently announced a new ‘chemical company in a box’ package that combines SAP’s ERP application software with the HANA platform deployed on a hosted cloud environment.  We expect operating margins to remain flat this quarter. However, better-than-expected revenue growth could give a healthy bottom line growth number.
We currently have a $74 Trefis price estimate for SAP, which is in line with the current market price.
SAP’s targeted growth areas include in-memory technology, enterprise mobility and its cloud portfolio. Its in-memory platform HANA has seen tremendous growth since inception. Revenues from HANA for the recently concluded quarter increased 21% q-o-q to €102 million (~$133 million) and are expected to amount to €650 – €750 million for fiscal 2013.  SAP announced its plan to accelerate innovation in cloud-based offerings and consolidate SAP HANA into existing and new products. 
Packaging HANA with its existing suite of softwares can boost sales from the ‘Software and Software-related Service’ front. The company could look to leverage its industry position in scaling up hybris’ offerings from a retail industry model to a model that fits across other industries such as manufacturing, financial services etc. SAP’s latest acquisition, hybris, provides retail businesses with effective ways to conduct business-to-business (B2B) as well as business-to-consumer (B2C) transactions. We expect increased integration of the HANA platform into SAP’s suite of business applications to boost revenues from its application softwares, resulting in an increase in its market share.
Long Term Prospects Rest On Growing Cloud Deployments
Adoption of cloud services is being fueled by improved business performance at lower costs. As the name suggests, database-as-a-service (DbaaS) entails accessing databases present on a cloud network. The cloud networks can be deployed by an external provider or can be an independent, enterprise network. DbaaS offers users limited initial investments into server hardware and has a growing preference in the business community. The DbaaS market was estimated to be worth approximately $150 million in 2012. However, the market is expected to grow 86% annually to reach $1.8 billion in size in four years. In comparison, on-premise deployments are expected to grow 33% y-o-y during the same period.
SAP reports that currently 77 of its products are on the HANA platform and more are expected to be converted to be ready for HANA.  Given the growth seen in its cloud business in the past two quarters, SAP plans to offer HANA itself as a service to its customers in the future.  With exclusive deployments of SAP’s softwares and platforms on a cloud environment, this offering could result in direct competition with cloud-based CRM market leader Salesforce.com (NYSE:CRM). However, newer in-memory technologies and cloud-based offerings from larger competitors like Oracle (NASDAQ:ORCL) could hinder these growth prospects.
We will be updating our price estimate on SAP once the company files its third quarter results on October 21.Notes:
- New Offering from SAP Helps Chemical Companies More Quickly Adopt Business Best Practices for Transformation and Rapid Time to Value, SAP Newsroom, October 2013 [↩]
- SAP’s Management Presents at Citi 2013 Global Technology Conference (Transcript), SeekingAlpha, September 2013 [↩]
- SAP to Accelerate Innovation for Cloud and SAP Hana Through One Unified Development Organization, SAP Newsroom, May 2013 [↩]
- SAP AG’s Management Presents at Deutsche Bank Technology Conference (Transcript), SeekingAlpha, September 2013 [↩] [↩]