Ariba, HANA Should Support Strong Growth In SAP’s Supply Chain Software Sales

Technology research firm Gartner released its Worldwide Supply Chain Management (SCM) software market report on May 12, 2014. According to the report, the global SCM software market grew 7.3% in 2013, reaching $8.94 billion in revenues. German enterprise software developer SAP AG (NYSE:SAP) continued to lead the market with a market share of 23.9% compared to 20.7% in 2012. Rival software developer Oracle (NYSE:ORCL) held second spot with a market share of 16.3% in 2013 compared to 17.4% in 2012.

In terms of revenues, SAP reported a strong 24% year-on-year growth in revenues in 2013 to reach $2.14 billion. During the same period, Oracle posted a meager 0.1% expansion over 2012 revenues to reach $1.46 billion. In this note, we take a look at various factors that have contributed to SAP’s strong performance in 2013 and their impact on the company going forward. According to our estimates, supply chain software accounts for approximately 13.5% of our $95 price estimate for SAP.

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Ariba Acquisition Boosts SAP Market Share In 2013

SAP completed the acquisition of Ariba in October 2012 for $4.3 billion. Ariba is a cloud-based procurement company that helps businesses cut costs and grow sales through better collaboration with trading partners. More than $500 billion was traded last fiscal on the Ariba network by more than 1.4 million companies. Ariba reported revenues of approximately €461 million (~$631 million) in 2013 compared to €120 million (~$163 million) in 2012, representing a 283% growth in revenues. With all of Ariba’s product offerings in the SCM and Procurement software vertical, we believe the reason for SAP’s strong surge in market share in 2013 was the acquisition of Ariba.

According to the Gartner report, SAP recognized about $2.14 billion in revenues in Supply Chain and Procurement software in 2013. Revenues in 2012 were approximately $1.72 billion. The $417 million increase in year-on-year revenues were a result of the consolidation of Ariba’s business into SAP. Given the strong triple digit growth in Ariba’s revenues, it is fair to expect a strong expansion in SCM revenues for SAP, going forward. Additionally, the company’s recent acquisition of FieldGlass should further bolster revenues from its SCM product vertical. FieldGlass is a vendor management system operator that provides temporary workforce requirements to businesses. By integrating its Supply Chain and Procurement and Vendor Management product offerings, SAP could benefit from operational synergies that the businesses derive from a composite offering.

Going forward, we expect SCM revenues to grow consistently at a double digit pace and cross $4 billion by the end of our review period. Although we currently forecast SAP’s SCM market share to remain close to its current level of 24%, additional synergies for businesses could result in a rapid increase in demand for SAP’s offering in the SCM vertical. This should lead to an expansion in market share and acceleration in sales for the SCM offering in the future.

Moreover, a recent report from Gartner touched upon SAP’s growth strategy for the SCM product vertical. The company believes its flagship HANA platform holds the key to unlocking rapid growth. By targeting more global, complex and volatile supply chains, SAP plans to utilize the advantage of cloud deployments and capabilities of its HANA in-memory computing module to deliver granular, real-time solutions that converge planning and execution. A successful execution of this integrated business model should lead to SAP strengthening its foothold in the Supply Chain and Procurement software market.

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