SAP Cloud Sales Should Benefit From Growing SaaS ERP And SCM Offerings

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SAP SE (NYSE:SAP) is a leader in the move to Cloud Computing.  On-demand versions of Enterprise Resource Planning (ERP) and Supply Chain Management (SCM) software products are likely to witness faster adoption rates going forward. Given the market leadership position of SAP in both these software verticals, we believe the company should benefit from an industry migration towards on-demand software subscriptions.

Luka Mucic, Chief Financial Officer of SAP, provided positive outlook on the software vendor’s on-demand software sales. Mr. Mucic expects revenues from on-demand software products to outpace traditional on-premise licenses by 2020. [1] Year to date, SAP has generated approximately €460 million and €1,581 million in sales from SaaS subscriptions and on-premise licenses, respectively. However, SaaS subscriptions grew 55% in H1FY14 from a similar period in FY13. During the same period, new license sales of on-premise software declined 4%. On-premise license sales have been in a secular decline across the IT industry, fueled by increasing demand for SaaS services.

In this research note, we take a look at key SaaS trends that could lift cloud revenues from SAP.

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ERP and SCM Likely to Witness Stronger SaaS Adoption

The entire IT industry is migrating from on-premise installations to on-demand subscriptions. The CRM market has been at the forefront of this migration, with Salesforce emerging as a clear winner in the market. The SaaS-based CRM company has posted a revenue growth rate of over 30% for years. This has resulted in Salesforce overtaking SAP as the leader of the CRM market in 2012. At the end of 2013, SAP had a market share of 12.8% compared to Salesforce’s 16.1%. [2]

We believe the CRM market particularly benefited from the on-demand migration by catering to the needs of sales personnel. Business-to-Consumer (B2C) and Business-to-Business (B2B) CRM suites witnessed strong demand by allowing sales personnel to track leads in real-time across various devices and provide personalized services. In addition to the strong surge in the CRM market, business intelligence software and data analytics tools have grown sharply on the back of rising demand to understand specific customer trends and build customized marketing campaigns.

In comparison, ERP and SCM suites cater to administrative and operational activities as opposed to sales and marketing activities that CRM offerings cater to. This has restricted strong growth in both these verticals, as most companies have in-house teams looking after these functions. The in-house nature of these teams has traditionally led to on-premise installations of ERP and SCM software. However, we believe this trend is slowly beginning to change.

For example, in the SCM market, SaaS installations provide real-time access to all-parties involved. This greatly improves visibility in the supply chain and enhances the efficiency of the distribution network. SAP has a strong presence in the global SCM market, and its recent acquisitions of Ariba and Fieldglass should contribute to market share gains going forward. Ariba is a cloud-based procurement company that helps businesses cut costs and grow sales through better collaboration with trading partners while Fieldglass is a vendor management system operator that provides temporary workforce requirements to businesses. Integrating Ariba and Fieldglass should provide businesses with an end-to-end solution in managing a supply chain, providing a market share expansion for SAP.

Similarly, in the ERP product space, on-demand deployments are growing faster than traditional on-premise installations. Enterprise Resource Planning software generally deals with all the administrative and financial aspects of a business and hence, on-premise installations have been the industry norm for many years. However, SaaS and mobile ERP suites have seen significant traction in recent times. Reduced budgets and tighter project schedules have resulted in faster time-to-market of products, with these on-demand, mobile modules unifying the manufacturing shop floor with top management floor. [3] In this regard, we believe SAP has a strong advantage in the ERP market and can gain further share by combining its market leadership with Sybase’s mobile enterprise offerings.

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Notes:
  1. SAP CFO Says Cloud Deals to Outpace Traditional Software by 2020, Bloomberg, September 2014 []
  2. Gartner Says Customer Relationship Management Software Market Grew 13.7 Percent in 2013, Gartner Press Release, May 2014 []
  3. Why Cloud ERP Adoption Is Faster Than Gartner Predicts, Forbes, February 2014 []