All Eyes on SAP S/4HANA and Cloud in SAP’s Q1 Results

European software giant SAP SE (NYSE: SAP) is slated to report its 2015 first quarter results on April 21st. The first three months of the year were quite eventful for SAP, with a number of major product updates and new partnerships. During the quarter, SAP released the biggest update to its ERP platform in over two decades (Read: Has SAP Bet The House With The Biggest Update to its ERP in Two Decades?) It also accelerated its foray into the Internet of Things (IoT) with several new partnerships and bagged major joint contracts in the nascent sector (Read: SAP Prepares to Take On The Internet of Things, Announces String of New Partnerships). The quarter also saw the release of a large number of new offerings by the European giant, setting the stage for additional revenue streams in coming quarters (Read: It’s Products Galore From Enterprise Software Vendors).

Consequently, the focus in the first quarter will be on adoption rates for the new products, especially for SAP S/4HANA. Given its legacy roots, SAP is seen by some to be a laggard in cloud computing, which is quickly supplanting the traditional on-premise model. Now, with SAP S/4HANA, the company hopes to catch up to its key competitors in the cloud computing segment, Oracle Corp. (NYSE: ORCL) and Salesforce.com (NYSE: CRM).

We have a price estimate of $78 for SAP SE, which is about 10% higher than its current market price.

See our complete analysis for SAP SE here

All Eyes on SAP S/4HANA

During the first quarter, SAP released the biggest update to its ERP platform in two decades in the form of SAP S/4HANA. S/4HANA is the company’s answer to its competitors’ products in the cloud computing industry. SAP has lagged behind Oracle and Salesforce in the cloud computing segment and is counting upon S/4HANA to provide it the much-needed foothold in this crucial market. The importance of S/4HANA can be summed up in SAP founder Hasso Plattner’s statement, “If it doesn’t work, we’re dead. Flat out dead.” ^[1]

Given the vital nature of S/4HANA for SAP’s future, investors will be keenly looking for updates regarding adoption rates of the platform. SAP needs to convince potential customers to switch from traditional databases like those offered by Oracle to this new database technology, which is a difficult task at the minimum. Therefore, the first quarter results are likely to provide a preliminary indication of whether the company is on the way to scaling this uphill task.

New Products and Concur Acquisition May Boost Cloud Revenues

SAP released a large number of new products during the first quarter, which are likely to boost its revenues in the first quarter compared to the same period previous year. Of course, the extent of incremental revenues achieved from these new products depends upon the success achieved by each of the products. However, it may be reasonable to assume that SAP may gain a slight advantage thanks to the aggressive expansion of its product line.

Further, the impact of the Concur acquisition is expected to be fully consolidated into SAP during the first quarter. This is evident from the 86% revenue growth in revenues from cloud expected by SAP in 2015. ^[2]

It should be noted that in terms of revenue growth, SAP outperformed both Oracle and Salesforce in 2014. The company achieved 72% year on year cloud revenue growth in the fourth quarter of 2014, and 45% growth for the full year. While part of this sky-high revenue acceleration may be attributed to a low base effect, it cannot be denied that SAP is making its presence felt in cloud computing. The company may have joined the cloud party later than most, but 2015 is set to be a watershed moment for SAP in the cloud business due to aforementioned factors.

Foreign Currencies Likely to Provide a Tailwind

SAP stated last month that the weakened Euro is set to provide a boost to its revenues and profits. ^[3] The company estimated that its top-line as well as bottom-line may end up higher than its original forecasts. The favorable foreign currency impact sets the company apart from its major competitors, which are based in the U.S. and are witnessing significant currency headwinds.

Currency tailwinds may also provide relief to SAP’s bottom line, which is under pressure due to the ongoing transition to a cloud computing model. Revenues from cloud computing are deferred over the period of the contract, unlike the on-premise model in which revenues are booked upfront. This negatively impacts margins during the transition period. However, SAP may be able to partially offset the same thanks to favorable currency movements.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. SAP founder Hasso Plattner: ‘If this doesn’t work, we’re dead. Flat-out dead’, Business Insider, February 5, 2015 [↩]
2. SAP 2014 Fourth Quarter Earnings Call, Seeking Alpha, January 20, 2015 [↩]
3. SAP Predicts Euro Slide Will Boost Software Revenue, Profit, Bloomberg, March 20, 2015 [↩]