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IT software and Services industries are suffering from a fall in demand for software and web services as consumers are focusing solely on essentials and not discretionary products. That said, the industry has seen companies with a portfolio of software as well as services aimed at remote collaboration benefit due to the growing number of people globally. Many companies are also operating with employees working remotely from their own home.
For Q3 2020, SAP recorded revenue of $7.7 billion, up by 5% y-o-y due to currency conversion. Revenue from Cloud subscriptions and Support was recorded at $2.3 billion, up by 18%. Operating profit was down to $1.7 billion from $1.8 billion in the previous year primarily due to the covid-19 pandemic
The company reduced its revenue outlook to €27.2-27.8 billion for the year 2020 and Operating profit to €8.1-8.5 billion for the year 2020.
Below are key drivers of SAP's value that present opportunities for upside or downside to the current Trefis price estimate for SAP:
For additional details, select a driver above or select a division from the interactive Trefis split for SAP at the top of the page.
SAP makes money by selling crucial software applications to businesses worldwide. Companies use SAP software to integrate efficiently and process data, better manage customer and supplier relationships, and shorten product lead time to market through the use of product management software.
Each of these four steps, i.e., integrate and process data, manage customer relationships, manage supplier relationships, and shorten product lead time, can be thought of as corresponding to one of SAP's four main software offerings.
SAP's best-known product is its SAP Enterprise Resource Planning (SAP ERP) software. Enterprise Resource Planning (ERP) is software used for integrating the data and processes of an organization into one single system.
For example, in a bank, a credit card system and a savings account system are two different systems having no common interface. SAP ERP provides an interface that connects all systems, in this example connecting credit card and savings account systems.
With the bank's system integrated using ERP software, the bank's customers will now be able to auto-debit their credit card payments to their savings account. Without this vital integration of the two systems, the customer would have to manually transfer funds from his savings account to his credit card account. Furthermore, by tracking such information, ERP software helps the bank cross-sell credit cards to their savings account customers and vice-versa, leading to new revenue opportunities.
Customer Relationship Management (CRM) is software that allows companies to better manage customer information such as leads, transaction history, and communication history. CRM data helps companies acquire and retain customers as well as gain marketing and customer insight.
For example, a customer may always buy the same product from a retailer. The retailer could advertise similar products to the customer if it kept track of the specific products purchased by the customer as well as the customer's spending habits and what products he may be interested in the future. Tracking and organizing such information creates significant business opportunities for the retailer. It is challenging to do such customer-specific marketing without the help of the CRM software.
Supply Chain Management (SCM) is software that helps companies track the movement and storage of raw materials, work-in-process inventory, and finished goods from the point of origin to the point of consumption.
For example, a medical services company that sells medical and surgical supplies to hospitals would benefit from a supply chain management system that can coordinate with medical supply manufacturers and hospital customers. By keeping track of usage patterns, the supply chain management system will be able to forecast the demand for medical and surgical products by seasons, by regions and by customer types. This will help both the medical service company and hospitals to more efficiently manage their supply inventory levels.
Large retailers with many regional distribution centers like Wal-Mart use supply chain management systems to coordinate between suppliers of merchandise (e.g., clothes, paper products) and Wal-Mart's retail stores to reduce the inventory cost. This helps retailers like Wal-Mart pass savings onto customers in the form of lower prices for many everyday products. The backbone of many service operations is Supply Chain Management or SCM.
The Software Support segment is SAP's most valuable segment for the following reasons:
Software Support Revenue has been the highest contributor to the total revenue for nearly a decade now. Till 2014 it contributed more than 50% of the revenues, but we see a decrease in percentage terms after that, with the Cloud Subscription seeing tremendous growth in the last four years. In FY 2019, the contribution to overall revenue was 40%.
From 2011 to 2014, the metric remained between 79% to 82%, but since 2015 it has risen almost every year and was at 86.6% in 2019.
Time and again, SAP has announced that its in-memory is a disruptive technology, which speeds up data storage and retrieval to unprecedented speeds. Leveraging the in-memory technology is a software known as HANA (High Performance Analytic Appliance). HANA uses a different method of storing and retrieving data by storing it on the computer’s CPU rather than the traditional way of reading and writing on storage disks.
On the other hand, Oracle has also made great strides over the last year or so through the introduction of faster Exadata machines capable of producing millions of transactions quickly.
SaaS is a subscription-based service where companies can access software online and pay only for the functionality utilized. This is often a cost-effective solution for companies, and suits small and medium enterprises more, as they have low IT budgets. In this model, the software is generally hosted on the service provider's servers from where users can easily access it. As such, businesses can save heavily on costs and time involved with the purchase and implementation of expensive software. We forecast an increasing trend towards "Software as a Service" adoption.
SAP SaaS offering includes CRM, which it sells by the name CRM on-demand.