German software developer SAP AG (NYSE:SAP) is scheduled to report first quarter results Thursday, April 17. We expect revenues of approximately €3.8 billion for the quarter, indicating a 6% year-on-year growth for the company. Revenues from the same period in fiscal 2013 grew 7.5% to reach €3.6 billion. In dollar terms, revenue growth rate for Q1FY13 stood at a slightly higher level of 8.3% compared to Q1FY12. This higher dollar growth rate signifies a stronger Euro against the U.S. Dollar. For Q1FY14, the Euro – Dollar conversion rate from the European Central Bank stands at 1.3696 compared to 1.3206 and 1.3108 during Q1FY13 and Q1FY12. This further appreciation of the Euro against the U.S. Dollar should boost revenue growth rate in dollar terms this quarter.
What is more significant this quarter is the performance of its cloud revenus, which grew very rapidly last year. Cloud subscription and support revenues for SAP expanded from €35 million in Q1FY12 to €167 million in Q1FY13. This represents a massive five-fold growth in cloud revenues on a year-on-year basis. For entire fiscal 2014, SAP has a €950 million – €1,000 million revenue forecast from cloud subscriptions and support. We expect strong double-digit growth in cloud subscriptions revenues for SAP this quarter. However, the company’s operating margins are expected to be subdued this fiscal, in line with SAP’s guidance of a deferral in its profitability target to 2017. The company plans to accelerate its investments into its cloud unit to boost sales growth further, which impacts profitability in the short term.
We currently have a $95 Trefis price estimate for SAP, which stands at a 20% premium to its market price of $79. We will be revising our price estimate once the company files its Q1 results with the SEC.
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Demand For In-Memory Computing Should Drive Revenues For HANA In 2014
Technology research firm Gartner predicts good adoption of in-memory computing technology in 2014, as deployments into business-critical computing environments in the enterprises deliver high-impact business value.  We believe SAP is positioned well to capture this growth in demand for in-memory computing technologies through itts High-Performance Analytic Appliance (HANA) platform. The company’s HANA platform is the first-of-its-kind in-memory database that offers converged Online Transaction Processing (OLTP) and Online Analytical Processing (OLAP) of data.
Last quarter, SAP generated revenues of €633 million (~$841 million) which was lower than its guidance range of €650 million – €700 million. This shortfall in revenues for the HANA platform was a result of adverse currency fluctuations in fiscal 2013. In terms of year-on-year growth rate, revenues for SAP HANA expanded close to 62% from €392 million in fiscal 2012. We expect this strong performance to continue in fiscal 2014, primarily driven by the business functionality of the HANA offering. Bundled offerings of its application suites on the HANA platform have seen strong growth from enterprises, and the launch of subscription-based solutions powered by SAP HANA should boost both HANA revenues and application revenues for SAP in 2014. 
Integration Between HCM And SCM Solutions Should Bode Well For SAP’s Cloud Growth Strategy
SAP recently announced the acquisition of Fieldglass, a human capital management firm that operates in the Vendor Management System (VMS) space. It utilizes the on-demand service model to manage vendors who provide contingent labor management solutions. This acquisition should bode well for SAP’s cloud strategy, especially given the synergies that the company can unlock by integrating offerings from its earlier acquisition of Ariba, a supply chain and business network organization.
Integrated offerings from Fieldglass and Ariba should provide end-to-end solutions for the 1.4 million businesses registered on the Ariba network. Ariba provides procurement and other supply chain related solutions within its supplier network. TO this, Fieldglass adds its vendor souring for temporary contract worker solutions suitable, complementing Ariba’s end-to-end solutions for business. The Fieldglass acquisition is expected to be complete by the second quarter of fiscal 2014. We are of the view that a synergistic portfolio should boost cloud revenues for SAP in 2014.Notes:
- Predicts 2014: In-Memory Computing Will Be Adopted to Deliver High-Impact Business Value, Gartner Research, November 2013 [↩]
- Solutions powered by SAP HANA Now Offered Via Subscription, SAP Newsroom, April 2014 [↩]