How Could Recent Management Change And Microsoft Partnership Affect SAP’s Revenues?

SAP (NYSE: SAP) had pre-announced its results for Q3 a couple of weeks ago. While the numbers were comfortably ahead of consensus, the announcement was accompanied by news that SAP’s erstwhile CEO is stepping down and that SAP will now have a dual CEO structure. Given the fierce competition in the cloud space over recent years, we think the new management has a lot of work ahead of itself.

One of the first announcements by SAP’s new management was the company’s new deal with Microsoft to bundle SAP S/4HANA ERP offering for large enterprises and SAP Cloud Platform on Microsoft Azure. The deal is clearly aimed at improving the company’s ties with Microsoft and is also an attempt to mitigate the impact of Oracle’s Gen 2 partnership with Azure (announced in September) on SAP’s growth prospects. Trefis captures trends in SAP’s revenues over recent years along with our forecast in an interactive dashboard, part of which are summarized below.

A Quick Overview Of SAP’s Business Model

What Need Does It Serve? SAP makes money selling enterprise software and related support services. Much of the company’s business is based on its flagship S4/HANA databases, to further which the company recently announced a partnership with Microsoft.

What Are The Alternatives? Competitors include Oracle, Microsoft, Adobe and Salesforce.com

Has 4 Operating Segments

• Cloud subscriptions and support: Revenue is derived from subscription SAP’s software, cloud platform, hosting management services and support for subscription customers.
• Software license: Revenue is derived from the sale of on-premise software.
• Software support: Revenue is derived from the sale of support services provided for on-premise software.
• Services: Revenue is derived from the sale of consulting, training and other support services.

SAP’s revenue grew 16% over 2016-18 to $28 billion and is expected to increase 23% to nearly $35 billion by 2020. Notably, revenue growth in 2018 was subdued due to weakness in the company’s license segment.

Expected Revenue Breakdown In 2019:

For the current year, we expect SAP’s revenues to be $32.5 billion, with the relative contribution of the 4 operating segments being as follows:

• Cloud Subscriptions And Support Revenues = $8 bn (24.5%)
• Software Licenses Revenues = $6 bn (17.8%)
• Software Support Revenues = $13 bn (42.1%)
• Professional Services Revenues = $5 bn (15.7%)

Growth Drivers For Individual Segments:

• Cloud Subscriptions And Support Division Revenue growth of about $4 billion over the next two years will be driven by continual adoption of SAP’s cloud offerings by the company’s existing database customers. Over the next couple of years, we expect growth to continue from database customers incrementally opting for SAP’s cloud, with the Microsoft partnership acting as a tailwind.
• Software Licenses Division Revenue growth of about $1 billion over the next two years will be driven by partnerships and customers balancing their cloud portfolios with licenses.
• Software Support Division Revenue growth of about $1 billion over the next two years will be driven by growth in licenses
• Professional Services Revenue growth of about $1 billion over the next two years will be driven by growth in other divisions.

Data around how revenues for each of SAP’s operating division have trended over recent years is available in our interactive dashboard.