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SAP is Moving Forward

April 16, 2014 | About:

Germany-based SAP AG ADR (SAP) is the world’s leading independent software vendor as well as enterprise resource planning (ERP) software. SAP’s solutions help global enterprises, small and large, to improve customer relationships, enhance collaboration and improve their efficiency. Almost the total revenue of the company is generated from two segments: on-premise software and services. The service segment represents fees earned from providing customers with technical support services and unspecified software upgrades, updates, and enhancements, and reported approximately 81.1% of revenues in 2013. Software revenue is generated from fees earned from the sale or license of software to customers. Geographically, the company works two large segments: in Europe, Middle East and Africa which generated 46% of total revenues as of 2012, and the Americas segment, which contributed 37%.

The firm has been recently involved in several acquisitions, adding companies such as SuccessFactors and Ariba, focusing on entering into the higher-growth mobile and cloud computing markets. SAP has built a strong cloud portfolio, with SAP HANA, a cloud platform-as-a-service (PaaS) which provides customers the possibility to create innovative software applications. SAP HANA has a strong market, and has been especially well received in the Chinese market, boosting the Asia Pacific segment’s growth, posting a double-digit figure. Still, the economic turmoil and currency volatility remain headwinds for the company’s future performance.

Fourth-quarter results were not surprising, delivering both revenues and operating profits modestly below forecasts. Revenues grew 1.7% versus 2012, with a 3.6% growth in software and software-related services (SSRS) revenues. Indeed the slowdown in SAP’s legacy “on-premises” software businesses is being replaced by cloud-based product, although smaller, faster growing. Therefore, the challenge for enterprise software vendors is to hold onto existing customers, while expanding their application portfolio and cloud services. Still SAP continues to grow cloud revenues and as far as on-premise applications and support are expected to grow as well, forecast for 2014 seems promising.

Strategic Approach

SAP works with a partner ecosystem strategy, a collaborative, interactive and innovative network which enables the company to better leverage its innovation, extending it to partners, experts in their own domain. This extensive global relationship network offers customers the possibility to choose from different providers of software-related services and support. As of December 2012, SAP had more than 12,000 partners, from smaller firms, highly specialized, to largest companies within the technology consulting and implementation market.

In order to expand its business, SAP has developed a systematic approach to its market, targeting customers by region, industry and customer segment. The company therefore concentrates its sales efforts in the faster-growing markets while seeking to effectively well industry-specific solutions. As a result of this strategy, the company has seen continued momentum in different emerging markets such as the Asian, European and Latin American.

SAP has recently revealed an initiative with two partners, COMPIRICUS, Inc. and ConVista Consulting Inc., to expand Financial Asset Management application to insurance companies in North America, currently used in more than 150 insurers worldwide. This service will be deployed by Zurich Financial Services Group (Zurich) for its North American operations in the later part of 2014. Thomas Graf, head, Group Investment Administration & Accounting, Zurich said: "SAP Financial Asset Management has been crucial in supporting our efforts to expand our North American footprint."

Innovative Challenges

The traditional “on premise” applications of SAP currently lead the industry, and cash flows generate excess return which allows the company to reinvest in the business, as well as enhancing shareholders’ return.

In order to grow its cloud business, SAP has recently acquired SuccessFactors and Ariba. Moreover, the company has recently introduces a new class of solutions for next generation of business applications: SAP HANA database, an in-memory database that combines transactional data processing, analytical data processing, and application logic processing functionality in memory. Real-time business is in focus, and the increased speed of application development is designed to suit the requirements of the industry. Recently the Chinese High-Way Group announced their intention to leverage SAP HANA platform, with cloud computing and mobile computing. However, growing its cloud business through acquisitions has impacted the company’s balance sheet, in the form of a high level of goodwill and intangible assets, and will require further integration efforts.

SAP has recently announced the introduction of control tower, which incorporates end-to-end visibility. The control tower has capabilities for business process definition and enforcement, social media style collaboration tools, and role definition, allowing marketing executives to drill down from the control tower to the promotion management or marketing applications in order to make proper adjustments. This innovative solution is still to be refined, but there’s no doubt SAP is advocated to improve its platforms.

Bottom Line

Competition within the cloud market is stiff; companies such as Salesforce.com, NetSuite and Workday represent highly focused solutions. The IT services industry has top peers such as Infosys Technologies, Tata Consultancy Services and Wipro, which use an integrated global delivery business model. The company also competes with large IT service providers with greater resources than Cognizant, such as Accenture, Computer Sciences Corporation, Electronic Data Systems (a Hewlett-Packard Company) and IBM Global Services. Analysts think the company’s main risk lies in the competitive position of peers, especially Oracle, as about 60% of SAP's customers use Oracle's database software alongside SAP's application software, providing the former firm direct access to SAP's existing customer base.

As a global enterprise, SAP generates a substantial portion of revenue from countries outside the United States, introducing a high exposure to foreign currency fluctuation, which are likely to hurt financials. Nevertheless, SAP forecasts a stable, highly-profitable performance on its business core, as well as a fast-growing cloud business. Aiming to increase total revenue to 20 billion by 2015, SAP is regarding the future with bright eyes.

Disclosure: Damian Illia holds no position in any of the stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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