Enterprise software provider, SAP AG (SAP, Financial), posted a decent quarter outpacing analyst expectations and providing the platform for promoting the cloud technology which has been the focus area for the company to raise its profits. Soon after the results were out, SAP shares were up 3.5% as of 12 pm ET to $76.41 having earlier moved higher to $77.59 with trading volumes well above the average. Let’s take a sneak peek into the quarter highlights and how the company has been doing in the cloud computing segment.
A quick number recap
Revenue of the company was up 2% at $5.5 billion for the quarter, while earnings stood at $1.03 per share beating the analyst estimates of $0.98 per share. In fact, the HANA business application platform saw immense growth during the past two quarters contributing nearly $134 million in the second quarter and around $204 million in the third quarter.
Region wise, SAP had a solid performance in EMEA despite the headwinds faced in Ukraine and the Middle East. In the Asia-Pacific region the company did a good performance with 10% growth in non-IFRS software and software related services. Non-IFRS cloud subscriptions and support revenue grew by 57%. Remarkably, SAP achieved a turnaround in its business in Japan with solid double-digit growth.
In the U.S. SAP’s software-related service revenue increased 5%, while the cloud subscriptions and support revenue grew by 34%.
Overall, cloud computing remained the major focus area driving the company’s fortunes in the upward direction. Cloud revenue rose 45% to EUR 277 million from EUR 197 million. As per SAP’s CEO, Bill McDermott stated –“from the back office to the front office, we have the broadest portfolio of solutions in the cloud…”
The number of cloud subscriptions has crossed more than 44 million subscribers, which includes 4,100 HANA customers. So, what’s so special about the cloud services for SAP? Let’s read further to get to the answer.
Cloud revenue to drive revenue uptick
While the cloud services were able to generate close to $240 million in the second quarter, in the third quarter cloud revenue was up 79% at $522 million. The management believes that SAP is winning in the cloud domain as it offers the customers a suite of solutions tightly integrated with each other. Indeed, such is the contribution of the cloud services that it is claimed to be the world’s second largest cloud business in the world, much bigger than Oracle (ORCL, Financial).
The SAP HANA product continues to be the industry standard in the software industry. During the earnings call on October 20, CEO Bill McDermott commented – “While our competition is making a lot of noise while they try to catch up, this simply validates our leadership position… We are stepping on the accelerator.”
Management remains optimistic, yet cautious
The German company says that it expects the full-year operating profit to be in a range of EUR 5.6 billion to EUR 5.8 billion, compared to the previous forecast of EUR 5.8 billion to EUR 6 billion. The company has anticipated that there would be lower upfront revenue and pressure would remain on the margins, as it is refocusing its business on cloud based software technology. To be noted in this matter is that for doing such a projection, SAP uses its own accounting method which isn’t in line with the international financial reporting standards.
The management has cast such a cautious outlook as the acceleration of sales of cloud-computing tools would mean that clients pay more money to SAP over a period of time, and not at the start of the contract. This would reduce the short-term profit for the enterprise software provider. But the management is keen to promote the cloud based business model for grabbing cloud market share from Salesforce.com (CRM, Financial) and Workday Inc. (WDAY, Financial) by offering businesses a more complete software line-up.
To conclude
In the journey of promoting cloud based services, SAP is making acquisitions to bolster its position in the cloud computing market and just a month back the company agreed to buy Concur Technologies Inc. (CNQR, Financial) for a whopping $7.4 million to expand in the cloud computing domain. The management has opined that such a shift from software services to cloud services might put pressure on margins for a short term, but will be the sole driver of its revenue and make SAP more profitable in the long-run. So let’s stay tuned, and keep watching SAP’s upcoming moves in this new business domain.
