Will SAP’s efforts in transition to cloud yields results?

Market Realist

Must-know: SAP AG's 2Q14 earnings review (Part 12 of 12)

(Continued from Part 11)

SAP’s efforts in transition to cloud

SAP AG (SAP) has a market capitalization of $92 billion. It leads the enterprise software market with its customer relationship management, business process management, and operational management software products. Its expertise lies in on premise software development.

The adoption of cloud is altering the business dynamics. It has led to slow growth and erosion in on premise software revenues. As a result, SAP is focused on its transition to the cloud space.

To benefit from the increasing cloud adoption, SAP developed HANA. HANA is a cloud Platform as a Service (or PaaS) offering that provides customers with endless possibilities to create innovative software applications.

The previous chart shows the market share held by leading vendors in the global enterprise software market. The market was worth $407.3 billion. Microsoft (MSFT) leads the market with a market share of 16%, followed by Oracle (ORCL) and IBM (IBM). ORCL and IBM each held a 7% share in 2013. SAP (SAP) and Symantec (SYMC) held 5% and 2% shares, respectively.

Integration of applications with HANA

To compensate for the decline in on premise sales and to push the growth in cloud based services, SAP came up with the solution of bundling its cloud application software with HANA—its high performance in memory platform.

Acquisitions and new product launch

The acquisition of SuccessFactors and Ariba in past few years has been done in order for SAP to enter and expand its presence in the high growth mobile and cloud computing markets.

Currency volatility and economic turmoil

Europe, Middle East, and Africa contributed to revenues in 2013 and 2014. Also, SAP HANA finds a strong market presence in China. This is positive news in terms of growth. China accounts for a major share in the Asia Pacific region. However, it exposes SAP to the economic turmoil and currency fluctuations that may impact its performance.

Cloud based products are growing, but the proportion is small

Through partnerships and strategic acquisitions, SAP is shifting its “on premise” software business to cloud based applications. SAP’s cloud based applications are growing fast. This is evident in their adoption rates. However, they still form a small share in the total revenues.

Fiscal year 2014 expectations

SAP expects cloud subscriptions and support to be one to 1.05 billion Euros in 2014. Full year software and software related services are expected to grow by 6%–8% at constant currencies. Operating profit is expected to be in the range of 5.8–6 billion Euros. By 2015, SAP expects its total revenues to reach 20 billion Euros. The cloud business is expected to contribute approximately two billion Euros.

SAP is in a transition phase. It’s changing its business model from selling on premise software to renting it through the internet. As a result, it requires faster development cycles, increased investment in remote data centers, and new web-based sales and support operations.

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