SAP’s strong financials support its market leadership position

Market Realist

Must-know: SAP AG's 2Q14 earnings review (Part 11 of 12)

(Continued from Part 10)

SAP’s strong financials

SAP AG (SAP) is based in Germany. It led the enterprise resource planning (or ERP) market with its 24.6 % market share in 2013. It has a market capitalization of $92 billion. SAP provides solutions and applications that range from global enterprises to small enterprises that focus on improving customer relationships, fostering collaboration, and enhancing efficiency.

The previous chart shows SAP’s revenue and net margin growth over the years. Increased investments and growing preference towards cloud based services has led to a contraction in software related services. This is one of SAP’s major operating segments. As a result, it impacts margins. Ongoing TomorrowNow and Versata lawsuits against SAP led to $289 million in litigation provisions that impacted margins.

Segment’s performance

SAP reported that for the first six months ending June, 2014 its revenues, net profit, and earnings per share (or EPS) grew by 2%, 4%, and 4%, respectively. Cloud subscriptions and services contributed majorly to this growth. New license sales, accounting for ~27% of SAP’s revenues, experienced low growth. The low growth was hidden by an acceleration in cloud revenues. SAP aims to generate 20 Euros and 22 billion Euros in total revenue by 2015 and 2017, respectively. Also, it has pushed its 35% operating margin target to 2017 in order to take advantage of the rapid growth in cloud.

Cash and debt position

SAP reported that it has 3.18 billion Euros worth of cash, cash equivalents, and short-term investments. As of June, 2014 it carried 4.4 billion Euros of net debt on its books.

Cash flows, acquisitions, and investments in research and development

Free cash flows for the first six months ending June, 2014 stood at 2.27 billion Euros—an increase of 2% on year-over-year (YoY) basis. SAP spends ~13%–14% of the revenue on research and development (or R&D). Microsoft (MSFT) spends ~13% of its revenues on R&D while IBM (IBM) only spends 5%–7% of its revenues on R&D. Salesforce.com (CRM) is another company that invests in research and development.

Focus on cloud and “big data”

The International Data Corporation (or IDC) expects that the digital universe will to grow to 44 trillion gigabytes in 2020 compared to 4.4 trillion gigabytes in 2013. Emerging markets are expected to contribute a staggering 60% to this growth.

To master this explosive growth of data by organizations across all industries, SAP has entered into agreements with its peers to bundle SAP HANA with their applications. It has developed the “Data Science Organization” as well as a specialized application for data apps.

It has also invested billions in R&D and strategic acquisitions to gain a foothold in the cloud space. Cloud subscriptions and support generated 242 million Euros, showing an increase of 32% on a YoY basis. SAP expects to generate 1.05 billion Euros from cloud revenues for fiscal year 2014.

Threat to customer base

Approximately 60% of the SAP’s customers use Oracle’s database software alongside the SAP’s application software. This gives Oracle (ORCL) direct access to SAP’s existing customer base. This poses a serious threat to the company.

Continue to Part 12

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