Is SAP back on track with cloud and software revenues up?

SAP is showing signs of being able to prosper in the cloud computing era having this week announced financials that point to an upturn in its cloud business and, just as intriguing, an increase in sales for its on-premise software business.

The German ERP giant saw cloud subscriptions and support revenue grow 129% year-over-year to €555m ($603m) for its second quarter. New cloud bookings increased 162% to €203m ($220m). But, helped by forex movements across the board, SAP also grew its software business by 13% to €4.1bn ($4.4bn). While currency fluctuations played a significant hand (non-cloud growth would have been 9% if currency rates had stood still) these are still numbers to challenge those who say (a) that businesses are moving wholesale to the cloud, or (b) that SAP is a relic of the client/server era.

Of course, the road hasn’t been without bumps and SAP’s transition to being a cloud giant helped profit decline by 15% on the year-ago figure to €471m ($510m). The Walldorf-headquartered company’s progress has been bolstered by an acquisition strategy that has seen it build strong cloud positions in human capital management through the purchase of SuccessFactors, spend management (Ariba), Concur for travel and expense management, and Fieldglass for vendor management. In total that spree would have cost about $17bn.

Darren Roos, SAP general manager for northern EMEA, said the rise in both on-premise and cloud income “suggests customers are not lifting and shifting” but rather are using the right deployment model to fit the appropriate usage scenario. However, he added that there was “definitely a transition, with line-of-business applications supplier relationship management, customer relationship management and HR going to the cloud.”

It may be that, post-recession, more companies are reinvesting in infrastructure generally but Roos said he could not be sure. However, France and the UK delivered historical highs in on-premise spending to effectively rebut the notion that there will be a linear transition from client/server to cloud.

Roos said that one underlying factor might be that the need to innovate and refresh is being driven by new competition, for example from ‘Uber for x’ transactions companies that simplify transactions for goods and services.

“Businesses don’t have the ability to stand still anymore,” he added.

Roos also described as “a red herring” the widely held belief that non-differentiated applications would move to cloud whereas those that promised competitive advantage would stay within company walls. Instead, he said, standardisation and a desire to focus on core business activities rather than technology was driving cloud purchases.

Cloud adoption is taking place in even regulated business areas like financial services, he said, although highly sensitive areas such as defence were still slower to adopt.

Roos also pointed to SAP’s Business Network cloud hub for connecting trading partners, with revenue up 194% year on year to €400m and said the company’s future lay across platforms, networks and applications.

SAP is often thought to have dropped the ball in small and medium-sized enterprises but Roos said SME sales are increasing faster than large enterprise sales.

“It’s a lot easier for a smaller customer to move to the cloud and much harder for a Heineken, ArcelorMittal or Unilever,” he said.

For a point of comparison, one company that often likes to tweak SAP’s tail is fast-growing cloud ERP company NetSuite, which also reported financials this week. NetSuite’s numbers were strong with $177m in revenue, up 35% on the year-ago figure but SAP had almost €5bn ($5.5bn) in revenue for its quarter. At $90bn, SAP’s market cap today is more than 12 times the size of NetSuite’s ($7.2bn). NetSuite is a fine company but it remains a minnow when sat next to SAP’s whale.

When industry commentators talk about companies “threatened” or even “disintermediated” by cloud natives they often point to companies that made their fortunes in the client/server era such as Microsoft, Oracle and SAP. This might be proving rather simplistic: all three are challenged by cloud as they would be with any major deployment model, but they also all have big resources for dealing with that change. In some areas at least, cloud might even prove handily accretive for companies that have saturated the market for enterprise software.

As cloud companies mature the biggest software companies must keep up with the pace of change – a tough challenge. For now though SAP is supplying evidence that it can stay relevant.


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Martin Veitch

Martin Veitch is Contributing Editor for IDG Connect

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