Europe’s largest software company, SAP, saw first quarter profits increase by 15 percent to €1.06 billion ($1.13 billion), compared with the first three months of 2014.
Performance was lifted by a weak euro, which made German products more affordable abroad. Without the boost of currency, operating profit was flat, falling by 2 percent. The slip can be attributed to the company’s continued investment in cloud-based products. Transitioning to the cloud-focused from server-based products equals less profit upfront as subscription payments come later. Cloud-based profits may be delayed, but the segment is growing rapidly. The first quarter ended with triple digit growth (131 percent) year-over-year and 80 million users. Cloud revenue also grew 24 percent, which is the fastest growth rate in the last three years.
Aiming for the Clouds
During Tuesday’s earnings call (April 21), both CEO Bill McDermott and CFO Luka Mucic made it clear SAP is looking to the cloud as the future of SAP’s business. “Customers want to run in real time, it’s now firmly established that the disc-based data base cannot be handle the data explosion in the enterprise,” McDermott said. SAP now has 6,400 customers using its HANA cloud platform; double the customers just 12 months ago.
A contributing factor to SAP’s cloud-based growth is the $7.3 billion acquisition of travel and expense management company, Concur. In its first full quarter as part of SAP, the service has attracted high profile companies including Whirlpool Asia and political news site Politico. Subscription growth to enterprise cloud services is expected to grow at a rate of 86 percent this year, of which subscribers to Concur and vendor-management system Fieldglass are expected to make up half.
The purchase of Concur, along with a weaker euro, helped to push revenue in the first quarter up 22 percent to €4.5 billion ($4.9 million), matching the upper end of analyst expectations. At a constant exchange rate, revenue grew 10 percent. Going forward, SAP’s focus will be on building its market share in the cloud. SAP expects to produce nearly €2 billion ($2.14 billion) in cloud software and services revenue by the end of the year. That is a figure it hopes to quadruple by the end of the decade, when around 30 percent of its total revenue will come from the cloud.
Business in Transition
In contrast to the success of the cloud-based business, the legacy businesses improved only slightly. License sales for the packed software business experienced a small 1 percent gain. Analysts interviewed by Reuters pointed out the rise undid four straight quarters of declines, which can be viewed as an achievement in itself. Having a profitable enterprise software business will only help SAP as it negotiates a transition to a cloud or subscription-based business model. “SAP is starting to deliver with cloud strength combined with stability in the core on-premise license & maintenance revenue,” Mark Moerdler, an analyst at Sanford Bernstein, said in a research note.
Not all analysts are convinced they will be able to outperform the constantly growing competition for B2B software-as-a-service dollars. SAP is fighting established software providers such as Microsoft and IBM along with purely eCommerce players moving into the digital procurement space, like Alibaba. Oracle, for one, has plans to become the No. 1 cloud service provider by the end of the year.
SAP’s CEO McDermott is confident his company will be able to compete. “SAP’s first quarter shows the customers are embracing our platform, our applications and our business network,” he said at the close of the earnings call. “We are seeing heavy win rates, strong pipeline and enthusiasm around the world. Every business needs to transform to meet the opportunities of the digital economy.”
SAP is betting big that B2B businesses will continue to embrace SaaS. Nearly 70 percent of businesses are currently using at least one cloud-based application, and the market has grown by 20 percent in the past two years.
Following positive first quarter results, the company did not alter its full-year outlook, forecasting an operating profit of between €5.6 billion ($6 billion) and €5.9 billion ($6.4 billion) at a constant currency exchange.