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SaaS At SAP

Posted on Thursday, Jul 30th 2009

According to recent research from IDC, the economic crisis has actually accelerated the growth prospects of the SaaS model. SAP (NYSE:SAP) recently unveiled its SaaS strategy for large enterprises and has been making “tuck-in” acquisitions to complement this strategy. SAP’s commitment to SaaS may protect the company from the worst of the cost-cutting going on at IT departments around the world. Let’s take a closer look.

IDC has increased its SaaS growth projection for 2009 from 36% to 40.5% growth versus 2008. It also predicts that by the end of 2009, 76% of US organizations will use at least one SaaS-delivered application for business. As SaaS offerings are positioned as right-sized, zero-capex alternatives to on-premise applications, even large enterprises are adopting SaaS solutions. Regular readers know that I believe the SaaS sector to be recession-proof.

Although many companies, including SAP’s biggest rival, Oracle, have been focusing on SaaS lately, SAP was the first enterprise software giant to acknowldge the merits of the SaaS business model. At a time when Oracle’s CEO Larry Ellison was skeptical about the profitability of the SaaS model, SAP launched a SaaS solution, Business ByDesign for SMBs.

SaaS or on-demand solutions at SAP are targeted at large enterprises, business users and the mid markets. SAP’s Business ByDesign is targeted at the mid market and offers preconfigured best-practice process support for financials, CRM, people management, procurement, project management, and the supply chain through a single, consistent user interface. The simplicity of this interface plays a crucial role in the easy adoption of SaaS solutions. SAP recently announced a new agreement allowing Business ByDesign to be preconfigured to use nine complimentary Web services, including Business Wire, [Talk09] and Google.
 
For business users, SAP offers Crystal Reports and SAP BusinessObjects BI OnDemand. For the enterprise market, SAP has been offering on-demand software services for its CRM and E-Sourcing solutions. It now plans to upgrade them to a multi-tenant architecture, which would allow the company to reduce its hardware and software costs. In this technology, gained from the company’s 2006 Frictionless Commerce acquisition, customers share the same instance of a software application but their data is kept separate.

As a result of the Clear Standards acquisition last month, SAP now offers on-demand carbon emissions management that is already multi-tenant. It also plans to launch on-demand expense management solutions. In May, SAP acquired SkyData, which will allow it to offer mobile versions of on-demand applications.

As for future acquisitions, the company recently announced its plans to acquire Swiss software company, Simulation, Analysis and Forecasting (SAF) AG, for €64 million. In May, it announced plans to acquire Highdeal, the leading provider of real-time billing solutions for telecommunications. SAP ended the quarter with total liquidity of €3.4 billion.

Yesterday SAP, with annual revenue of €11.57 billion or $16.3 billion, reported its second quarter results. Q2 revenue declined 10% to €2.58 billion versus analyst estimates of €2.65 billion. Due to cost cuts, net income increased 4% to €423 million versus €408 last year and analyst estimates of €381.5 million. Non-GAAP operating margin was 27.9%, up 3.5 percentage points over last year.

Software revenue fell even more, by 40% to €543 million. Software and software-related service revenues were down 5% to €1.95 billion. Recurring revenue stream accounted for 55% of total revenue.

SAP raised its profitability outlook. It now expects 2009 non-GAAP operating margin to be in the range of 25.5% to 27%, including one-time restructuring charges of €200 million. SAP has already cut 2,800 of the 3,000 jobs it planned to cut this year and has incurred restructuring expenses of €160 million and €5 million in the first and second quarters of 2009, respectively.

The stock is currently trading around $45 with a market cap of about $53 billion. It hit a 52-week high of $41.60 on April 24.

Chart for SAP AG (SAP)

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Regarding SAP’s SAAS Strategy, what seems very interesting is that it is offering online applications that would plug into the onsite SAP Business systems. Hence, they are not competing with independent SAAS vendors like Salesforce.com. SAAS is typically thought of as a model more suited towards small and mid size businesses because of zero capex, subscription based payments, etc. But SAP, according to me is kind of redefining this notion by tying up SAAS offerings with its already existing on-site deployments of large enterprises, hence not cannibalizing the sales/ maintenance revenue of these very profitable onsite systems. (Reference: InformationWeek, June 22 2009)

Narayanan Thursday, July 30, 2009 at 2:53 PM PT

I agree with Narayanan assessment of the SAP strategy. I wrote about this a month ago when John Wookey first announced their new strategy.
https://www.prudentcloud.com/saas/sap-saas-strategy-10062009/

I think this is a great strategy. Instead of having your sales force compete and get confusing messages on how to position competing offerings SAP has realized that there will some solutions like the core financials which will probably not come out to the cloud for a while so in the meanwhile instead of banging their heads trying to sell SaaS they are expanding the footprint of their Enterprise solutions by providing complementary SaaS offerings that are more suited for SaaS delivery model.

This also allows them to not alienate their vast SI ecosystem and leverage their domain expertise to build out SaaS offerings. The “tuck-ins” surely do help.

Subraya Mallya

Subraya Mallya Thursday, July 30, 2009 at 11:51 PM PT