SAP To Intensify Cloud Strategy

SAP, one of the largest companies in the enterprise resource planning (ERP) market, recently reported strong results – its seventh straight quarter of double-digit growth. It even reported a double-digit gain in market share against Oracle, which recently announced its plans to acquire customer service SaaS vendor RightNow for $1.5 billion. Let’s take a closer look.

SAP’s Financials
SAP last week reported third quarter revenue of €3.4 billion ($ 4.7 billion), up 14%. Software and software-related service revenue increased 16% to €2.7 billion ($ 3.7 billion). Software revenue grew 28% to €841 million ($ 1.16 billion). Net income increased 150% to €1.25 billion ($1.7 billion) or €1.05 per share from €501 million or €0.42 per share last year. Non-IFRS operating profit increased 27% to €1.13 billion.

Software and related services sales in the Americas grew 16%, Asia-Pacific and Japan grew 24%, and Europe, the Middle East, and Africa grew 14%. During the third quarter SAP bought back 2.9 million shares for a total of approximately €100 million. The company ended the quarter with cash balance of €3.91 billion ($5.4 billion).

SAP attributed its continued strong performance to its High-Speed Analytical Appliance (HANA) in-memory appliance, enterprise mobility products, and emerging cloud-computing offerings. In-memory computing allows companies to store data locally in the main memory instead of a server, which speeds up the analysis of business data.

Based on its strong performance in the quarter, SAP reaffirmed its revenue and profit outlook for the year. SAP expects full-year 2011 non-IFRS software and software-related service revenue to increase in a range of 10%–14% from €9.87 billion ($14.05 billion) in 2010. The company expects full-year 2011 non-IFRS operating profit to be at higher end of a range of €4.45 billion–€4.65 billion ($6.5 to $6.75 billion). SAP expects to reach $20 billion in annual revenue by 2015. Its annual revenue in 2010 was €12.9 billion ($17.6 billion). Its stock is trading around $58.48 with market cap of about $69.57 billion. It hit a 52-week high of $68.39 on April 27.

Recent Acquisitions
While Oracle is known to make big acquisitions, SAP is known to make small acquisitions and focus on organic growth (with some exceptions like Business Objects). SAP recently made two such acquisitions, Right Hemisphere and Crossgate.

In early September, SAP acquired Right Hemisphere a software company, which creates 3D visualization software for enterprises. It enables its customers visualize business processes like design, manufacturing, sales, and operations and understand them more easily. SAP expects this acquisition to improve its ERP, customer relationship management (CRM), and supply chain management (SCM) products by adding enhanced visualization capabilities.

SAP in late September announced plans to acquire Crossgate, a German business integration software provider. Crossgate provides hosted B2B integration services, which enable corporations to share data with their trading partners. This acquisition is expected to help SAP strengthen its ERP and SCM products. Doug Henschen of InformationWeek reports that SAP is planning to step up its cloud computing initiatives considerably and that its Crossgate acquisition will be part of its larger cloud computing strategy to provide the base for business-to-business data connectivity:

“SAP’s cloud strategy doesn’t rest entirely on Business ByDesign, launched in July 2010 after a two-year delay. SAP also has BusinessObjects BI OnDemand and the StreamWork OnDemand collaborative environment. In recent months it has also added on-demand salesforce automation and carbon reporting apps, and it’s planning one for talent management. But even when throwing in SAP’s subscription-based hosting of conventional application software, the company’s cloud business in the last quarter added up to 93 million Euros ($127 million) in revenue.”

Oracle’s recent acquisition of RightNow puts the pressure on its rivals SAP and Microsoft to step up their SaaS efforts. Oracle, most likely, will acquire other SaaS companies. Will SAP and its competitors follow suit? 2012, by the looks of it, may become the year of the SaaS roll-ups with both SAP and Oracle in heavy acquisition mode.