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SAP Needs To Acquire SaaS Portfolio

Posted on Monday, Feb 6th 2012

SAP, one of the largest companies in the enterprise resource planning (ERP) market, recently reported strong results – its eighth straight quarter of double-digit growth – while its rival Oracle recently reported disappointing results. In December SAP announced plans to acquire SaaS talent management vendor SuccessFactors for $3.4 billion. After Oracle’s $1.5 billion acquisition of SaaS vendor RightNow, SAP seems to be getting serious about its cloud strategy. Let’s take a closer look.

SAP’s Financials
SAP last week reported fourth quarter revenue of €4.5 billion ($5.9 billion), up 11%. Software and software-related service revenue increased 14% to €3.72 billion ($4.87 billion). Software revenue grew 16% to €1.74 billion ($2.3 billion). Net income increased 176% to €1.2 billion ($1.6 billion) or €1.01 per share. Non-IFRS profit increased 16% to €1.28 billion.

For the full year 2011, revenue was €14.23 billion ($18.7 billion), up 14%. Software and software-related service revenue increased 16% to €11.32 billion ($14.85 billion). Software revenue grew 22% to €3.97 billion ($5.2 billion). Net income increased 90% to €3.44 billion ($4.5 billion) or €2.89 per share. Non-IFRS profit increased 23% to €3.37 billion. The company ended the year with group liquidity of €5.6 billion ($7.34 billion) and net liquidity of €1.64 billion ($2.15 billion).

Victoria Barret on Forbes Asia Magazine says

“SAP is benefiting from brisk sales of the mobile and database technology it bought via the $5.8 billion ­acquisition in May 2010 of ailing database firm Sybase. Another key to the company’s ­recent revival is a shift in how the company sells software. Traditionally, SAP sold big deals to big-company chief information officers. A little over a year ago SAP started a sales group that focuses entirely on selling lower down the organizational chart. McDermott believes this new focus on selling to individual corporate units, plus the rapid growth in fast analytics, accounted for a considerable share of the new customers last fall. Of SAP’s software license sales, he figures 40% came from customers new to SAP.”

SAP’s focus on mobile computing seems to be paying off, and the company exceeded their sales target for Hana in-memory computing technology. SAP also seems to be taking market share from Oracle. Cornelius Rahn on Bloomberg reports that SAP is benefiting from Oracle’s customer base being upset about the prices and contract negotiations.

Based on its strong performance in the quarter, SAP expects full-year 2012 non-IFRS software and software-related service revenue to increase in a range of 10%-12% from €11.35 billion ($14.85 billion) in 2011. The company expects full-year 2012 non-IFRS operating profit to be in a range of €5.05 billion-€5.25 billion ($6.6 billion-$6.9 billion) from €4.71 billion in 2011. The stock is trading around $63.17 with a market cap of about $75.1 billion. It hit a 52-week high of $68.39 on April 27, 2011.

Chart forSAP AG (SAP)

SAP’s Strategy

SAP has traditionally been an organic company, but the recent $3.4 billion acquisition of SuccessFactors is a deviation from this strategy. It shows SAP’s intention to rival Oracle’s recent focus on the cloud. SAP has in the past made large acquisitions and used them well to boost its growth. The $5.8 billion Sybase acquisition in 2010 and the $6.8 billion Business Objects acquisition in 2007 were the other deviations that helped SAP build their momentum in the mobile applications and analytics markets, respectively.

Doug Henschen of InformationWeek reports that SAP is planning to extend their momentum in enterprise applications, analytics, and mobility while stepping up efforts to crack into the database and cloud computing markets. With the help of the SuccessFactors acquisition, SAP has set a target of becoming a $2 billion company in cloud computing by 2015. SuccessFactors reported annual revenue of $209.4 million in 2010, while the leader in the SaaS market,, reported annual revenue of $1.6 billion in 2010. The SaaS market was worth $10 billion in 2010 and is expected to reach $21.3 billion in 2015.

This is not an impossible goal for SAP considering that they already have their own cloud business. They launched BusinessByDesign in 2010 and also has BusinessObjects BI OnDemand and the StreamWork OnDemand collaborative environment. But these were baby steps, and SAP has finally taken a big step, and more SaaS acquisitions are likely to follow. Concur, for example, could be a very interesting and relevant acquisition that will fit nicely in its portfolio. Other acquisitions in SaaS applications for CRM, email marketing, web conferencing and online events, human capital management, as well as mid-market and small business ERP could be interesting areas to explore.

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With both Oracle and SAP chasing SaaS acquisitions, and giving that both have deep pockets, the valuations of SaaS companies will go through the roof!
I can see Oracle and SAP bidding against each other on a bunch of deals, and they will end up overpaying for their acquisitions…

Luiz Inacio Monday, February 6, 2012 at 5:09 AM PT

SAP B1 which was being sold to the mid market segment was also a bought out FYI.

Akshay Shah
India, Mumbai.

Akshay Shah Sunday, February 26, 2012 at 4:49 AM PT