SAP Going Full Throttle On Cloud Strategy

According to market reports, end user spending on cloud services is expected to be more than $180 billion by the year 2015 and spending on cloud equipment to grow to $79.1 billion by 2018. It is estimated that by 2014, US organizations will spend more than $13 billion on cloud computing and managed hosting services.

SAP’s Financials
SAP’s (NYSE: SAP) third quarter revenues grew 5% over the year to €4.3 billion (~$5.4 billion), falling short of market estimates of $5.77 billion. EPS of €0.78 (~$1.07) grew 8% over the year and was ahead of the Street’s projections of $0.94.

By segment, support revenues grew 5% to €3.32 billion (~$4.22 billion) and revenues from software and related subscriptions grew 7% to €3.6 billion (~$4.57 billion). Cloud subscriptions and support revenues grew 42% over the year to €0.28 billion (~$0.35 billion).

SAP expects to end the year with cloud subscription and support revenues at €1.04 billion-€1.07 billion (~$1.32-$1.36 billion) and profits of €5.6 billion-€5.8 billion (~$7.12-$7.37 billion).

SAP’s Cloud Focus
SAP’s cloud focus has delivered them good results. The company now has more than 40% of their revenues coming from the cloud. HANA continues to drive SAP’s growth during the quarter. They ended the quarter with over 4,100 SAP HANA customers and 1,450 SAP HANA Business Suite customers. A quarter ago, SAP HANA had 3,600 customers and over 1,200 Business Suite customers. SAP HANA has helped them deliver to more than 44 million cloud users on the cloud.

As part of the new offerings for cloud, SAP recently announced plans for a Cloud for Planning solution. The new solution will be focused on  simplifying the planning process by providing customers with a consumer app-like experience integrated with in-context collaboration and analytics, and all of that on the cloud. The application will be built on SAP HANA and will simplify the financial planning and analysis for an organization.

To further strengthen the cloud growth, SAP recently announced the acquisition of cloud-based expense and travel management solutions provider Concur. Market reports suggest that Concur was approached by both Oracle and SAP for a merger. In the end, SAP managed to close the deal at a price tag of $8.3 billion, making this their biggest acquisition ever. Concur brings with it a revenue rate of $700 million and a global customer base of 23,000. For the year ended September 2013, Concur had reported revenues of $546 million and a loss of $24.4 million.

Analysts aren’t particularly thrilled with the acquisition. As Commerzbank analyst Thomas Becker said,

 “The deal multiple is quite rich, given that travel and entertainment is not strengthening SAP’s core business or bringing its cloud business (from a technological viewpoint) to the next level.”

I don’t agree. I am very bullish on Concur, and expect that it will avail SAP a much closer relationship with enterprise end-users, something they have lacked systematically.

Post the acquisition, SAP will be able to boast of supporting network spend volumes of over $600 billion on their network. The addition of Concur will take SAP to more than 50 million end users in the cloud, making them the biggest enterprise cloud company in the world.

SAP’s stock is trading at $66.63 with a market capitalization of $79.7 billion. It touched a 52-week high of $87.42 in December last year.