SAP's Growth Story Remains Intact Despite Asia-Pac Softness

| About: SAP AG (SAP)

Software corporation SAP AG (NYSE:SAP) released its preliminary financial results for Q1 2013 on April 19, and reported an ~8% y-o-y growth in non-IFRS revenues, to €3,636 million (~$4.8 billion). The company’s revenues have now grown for 13 consecutive quarters. Software and cloud subscriptions revenues grew almost 25% y-o-y, to €824 million (~$1.1 billion). The highlight of the quarter was continued performance of SAP HANA, which more than tripled revenues y-o-y, to €86 million (~$112 million).

The company also maintained its operating margins at ~25% while operating profits grew 8% to €901 million. Its success in growing its revenues across geographies such as the Americas and Europe while its competitors struggle is suggestive of it gaining market share there. The company reported revenue growth from all geographies except Asia-Pacific and Japan. Here we take a look at the driving factors behind its performance and our expectations in the future.

HANA Meets Expectations

SAP HANA remains the major growth engine for SAP with HANA software revenues of €86 million. Last year, SAP had more than doubled revenue on HANA. This quarter, HANA revenues tripled compared to Q1 last year. It has about 1,000 customers on it now and is growing fast. HANA’s relevance as a real-time analytics platform for big data and warehouses has been driving its popularity. This quarter, SAP added Levi Strauss, an iconic clothing brand and ConAgra Foods, a U.S. consumer company as its customer in the Americas. The company estimates that it could be half a billion U.S.-dollar business, making it one of the the fastest-growing software product in the world. [1]

For 2013, the company has set lofty expectations of the product. It estimates that software revenue from SAP HANA will range between €650 million to €700 million. Its expectations are supported by the completion of the transition of entire SAP ERP (Enterprise Resource Planning) suite onto the HANA platform in January. This will put it in direct competition with Salesforce.com, which is the leader in cloud-based CRM. We expect SAP to successfully cross sell HANA and other software in its suite of products over the year, and expect SAP HANA to define the company’s 2013 performance.

The Americas Lead The Growth From Front

SAP registered revenue growth across geographies riding on the success of its push into cloud computing and SAP HANA. In the Americas, software and cloud subscription revenues grew 51%. This was driven by strong performance in Latin America and strong cloud subscription and support growth in North America, Brazil and Mexico. Despite the delayed budgetary cycles in the U.S. caused by the federal budget uncertainty, software license revenue grew by 8% in the Americas. We expect an improving economy to speed up this growth. Emerging markets in EMEA such as the Middle East, Africa and Russia helped the company achieve 15% growth in software and cloud subscription revenues. Even established markets such as U.K., Sweden and Switzerland grew over 50%. SAP HANA once again helped the company win over big clients such as BSH Bosch und Siemens Hausgeräte, which will migrate to SAP Business Suite, powered by SAP HANA.

The only drawback to the otherwise solid overall performance came from the Asia-Pacific and Japan region where software and cloud revenues declined by 7%. External factors such as lower-than-expected demand for IT investments in the beginning of the year from state-owned enterprises in China led to this decline. However, the company expects that the stability provided by the new government will help it return to solid growth in Q2.

We are currently revising our $73 price estimate for SAP.

Disclosure: No positions.