SAP - Set For Growth

| About: SAP AG (SAP)
This article is now exclusive for PRO subscribers.

SAP is the first name that comes to mind when thinking of ERP software, as it is one of the largest and most trusted software companies in the world for ERP solutions.

The German company is renowned for providing ERP (Enterprise Resource Planning) based business solutions. Besides ERP, it also provides data warehousing and data mining solutions. Recently, the focal point of SAP has been on business solutions in public and private cloud computing and this has helped it grow revenue and perform well financially even in times of distress.

Financial performance

In the second quarter results declared recently, SAP's revenue grew 8% year over year to $5.3 billion. The growth was driven by higher revenue from support services, which was up by 11%. Software and software based services witnessed a growth of 10% and cloud enabled solutions reported 7% growth. This growth was achieved despite pressure in Asian countries, especially China.

The company saw outstanding performance in Brazil and Latin America for its software services and cloud enabled solutions, which resulted in a year over year regional growth of 18%. Despite an uncertain EMEA market, it still recorded year to year growth of 3% from its software services and cloud solutions. But as mentioned earlier, it saw a setback in Asia Pacific & Japan with 7% decline in revenue.

SAP continues to generate an impressive cash flow of $3.2 billion, up by 3% year over year, while there was phenomenal growth of 37% in cash and cash equivalents that amounted to $4.4 billion.

SAP's major acquisitions and innovations have helped it dominate the cloud and this has started showing positive results in terms of comparative revenue growth and its acquisition based strategy of growth should lead to more revenue growth in the future.

Looking ahead

SAP's latest acquisition of hybris, an e-commerce vendor, will enable it to venture into omni-channel commerce. The total estimated market size of this segment is around $37 billion according to analysts. With hybris being a leader in commerce solutions, its combination with SAP's expertise should lead to synergies and help it capture a portion of this sector.

Also, SAP's HANA should be one of the major contributors to its revenue growth as businesses move to the cloud around the world. SAP HANA is targeting revenue of around $500 million to $545 million in the current fiscal year. SAP expects an increase in its revenue from cloud subscription services and software by 14% to 20% this year which is an impressive expected rate of growth.

In India, SAP has joined hands with Wipro for providing SAP HANA solutions. Since the Indian market is still nascent as far as cloud computing is concerned and Wipro is a leading software company in India, the partnership would be beneficial for SAP as Wipro has a huge client base with over 140,000 clients spread in over 57 countries.

Other players (NYSE:CRM) is a company with its core business model being CRM (Customer Relationship Management) on the cloud. The company has been awarded for being the world's most innovative company for 2 consecutive years by Forbes and for CRM excellence by Gartner and many more.

Salesforce is one of the direct competitors of SAP. Just before SAP acquired hybris, Salesforce had announced that it would be acquiring ExactTarget for $2.5 billion. ExactTarget's solutions are focused on multi-channel marketing automation and the company has around 6,000 customers including the likes of Nike and Coca-Cola. So this deal should lead to further growth for Salesforce which is already growing at a fast rate.

Its revenue the first quarter was $892.6 million, a growth of 28% over last year and the new deal should bring in more customers and enable Salesforce to keep its revenue growth rate intact.

CGI Group (NYSE:GIB) is another provider of IT solutions with operations in over 40 countries around the globe. It also has a history of acquisitions. Its recent acquisitions include major software companies like American Management System, Stanley Inc, and the most recent in 2012 was Logica. The core business of the company is providing business solutions and consultancy.

The company has been growing rapidly as it reported revenue of $2.6 billion in its recent quarter, a huge growth of 141% year over year. Logica has been the company's biggest ever acquisition and CGI is working to integrate it into its business. CGI has decided to eliminate Logica's low-margin contracts as it is intent on improving overall quality and moves like these should lead to improved margins.


Looking at SAP's innovations and tie ups to profit from "Business solutions on the Cloud" I think that the company is in a good position to increase its revenue. Its year over year growth even in uncertain global economic conditions shows its strength and the necessity of its products. As more businesses move to the cloud, SAP's performances will improve and investors would benefit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.