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SAP posts growth but lowers outlook in main software business

The business software company said it was seeing challenges particularly in Asia and from rapid uptake of cloud computing

By Chris Kanaracus, John Ribeiro
July 18, 2013 10:32 AM ET

IDG News Service - SAP reported revenue growth in the second quarter driven by growth in cloud subscriptions and revenue from support and its HANA in-memory database.

However, the company lowered its growth outlook for software and software-related service revenue for the full year 2013, citing lower software revenue expectations as a result of macroeconomic challenges, particularly in Asia Pacific and Japan, and a rapid transition to the cloud.

The business software company said Thursday that its revenue grew 4 percent to a!4 billion (US$5.3 billion) from the same quarter last year, according to IFRS (international financial reporting standards). Profit grew 10 percent to a!724 million.

Software and software-related service revenue grew 6 percent year-on-year to a!3.3 billion although revenue from software dropped 7 percent to a!982 million. Cloud subscriptions and support revenue increased 206 percent to a!159 million, while support revenue grew 8 percent year-on-year to a!2.2 billion.

"We have reached an inflection point in the business of technology," with companies "radically shifting their businesses to the cloud," co-CEO Bill McDermott said during a conference call Thursday.

"The move to the cloud in the US is happening faster and much more broadly than any other geography," added co-CEO Jim Hagemann Snabe.

Non-IFRS software and cloud subscription revenue in the Asia Pacific and Japan region declined 7 percent, although it was up 18 percent in the Americas, as the company saw strong growth in software revenue in markets in Latin America, particularly Brazil.

SAP said HANA was a major "growth engine" and contributed to a!102 million in software revenue, growing 21 percent year-on-year in the quarter. The company continues to expect HANA software revenue to be between a!650 million and a!700 million in 2013. Strong customer interest in SAP Business Suite powered by HANA which was made generally available in May and HANA Enterprise Cloud, a new hosting service based on the platform, are expected to drive adoption of HANA, it said.

SAP has inked a "triple-digit" number of deals for the Suite on HANA so far, according to McDermott.

While SAP's on-premises software license business experienced a drop in the second quarter, the company remains confident, McDermott said. "We believe there are business opportunities in core business applications," particularly in emerging markets as companies there continue to globalize their operations and need to move to higher-end software packages, he said.

In a sense, HANA Enterprise Cloud allows SAP to preserve its on-premises license business while offering customers a cloud deployment option. That's because the service uses a "bring your own license" model wherein customers shift licenses they are currently using in on-premises installations.

"We want to go where our customers want to go," McDermott said. "If the customer can put it in the cloud and its more efficient and better for their customers and their shareholders and employees, that's what they're going to do."

SAP has also "equalized" the way its sales people are compensated for cloud and on-premises software sales, in order to avoid biases toward one product or another. "They get paid the same," McDermott said. "We completely equalized that in the company."

The company also reported that non-IFRS "deferred cloud subscription and support revenue" was a!361 million at the end of the quarter, a year-over-year increase of 68 percent. Deferred cloud subscription and support revenue includes committed future cloud subscription and support revenue already paid by the customer for subsequent quarters of the year.

SAP, however, forecast at least 10 percent growth in non-IFRS software and software-related service revenue at constant currencies for the full year 2013, down from 11 to 13 percent forecast in the last quarter. It, however, maintained its full year 2013 non-IFRS operating profit outlook to be in the range of a!5.85 billionA to a!5.95 billion at constant currencies, up from a!5.21 billion in 2012. SAP continues to expect non-IFRS cloud subscription and support revenue of around a!750 million in 2013 at constant currencies, from a!343 million last year.

The 2013 revenue and profit figures include the revenue and profit from SAP's acquisition of cloud-based human capital management tools company SuccessFactors and cloud-based e-commerce vendor Ariba. The comparative second quarter numbers for 2012 do not include Ariba as the acquisition did not occur until Oct. 1, SAP said.

Meanwhile, time and again on the conference call talk returned to HANA and its competition, including Oracle's newly released 12c database as well as a future Oracle product involving in-memory technology that CEO Larry Ellison recently revealed.

"We believe we have an 18 to 24-month lead [with HANA] while our competition is announcing products based on future promises," McDermott said.

Snabe also took a shot at Salesforce.com's recently announced partnership with Oracle, which will calls for Salesforce to extend its commitment to Oracle's technology stack for the long term.

"Unlike our competition, we do not outsource innovation," he said.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

Reprinted with permission from IDG.net. Story copyright 2014 International Data Group. All rights reserved.
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