SAP raises cloud revenue forecast after Q2 business soars

The company's overall revenue was up 2 percent in Q2 as software revenue dropped

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SAP reported strong growth in cloud revenue in the second quarter, while its software revenue continued to fall, reflecting a shift in the market from on-premises software and services to applications delivered through the cloud on a subscription model.

The business software company's net profit, however, dropped on account of a provision for a patent litigation.

SAP's cloud subscriptions and support revenue was a!241 million (US$329 million) in the quarter, up 52 percent from the same quarter a year earlier under IFRS (International Financial Reporting Standards).

The company now expects its non-IFRS cloud subscriptions and support revenue for the full year to grow by up to 39 percent to up to a!1.05 billion, up from the earlier forecasted range of a!950 million to a!1 billion. SAP now has 38 million cloud users, and is the "fastest-growing cloud company at scale," CEO Bill McDermott said during a conference call.

That number should be placed into context, however, as SAP cloud products such as SuccessFactors HCM (human capital management) are often licensed for every worker in a company, and the software may only be used by them occasionally.

Meanwhile, SAP also saw higher adoption of its HANA platform with more than 3,600 HANA customers and over 1,200 customers for SAP Business Suite on HANA. The company did not, however, disclose its revenue from the in-memory database platform. It said in the last quarter that it had reached 3,200 HANA customers, including close to 1,000 for the business suite.

"Hana has taken hold," McDermott said during the call. "We don't have to prove that it works."

The company's overall revenue grew by 2 percent to a!4.2 billion in the quarter, while its net profit dropped year-on-year by 23 percent to a!556 million, following a provision of a!289 million for its patent dispute with software vendor Versata.

SAP's software revenue in the quarter fell 2 percent to a!957 million. Its support revenue was up 5 percent to a!2.3 billion. Overall software and software-related service revenue, which includes the cloud business, grew 5 percent to about a!3.5 billion.

The company has not changed its forecast for 2014 at constant currencies. It warned, however, that its non-IFRS software and software-related service revenue and operating profit growth rates at actual currency could be hit if exchange rates remained at June levels for the rest of the year.

SAP saw strong revenue growth in the second quarter in the EMEA (Europe, Middle East and Africa) region despite the political crisis in the Ukraine, with non-IFRS software and software-related service revenue up 8 percent year-over-year at constant currencies. Non-IFRS software and software-related service revenue in the Americas region increased 6 percent year-over-year at constant currencies.

Moving forward, SAP is going to ramp up its efforts to court small and medium-size businesses. It announced the formation of an SMB division that will be led by Dean Mansfield, a former president at NetSuite, which caters to SMB customers with its cloud ERP (enterprise resource planning) software.

"It's an area where we see considerable long-term growth," McDermott said. "We're going after smaller customers and lots of names."

In general, SAP is hoping to please customers and increase loyalty with the "Run Simple" theme it unveiled at the Sapphire conference in June. The company has pledged to make not only its software easier to implement and use, but also make it easier to do business with SAP.

For example, SAP is offering on-premises software customers the ability to purchase it by subscription, an arrangement that typically is found with cloud software. However, the option hasn't had much uptake, McDermott said.

"They view SAP as a strategic asset and for now have behaved in a way that purchase is their preferred option," he said. "But renting is on the table."

In addition, SAP's notoriously complex price list has been reduced in size by 70 percent, McDermott said. "We're behaving very differently within the company and the clock speed has dramatically sped up."

SAP saw an uptick in the number of deals larger than a!5 million during the quarter, an indication that the company's message is resonating, McDermott added.

"The Run Simple concept, the vision of it, has hit home," he said. "When the confidence is there with the customer you tend to increase the bill of materials."

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