Cloudy Software Jump Saves SAP’s Second Quarter

July 22, 2013 Timothy Prickett Morgan

German software giant SAP has turned in a mixed second quarter, and as it turns out, the mix was just right. Between perpetual software license sales and cloud-style subscriptions, that is.

In the quarter ended in June, SAP’s software license sales took a 7 percent dive to €982 million, which would be pretty bad news under normal circumstances. However, its cloud software subscription sales exploded by 206 percent (that means more than tripled) to €159 million, saving the day. Add it all up, and software license and cloud subscription sales together rose by 3 percent to €1.14 billion, and at constant currency in all the markets that SAP sells into, the growth overall was more like 7 percent. With support contracts on these wares up 8 percent to €2.18 billion. Other revenues fell by 3.9 percent to €744 million, and when you add it all up, SAP raked in €4.06 billion. After paying all the bills and the tax man back in Germany, profits after taxes rose by 10 points to €724 million.

“The industry transformation we predicted back in 2010 is now happening at full speed and our strategy of innovation for growth is paying off,” bragged SAP co-CEOs Bill McDermott and Jim Hagemann Snabe in a statement accompanying the numbers. “We continued our double-digit growth momentum, we are leading the transformation of the industry, and our market opportunity is bigger than ever. We are gaining market share in a challenging macroeconomic environment, and with the HANA Enterprise Cloud, we are resolute to capture the future as the cloud company.”

The HANA in-memory database drove €102 million in revenues in the second quarter, by the way, an increase of 21 percent compared to the year-ago period. The company did €86 million in HANA-related sales in the first quarter ended in March. SAP still thinks the HANA line will drive somewhere between €650 million and €700 million in revenues. That seems to imply that HANA is going to have a killer second half. SAP is expecting that the availability of its Business Suite ERP software running atop the HANA database is going to be the rocket fuel that brings in the remaining €462 million to €512 million in HANA stuff in the second half.

McDermott said on a call with Wall Street analysts that by shifting some of its code to the cloud (or buying those that did, to be more precise) and adding mobile applications and in-memory databases, SAP had doubled its addressable market to $220 billion. “We placed our bet on software as the innovation layer in the IT stack instead of consolidating the stack with hardware,” McDermott said in an obvious dig at hardware peddling archrival Oracle. “This is proving to be the winning strategy.”

To be fair, Oracle has done a better job of managing down the Sun hardware that Sun Microsystems would have done, and all of the issues that Oracle has in the Unix systems business its rivals IBM and Hewlett-Packard are also facing with their respective Power and Itanium platforms. That said, SAP gets to play hardware vendors off against each other, which is good. But it is also not able to tune its software for one or two precise sets of software without offending its many hardware partners, and in the long run, this could become an issue. We will have to see how this whole “engineered systems” convergence plays out in the market. It is far from clear, no matter how intriguing it may be to have a completely tuned stack.