Editor’s note: Its latest earnings report shows that SAP has a long road ahead before S/4HANA drives revenue growth, but the cloud buoys top line in the near-term, believes Technology Business Research analyst Kelsey Mason.
HAMPTON, N.H. – Unlike many of its peers experiencing total software declines, SAP experienced single-digit revenue growth and expanded operating margin year-to-year in 1Q16, highlighting the company’s ability to manage ongoing internal simplification and business model shifts associated with quickly growing subscription sales.
Though license sales declined in the quarter, TBR does not believe this is indicative of SAP’s long-term trajectory. SAP Business Suite 4 SAP HANA (S/4HANA) migration within its ERP install base will become a driver of SAP’s traditional business over the next 3 to 5 years; however, apparent capacity challenges from the company’s services business hinder SAP’s ability to bring customers live (only 4% of S/4HANA customers are currently live).
Assistance from partners such as Accenture and IBM will be crucial for generating and keeping up with demand, though increasing use of third-party resources pressures margins.
As SAP’s traditional business remains stifled in the near-term, cloud growth mitigates negative impacts on total revenue. Growth of 33% year-to-year in cloud subscription and support revenue in the quarter marks SAP’s twelfth consecutive quarter of more than 30% organic year-to-year cloud growth. Ongoing adoption of core cloud portfolios like SuccessFactors, Business Networks and Customer Engagement and Commerce diversify SAP’s cloud revenue growth while many peers operate within a single line of business. Investments outside lines of business in areas such as analytics will add value to core portfolios and help SAP capture at-risk market share as more agile pure plays like Tableau gain traction.
SAP will drive analytics adoption at competitors’ expense using a trade-in promotion and Roambi’s interface to improve user experience
SAP acquired mobile analytics vendor Roambi in February, and will use its reporting, visualization and dashboard functionality as a front-end for the recently launched SAP Cloud for Analytics. Roambi’s iOS and Android apps currently integrate with back-end data sources including SAP, Excel, SQL Server, Box and Salesforce. While SAP has not announced whether these connections will remain, TBR believes that they will be beneficial to SAP’s broader analytics strategy, and expanding the variety of integrations will help SAP address customer concerns around interoperability with their enterprise software environment.
With a new front-end on SAP Cloud for Analytics, SAP is also offering a trade-in promotion to attract new customers using other vendors’ desktop analytics solutions. TBR believes this promotion will help SAP start to pull away from leaders like IBM and reverse some defection to disrupters such as Tableau; however product demonstrations of the new front-end will be critical for SAP to prove that its new analytics solution is easier to use than its prior analytics offerings.
SAP relies on partners to show the business value and road map of SAP HANA and S/4HANA in customers’ digital business transformations
Complexity and high costs of migration have hindered widespread adoption of SAP HANA, and as a result S/4HANA, to date. SAP looks to partnerships including expanded relationships with Lenovo and IBM to address these concerns.
SAP and Lenovo extended their partnership in January 2016 to drive SAP HANA adoption in key countries such as the U.S., Germany and, most importantly, China. SAP has noted that it sees a growth opportunity to enable digital transformations in China with SAP HANA as the backbone; however TBR asserts that regional partners will be needed in this effort. The vendors will collaborate to build hardware optimized to run SAP HANA, and codevelop SAP HANA-based solutions tailored to the Chinese market in a planned Lenovo Enterprise Innovation Center in Beijing. This arrangement is similar to SAP’s partnerships with HPE and Dell, and while those relationships may prove more strategic for SAP globally, Lenovo is ultimately better positioned to help SAP execute on its China-specific efforts.
IBM and SAP will combine technologies and services with the goal of assisting companies in their digital transformations. IBM will bring its cognitive technology and consulting expertise to market with SAP S/4HANA, which SAP positions as the “digital core”. The vendors will co-invest in two innovation centers, located in Walldorf, Germany and Palo Alto, California, where teams from both IBM and SAP will develop best practices and showcase new solutions. Collaboration efforts include creating solution roadmaps and marketing plans that target specific industries, LOBs and roles.