According to a recent cloud computing report published by Bessemer Venture Partners, the global cloud computing market is projected to grow 23% annually over the period 2014 through 2018 and reach $127.5 billion by the year 2018. The report reveals that enterprise spending on SaaS applications is currently at nearly 30% of all application spending. Technology companies that have embraced cloud are already seeing strong results.
SAP’s (NYSE: SAP) third quarter revenues grew 17% over the year to €4.98 billion (~$5.48 billion), ahead of the market estimates of €4.92 billion (~$5.41 billion). EPS of €0.98 (~$1.08) was also ahead of the Street’s projections of €0.90 (~$0.90).
By segment, cloud subscriptions and support revenues grew an impressive 116% over the year to €0.60 billion (~$0.66 billion) and revenues from software and related subscriptions grew 11% to €3.52 billion (~$3.87 billion).
The market was especially pleased with the growth of their cloud offerings. Last month, SAP announced that they had more than 1,300 customers for the SAP Business Suite for HANA, which was launched earlier this year.
For the current year, SAP expects cloud subscriptions and support revenues of €1.95 billion-€2.05 billion (~$2.15 billion-$2.26 billion). They expect full year cloud and software revenues to grow 8%-10% over the year and are projecting an operating profit of €5.6 billion-€5.9 billion (~$6.16 billion-$6.49 billion).
SAP’s Cloud Offerings
Over the past few years, SAP has been successfully implementing their cloud strategy, and they continued to do so this quarter with new offerings. Last month, SAP announced the release of a new SAP Vehicles Network solution, which is a cloud offering that allows organizations to offer secure, end-to-end vehicle and mobility-centric services. Companies will be able to allow drivers in North America to share data from the Internet of Things, activate gas pumps, pay at the pump, reserve parking, open off-street parking gates, and pay for on-street parking from the car through a mobile wallet or app.
Last month, they also released the SAP Digital Boardroom, a service built on the Cloud for Analytics solution that is able to simplify performance and metric reporting across all areas of business on a real-time basis. It is early days to talk about the adoption of SAP’s vehicle solution, but SAP is looking at a big market opportunity ahead. According to a Gartner report, by the year 2020, connected vehicles will account for 25 billion vehicles on the road compared with an expected 4.9 billion this year.
SAP is also improving their analytics offering. They are embedding their Cloud for Analytics solution in the existing SAP solutions so that organizations will be able to connect to cloud and on-premise data to deliver planning, predictive, and business intelligence (BI) capabilities in a single analytics solution. Market reports suggest that cloud analytics SaaS offerings is a $50 billion market this year and will grow to $67 billion by 2018. The new service includes reporting, dashboarding, data-discovery, and visualization capabilities in addition to the business planning, predictive analytics, and governance, risk, and compliance solutions.
The market is pleased with SAP’s cloud growth. Their stock is trading at 52-week high levels of $79.81 with a market capitalization of $95.65 billion. It touched a 52-week high of $79.32 last week. Besides delivering on cloud, SAP is also displaying financial acumen in managing their profitability. They are eliminating jobs faster than expected by offering voluntary retirement. Given Europe’s stringent labor laws, SAP is finding it difficult to eliminate jobs easily and is thus offering their workers options to retire early or seek employment within the organization in other divisions and departments. Overall, though, they are expecting nearly 3,000 employees to leave the company by the end of the year and save over €500 million (~$550 million) a year from the job cuts. The restructuring will come at a cost and SAP is projecting to incur nearly €585 million-€615 million (~$645 million-$678 million) as part of those costs.
Over the past few years, all tech giants have been making their way into the Cloud Computing space. But SAP definitely seems to be seeing better results with their investments. Oracle may be a giant when compared to SAP, but they have had a tough time shifting to the cloud as has been evident in their recent quarter results. During their last quarter, SAP saw new license sales grow 4% over the year to $1.16 billion, compared with Oracle’s reported decline of 9% in license sales.
According to Gartner, 47% of the global CRM market was SaaS-based with Salesforce as the market leader with 18.6% share. SAP was second largest with 12.1% share followed by Oracle with 9.2% market share. But while SAP saw a 7% growth over the year in their CRM numbers, Oracle registered a comparatively modest 3% growth. Clearly, SAP has got their cloud strategy all worked out.
SAP has already made some smart acquisitive moves in the space. Last year’s $8.3 billion acquisition of Concur has fared them well so far as SAP has integrated them into their Business Networks Group to deliver business networks, or as they call it, the “next generation of business applications“. Similarly, the $3.4 billion acquisition of SuccessFactors has helped them expand their reach into the cloud space for talent management. They can continue to expand their offerings through several smaller acquisitions based on the market that they wish to grow into. For instance, to cater to the services sector, they could look at acquiring Bullhorn, a cloud-based vertical CRM solution provider for companies in service-based industries. Bullhorn is not yet a Billion Dollar Unicorn club member, but given their strong financials, they are likely to get there soon enough. You can listen to Bullhorn’s CEO, Art Papas, when he joined me at the 1M/1M Roundtable in June this year.
Then there is the opportunity within finance with Blackline, the Billion Dollar Unicorn contender that offers an automated solution for account reconciliations that big organizations really like. I spoke with Therese Tucker, Blackline’s founder, earlier this year and you can listen to their impressive growth chart here.
Another interesting area for SAP to venture in is the healthcare industry. They have a wide array of companies to choose from within the space which include the likes of eClinicalworks, AthenaHealth, and Modernizing Medicine.
eClinicalworks is a leader in cloud-based healthcare IT solutions. Their founder, Girish Navani, has managed to bootstrap the company so far, and is hopeful of keeping it privately held. You can listen to him speak more here at a recent 1M/1M Roundtable. The company has over $300 million in revenue.
If they are looking for a bigger acquisition, there is athenahealth, the leading provider of cloud-based payment collection services for physician practices. The company is currently valued at nearly $6 billion as it continues to grow at a fast clip.
And, last but not the least, Modernizing Medicine, the company that is offering cloud-based, specialty-focused, adaptive learning, and a touch-based system for practitioners. You can listen to the founder Dan Cane speak with me more about it over here.