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January 21, 2014

SAP Announces Solid Q4 2013 and Full Year Results - A Tale of Cloud-based Growth and Investment

By Tony Rizzo, TMCnet Senior Editor

Early this morning SAP (News - Alert) announced its earnings results for its Q4 2013 and the full year. The company did well, but the biggest story of the day is really SAP's clear intentions to dominate and own the cloud. SAP has invested considerable dollars to get itself positioned for cloud growth and the clear message today is SAP's focus on getting there. SAP has moved most of its assets to the cloud already, but the company believes that it will require additional considerable investment over the next three years to ensure SAP’s goal of owning the dominant cloud position among its peers - we'll leave it as a reader exercise to imagine the challenge here given who SAP's peers are.

This cloud positioning is critical to understanding SAP's guidance for 2014 and in looking ahead as far as 2017. In fact we view SAP's business outlook and cloud focus as far more important than the fact that SAP managed to deliver a fourth straight year of double digit growth. Further, SAP mobile is now the new desktop, and that view resonates with its cloud-based focus.

What are the specific implications, financially, for SAP in doubling down on the cloud? In previous guidance the company had forecast it would reach operating margins of 35 percent in 2015. Today, however, the company announced that it has shifted its focus towards substantial new cloud-based investments over the next several years.

The substantial dollars (or rather euros, as SAP reports it's numbers) SAP will allocate for this investment - according to co-CEO Bill McDermott (who will soon become sole CEO as SAP's other co-CEO Jim Hagemann Snabe moves up the ladder to SAP's supervisory board team) - will put the brakes on SAP's original 2015 goal to hit the 35 percent operating margin goal.

Financial analysts are never pleased with margin news of this sort, bit in this case it is an absolutely well-placed shift in strategy given SAP's cloud ambitions. In any case, SAP now forecasts that it will reach that 35 percent margin number in 2017, and McDermott believes it will do so with its core cloud strategic positions much more solidly built than might otherwise be the case. It is a necessary shift to accomplish the company's cloud goals. Financial analysts will give SAP that room to invest and we are glad to see SAP doing so. Still, it is worth noting that as we write at 10:30 a.m. EST the stock is down to $80.29 or $2.03, a 2.47 decrease during morning trading.

Almost needless to say, SAP also made it clear that its HANA in-memory database continues to drive a tremendous amount of business - with sell-through to existing customers and sales to new customers continuing at unprecedented rates. We're huge fans of HANA and continue to be impressed with what SAP continues to accomplish with HANA. The cloud, of course, is instrumental to HANA's own growth and to the value HANA will bring to SAP's enterprise customers, whether a Fortune 50, 500, 1000 or an SMB.

The Numbers

SAP provides its financial numbers utilizing its own internal accounting standards. The numbers reported below are all labeled as non-IRFS (International Financial Reporting Standards) by SAP, although IFRS numbers are also provided in most cases (we've not noted them here, and in many cases the two numbers are the same). IRFS is similar to GAAP in the United States. In any case, the SAP numbers are all relative to previous SAP numbers and provide a perfectly fine measure of SAP's financials.

SAP's full year software and cloud subscription revenue increased 11 percent 5.28 billion euros ($7.14 billion dollars). Software and software-related service revenue also grew 11 percent 14.03 billion ($18.97 billion). Total revenue grew 8 percent to 16.90 billion euros ($22.85 billion).

SAP's cloud subscription and support revenue reached 787 million euros ($1.06 billion). That number beat SAP's own estimate of full year 2013 guidance of 750 million euros ($1.01 billion), and far exceeded total 2012 revenue of 343 million euros ($463.67 million). SAP also reported deferred cloud subscription and support revenue of 447 million euros ($604.25 million) as of December 31, 2013, a year-over-year increase of 25 percent.

SAP's cloud subscription and support backlog as of December 31, 2013 was approximately 1.2 billion euros ($1.62 billion), a major year-over-year increase of 50 percent. SAP further notes that its annual cloud revenue run rate now exceeds 1.06 billion euros ($1.43 billion). Finally, SAP's total cloud portfolio applications subscribers now exceed 35 million.

McDermott and Snabe together noted that, "Based on our strong global momentum from 2013 we will accelerate the transition to the cloud by offering customers choice. With all solutions moving to the Cloud powered by our real time platform HANA, we will simplify for our customers, extend our lead and drive growth that is more predictable and profitable for the long term."

SAP HANA was, of course, a major growth engine for SAP in 2013. SAP now has now over 3,000 HANA customers. Full year 2013 HANA software revenue increased a huge 69 percent to 664 million euros ($897.6 million). SAP Business Suite powered by SAP HANA has now reached 800 customers at the end of 2013 since its launch in May 2013.

Operating profit for the full year was 5.5 billion euros ($7.45 billion) and net profit after taxes was 4.02 billion euros ($5.43 billion). Earnings per share reached 3.37 euros ($4.56 dollars). In this particular case it is worth comparing the non-IRFS numbers to SAP's IRFS reported earnings, which stand as follows: Operating profit for the full year was 4.5 billion euros ($6.08 billion), net profit after taxes was 3.3 billion euros ($4.46 billion) and EPS was 2.79 euros ($3.77 dollars).

Finally, as of December 31, 2013 SAP had a total group liquidity of 2.84 billion euros ($3.84 billion), which includes cash and cash equivalents and short term investments. Net liquidity as of December 31, 2013 stood at 1.47 billion euros ($1.99 billion).

2014 Business Outlook

SAP expects full year 2014 (non-IFRS) cloud subscription and support revenue to fall in the range of 950 to 1 billion euros ($1.28 billion to $1.35 billion). The upper end of this range represents a growth rate of 32 percent, essentially along the same lines as was forecast for 2013.

SAP expects full year 2014 (non-IFRS) software and software-related service revenue to increase by six to eight percent.

SAP expects full year 2014 (non-IFRS) operating profit to be in a range of 5.8 billion to 6.0 billion euros ($7.84 billion to $8.11 billion).

As we noted earlier, beyond 2015 SAP has provided new 2017 targets. SAP aims to increase total revenue to at least 22 billion euros ($29.74) and total revenue from its cloud business to 3.0 to 3.5 billion euros ($4.06 to $4.73 billion) by 2017. Also as noted earlier SAP continues to target 35 percent operating margins, but now says it will reach that target in 2017 rather than the previously targeted 2015.

A rather good year all in all.

Edited by Cassandra Tucker

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