SAP Q2 earnings analysis by TBR analyst Kelsey Mason

Kelsey Mason, analyst at TBR, says business software major SAP remains stable as market dynamics and internal structures shift.

S/4HANA adoption provides a promising springboard to future growth for SAP. Positive revenue growth in both new software licenses and cloud subscriptions, and an expanding operating margin in 2Q16 show that SAP can remain stable despite customer migration to cloud and internal restructuring.

SAP is well positioned to deliver innovation in both the front- and back-office, capturing hybrid opportunity as customers increasingly evaluate digital transformation strategies. S/4HANA adoption continues to accelerate, with 500 new customers in the quarter, providing ample opportunity for SAP to cross-sell its broader portfolio. However, partnerships remain a critical to SAP, both in driving adoption of core S/4HANA, and in creating inherent integration that align with customer use cases.

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Streamlining the analytics portfolio under a single brand enables SAP to easily expand analytics share of wallet through cross- and up-selling.

SAP has made several analytics acquisitions over the years and the portfolio and branding has become too complex, creating customer confusion. At the same time, customers’ analytics environments are becoming more complex as their data landscapes grow, particularly with the proliferation of cloud. To address these pain points, SAP consolidated its analytics portfolio under the SAP BusinessObjects brand.

Although this effort aligns with SAP’s Run Simple strategy, there may be initial confusion for customers. SAP had rebranded Lumira Cloud as Cloud for Analytics in October and is now putting it under SAP BusinessObjects Cloud. Consolidation, which resulted in a 70 percent SKU reduction, will be beneficial in the long-run as SAP changes its perception and simplifies its engagement models.

SAP restructures internally to better address the SME market

Over the last few years, SAP has been pushing down-market, ramping up investments in the SME segment to expand outside its established enterprise customer base. The company recently reorganized its SME-focused solutions including SAP Business One, SAP Business ByDesign and SAP Anywhere into a single business unit that will fall under the leadership of Steve Singh, who is also the head of business networks and applications. This restructuring shows the importance and resource allocation SAP is attributing to the SME segment, as it looks to this group of customers to drive long-term revenue growth.

Prior to this realignment, SME solutions resided under the global partner organization, lea by Rodolpho Cardenuto, as SAP exclusively uses the channel to drive SME business. Although the move may raise concerns for partners initially, there will be few negative implications for partners. Instead, SAP will bring a more cohesive SME message and strategy to market that will drive partner growth.

Updates to the HANA Cloud Platform will help SAP appeal to a wider range of developers

Though SAP has traditionally had a proprietary platform, the company launched the beta version of the HANA Cloud Platform for Cloud Foundry in May, which integrates Cloud Foundry services directly into HCP. This integration will provide a multitude of benefits to developers including support for new languages such as Java and Node.js and increased application portability.

HCP for Cloud Foundry will also have the ability to run in customer and partner data centers in addition to SAP’s own data centers. SAP currently only runs HCP out of data centers in the U.S., Australia and Germany, and this expanded availability will help SAP reach customers in new regions, particularly those with strict data sovereignty laws.

SAP also released a beta of the SAP API Business Hub in May to make it easier for customers to find and distribute APIs. SAP API Business Hub is a catalog of SAP APIs that customers can use to integrate their custom applications with SAP apps such as S/4HANA Finance and SuccessFactors.

SAP expanded its partnership with Microsoft in May to create more inherent interoperability between their solutions, many of which exist in the same IT environments. SAP’s Ariba, Concur, Fieldglass and SuccessFactors will be integrated with Microsoft Office 365, making SAP’s applications more appealing to the 70 million active business users on Office 365. SAP relies on its business network portfolio, which includes Ariba, Concur and Fieldglass, to drive growth and integration with Office 365 will help SAP expand the addressable market of these solutions. Additionally, SAP HANA will now be available on Azure, extending the reach of the in-memory database.

By Kelsey Mason, analyst at TBR