SAP reports strong growth in cloud amid slow overall revenue growth

The company had a dip in software revenue in the first quarter as the cloud business took off

SAP reported a strong growth in cloud revenue and fast adoption of its HANA platform in the first quarter, while its software revenue dipped from the same quarter in the previous year.

The business software company said Thursday its revenue grew 3 percent to €3.7 billion ($5 billion), while its cloud subscriptions and support revenue grew 60 percent to €219 million in the quarter under IFRS (International Financial Reporting Standards).

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Its net profit grew 3 percent to €534 million in the quarter.

SAP's annual cloud revenue run rate is now approaching €1.1 billion, and subscribers of its cloud applications now exceed 36 million, the company said.

Reflecting the transition in the market from on-premises software and services to applications delivered through the cloud on a subscription model, SAP's software revenue in the quarter fell 5 percent to €623 million. Its support revenue was up 5 percent to €2.2 billion.

Software and software-related service revenue, which includes the cloud business, grew 5 percent to €3 billion.

SAP is the only vendor "innovating in the core and transitioning to the cloud, and doing both profitably," co-CEO Bill McDermott said during a conference call Thursday.

The 2014 revenue and profit figures include revenue and profits from SAP's acquisition of Swiss e-commerce software vendor Hybris. The comparative numbers for 2013 do not include Hybris' revenue and profit until Aug. 1, 2013.

"We're about to disrupt the CRM business" with a combination of Hybris and SAP's CRM software, McDermott said on the call. "Why not?" he said, adding in an apparent allusion to the fast-growing but profit-lacking Salesforce.com, "the ones in the cloud now haven't made any money at it."

"CRM is no longer about sales force automation," McDermott said. "That's commodity. It's about managing your customers across every single touch point." What McDermott didn't acknowledge is that many other vendors, including Salesforce.com and Oracle, are also building out software portfolios aimed at that same goal.

McDermott also touched upon Fiori, a set of user-friendly, lightweight applications that expose data and processes from SAP's Business Suite software and can be deployed across multiple device types. SAP's ambition is to weave Fiori's "new and intuitive UI" into all its applications over time, McDermott said.

He did not allude to growing user resentment over the fact that Fiori must be purchased separately, rather than being included with the substantial annual maintenance payments customers pay for their Business Suite licenses. Suite customers have long bemoaned the software's clunky user interface and demand is mounting for SAP to change its Fiori pricing model.

The company did not change its forecast for 2014 at constant currencies that it provided in January. But it warned that its non-IFRS software and software-related service revenue and operating profit growth at actual currency could be hit in the second quarter and the full year if exchange rates stay at March levels for the rest of the year.

In the first quarter, growth in software and software-related service revenue in actual currency was down 5 percent from growth at constant currencies.

SAP's HANA in-memory database is seeing growing acceptance by users. Since launch in June 2011, the company claims more than 3,200 HANA customers, including close to 1,000 customers for SAP Business Suite powered by HANA, launched a year ago. Over 1,200 startups across 57 countries are building applications on HANA, with over 60 having products available commercially, SAP said.

"HANA is SAP," McDermott said. "HANA is the bedrock of our brand, of our soul. It will also stand on its own in the database market and we like our chances against anybody."

However, unlike in past earnings announcements SAP did not release revenue totals for HANA. Of late it has expanded the way customers can use the product, including through a new hosting service for the Business Suite.

Meanwhile, SAP saw double-digit software revenue growth at constant currencies in China, and had solid performance in the EMEA (Europe, Middle East and Africa) region despite uncertainties arising from the crisis in the Crimea.

SAP saw some weakness in Japan during the quarter due to economic conditions there, said Rob Enslin, president of global customer operations, on the conference call. But SAP expects "a strong rebound" in Japan toward the latter half of the year, he added.

In the Americas, SAP reported in the quarter 10 percent growth in non-IFRS software and software-related service revenue at constant currencies and 37 percent growth in non-IFRS cloud subscriptions and support revenue at constant currencies.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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