How will SAP's cloud and in-memory drive affect existing customers?

SAP is expanding its cloud and in-memory computing businesses, but how is the company adapting its strategy to market forces?

Hana is the new frontier for SAP. “We are the only company to have our entire portfolio in the cloud and running in-memory technology,” said SAP co-CEO Jim Hagemann Snabe.

SAP's latest financial statement showed a decline in its software business for the second quarter of 2013 – down 7% to €982m – as the company expands into the cloud.

Total profit after tax for the quarter was up 10% to €724n, compared with €661m for the second quarter last year.

In a financial conference call, co-CEO Bill McDermott said: “The world is being transformed by cloud and in-memory. We are at a business inflexion point – businesses are shifting to the cloud.
"Cloud is a strategic priority for SAP. We are winning more deals over Workday than ever before, such as the US Weather Channel. We have a full portfolio of cloud CRM solutions and we recently won business with T-Mobile and Nespresso.”

In spite of having almost 4,000 fewer staff, after reducing its headcount by 7% over the past year, SAP's operating expenses were 3% higher year on year, totalling €3.07bn compared with €2.98bn in 2012.
SAP’s Hana in-memory database engine and cloud businesses were the company’s big growth areas.
Hana contributed €102m to SAP's software revenue during the second quarter, growing by 21% year on year. The company expects revenue from Hana to be in the region of €650-700m in 2013.

“The world is moving to in-memory to get a competitive edge. We saw strong adoption of SAP Enterprise Suite on Hana, which simplifies customers' IT landscape,” said McDermott. More than 500 startups are developing applications on top of Hana, he added.

SAP’s nearest rival in the enterprise market, Oracle, has yet to release its in-memory system, but since Oracle is the preferred database system for running large-scale SAP systems, Hana may be facing competition in the near term as users wait to see what Oracle can do. Gartner estimates that 40% of SAP installations run their SAP system on top of Oracle.

David Khan, an analyst at Berenberg Partnership, said: "The spectre of Oracle claiming to have an in-memory, columnar database by year end still looms. We still believe that Oracle’s product will not be comparable, as it will not be native columnar, and that announcing a product would mean it has given its seal of approval to the trend. However, Oracle could put short-term pressure on Hana signings, and SAP needs Hana to keep performing.”

Although Oracle is developing in-memory database capabilities, Gartner distinguished analyst Donald Feinberg suggested these may be limited to analytics and not support transactions, such as those required to run a system like SAP.

“Arguably, the nearest product to Hana is Microsoft SQL Server 2014, which is in beta,” he said. But users will have to wait to see if SAP certifies the new Microsoft relational database.

SAP’s biggest growth area was in the enterprise software company’s cloud business. Cloud subscription and support revenue for the second quarter of 2013 increased by 166% year on year to €183m. SAP reported annual revenue of €932m within its cloud business and said it had 30 million cloud subscribers. Much of this growth has come through the acquisitions of human resources cloud application SuccessFactors and Ariba.
Existing SAP enterprise software users will need to work out when and how they migrate to the cloud. “One big challenge for SAP customers is SaaS [software as a service] versus on-premises. Cloud computing is a realistic approach for SMEs, but even larger enterprises are looking at whether to move to an SAP hosted environment,” said Feinberg.

With SAP users now having to pay annual maintenance of 19% per year, as of June 2013, the biggest revenue streams for the company remain the support and maintenance businesses, which reported revenue of €5.5bn for the second quarter.

Blogging about the SAP support hike earlier this year, Forrester principal analyst Duncan Jones wrote: “Even if [users are] not directly affected by this change (for example because they’re on Enterprise Support) they may start to wonder, 'if SAP thinks it is acceptable to increase maintenance charges now without any real attempt at a business justification, what will it do when it is even more powerful than it already is?'.”