SAP Is Emphasizing Internet Of Things

After the announcement of Brexit last quarter, many were worried about the performance of Europe-based companies. Recently reported second quarter results by ERP leader SAP (NYSE: SAP) appear to have put those concerns to rest. After delivering rather lack luster results in the first quarter, SAP delivered very strong second quarter results that sent the stock soaring to 52-week high levels.

SAP’s Financials

SAP’s second quarter revenues grew 5% over the year to €5.24 billion (~$5.76 billion) compared with the market’s forecast of €5.2 billion (~$5.71 billion). Operating profit in the quarter grew 11% to €1.52 billion (~$1.67 billion), ahead of the market consensus of €1.44 billion (~$1.58 billion). EPS of €0.82 (~$0.90) was ahead of the Street’s forecast of $0.78.

By segment, Cloud and Software business grew 30% to €720 million (~$791.4 million) and software licenses and support revenues grew 4% to €3.64 billion (~$4 billion). This was the thirteenth consecutive quarter that SAP reported growth of over 30% from cloud-based offerings. Revenues from other services fell 3% to €878 million (~$965 million). SAP attributed the impressive performance to the “trifecta of double digit growth in software revenue, cloud revenue, and operating income in double digits, a rare feat in the industry“.

By region, revenue from cloud subscriptions and support grew 47% in the Asia Pacific region, 41% in Europe, Middle East and Africa, and 29% in the Americas.

For the current year, SAP maintained its outlook of revenues of €6.4 billion-€6.7 billion (~$7.04-$7.38 billion).

SAP’s IoT Growth

Since early 2016, SAP has been increasing focus on the Internet of Things (IoT) segment. It is working on various offerings that will be able to support customers who are already using IoT-based systems, and it is also working on a future wave of SAP IoT implementations. It is currently seeing three kinds of key uses for the technology – the industrial customers who use heavy equipment and are aiming to optimize operations cost, maintenance cost and turnaround time; the aftermarket which includes end consumer and other businesses which have traded a product and are getting feedback to improve design, marketing, and create better engagement with customers; and finally customers with large moving assets such as fleets, cars, trucks who are using the service to track and trace on a real-time basis.

While these customers are most prevalent in the oil, gas, chemical and mining industries for now, SAP is counting on the reach growing to agriculture, healthcare, and the financial industry within the next year. To cater to these new industries, SAP is working on new solutions. For instance, within the insurance sector, it is working on the ability to track the vehicle usage to deliver customized insurance quotes.

Earlier last month, SAP announced the acquisition of Norwegian company Fedem Technology AS, which would be its first strategic IoT acquisition. Fedem’s core assets include an advanced engineering experience and proprietary software that is able to run analysis based on scientific laws and is thus able to provide definitive answers. The company helps build a digital clone of the installation, collect sensor data from the physical structure in the cloud, analyze the data real-time and provide an overview of the structure’s condition. SAP plans to build these capabilities into SAP’s next generation end-to-end IoT solutions for predictive maintenance as well as real-time structural integrity monitoring and Industry 4.0 scenarios. The integration will help enterprise customers get an overview of wear and tear in equipment, vehicles or plant operations, and give them the ability to conduct proactive maintenance, thus reducing downtime. The technology is expected to be most useful for the renewable energy, oil and gas, and marine and mechanical sectors. Terms of the acquisition were not disclosed.

A McKinsey report published last year estimates the global IoT market to grow to have a global economic impact of as much as $11.1 trillion by the year 2025. SAP clearly wants to play a big part in this industry.

SAP HANA

Meanwhile, SAP continues to reap benefits from the impressive HANA platform. SAP now boasts of more than 3,700 S/4 HANA customers. During the quarter, SAP added more than 500 SAP S/4HANA customers, of which approximately 40% are net new SAP customers.

Recently, the company announced several new upgrades to the system including Cloud Identity Access Governance, smart data integration, smart data quality, and other Data Services. The new products are able to integrate all businesses and their data into one source of truth, allowing people to deal with live data and dig into any aspect of their business. Services like HANA Vora are allowing customers to blend scale on structured data in Hadoop allowing customers to seamlessly integrate cloud, on-premise, and hybrid landscapes.

SAP’s stock is trading at $87.24 with a market capitalization of about $104 billion. It has recovered from the 52-week low of $62.57 it had fallen to back in September last year.

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