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July 24, 2015

SAP, Sage & Microsoft bet on cloud software dominance

Is a shift to cloud software sales causing confidence in business to wane?

By CBR Staff Writer

Financial results from the leviathans of the software world revealed mixed success this past week, as the firms continue to move their portfolios to the cloud.

Legacy software makers such as SAP, Microsoft and Sage are all attempting to compete with cloud insurgents such as Salesforce and NetSuite. The move is creating a delicate juggling act, with fluctuating share prices and software sales.

While cloud software sales can grow first it will often reduce short-term spending on the vendor, causing confidence in the business to wane and jitters from financiers in Wall Street.

And as the shift occurs, a rise in maintenance fees, upgrade costs and end-of-support issues could lead to customers entertaining other options.


SAP’s financial results for Q2 2015 revealed a telling comparison between the rapid increases in sales of cloud subscription and support, which grew to €555m (£392m) from €242m in the previous year.

Sales of its packaged software remain the main source of revenue at €979m for the second quarter, but only rose by 2% from €957m year-on-year. Under constant currency, software licenses actually fell by 7%.

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This is potentially a sign that the transition from being a legacy software provider to being a cloud software provider is taking affect, if perhaps at the cost of old licenses.

But speaking to CBR, Daniel Reinhardt, global corporate affairs at SAP, dismissed the notion that the company is cannibalising itself: "It’s not true, they cannot cannibalise themselves, due to the nature of the product portfolio – the market is hybrid.

"Many with on-premise are complementing with cloud, it’s additional rather than a replacement."

Reinhardt added that SAP still sees strong demand in cloud and software from important markets like France, the UK, Germany and the US, but declines in markets like Russia and Latin America.

This he attributes to difficult local economies, but the situation isn’t unique to software as cloud has also slowed in these regions.

Even so SAP forecasts that its cloud subscription revenue will exceed sales of its on-premise software licenses in 2018, though at present the cloud growth is coming at the expense of profit margins.

Luka Mucic, CFO at SAP, said: "At that time, SAP expects to reach a scale in its cloud business that will clear the way for accelerated operating profit expansion."


Earlier this year Microsoft’s chief executive Satya Nadella vowed that the firm would have $20bn of cloud revenue by the middle of 2018.

This would be quite a jump from its current commercial cloud revenues, which including Office 365, Azure and Dynamics CRM Online grew by 96% in constant currency terms in Q4 of the firm’s 2015 fiscal year to a $8bn annualised rate.

"In our commercial business we continue to transform the product mix to annuity cloud solutions and now have 75,000 partners transacting in our cloud," said Kevin Turner, chief operating officer at Microsoft.

Alan Pelz-Sharpe, research director of social business applications at 451 research, told CBR that he thought Microsoft was "going in the right direction", in terms of its cloud strategy.

"Certainly Azure is going well," he said. "But I think what they have to do now is build more sophisticated apps."

He added that Microsoft was still seen as a productivity app firm, as exemplified by Office 365, but that their business apps were "very good".

"If Microsoft can pull its products together into a single stack it’s definitely a good offer," he added.


Since the appointment of Stephen Kelly as the firm’s chief executive in November, Sage has made some big plays to reconcile its business with the cloud.

At a trading update on Wednesday the firm insisted that its strategy was working, claiming that it could hit a 28% operating margin and 6% revenue growth for this financial year.

This switchover, according to Kelly, is likely to "take a couple of years to fully implement", but software subscriptions were already said to add up to 550,000 at Sage, generating £260m of annualised revenue.

According to Pelz-Sharpe the company’s focus on small and medium businesses (SMBs) is a key advantage.

"Certainly in the SMB market everything is moving to the cloud," he said. "That’s not the case in [large] enterprises – at best there will be hybrid for years to come."

However he warned that the ease for smaller firms to switch had downsides for Sage: "[SMB cloud customers] don’t have complex customised processes. They’re in the position that if a cheap cloud option becomes available they can make that move."

Another bold move by Sage, its partnership with Salesforce earlier this year, could also backfire, according to Pelz-Sharpe, who points out that Salesforce may move into Sage’s sphere of accounting software in the future.

"Short-term it’s a great deal," he said. "In the long-term I’m not so sure."


Co-authored by James Nunns and Jimmy Nicholls

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