SAP to Steadily Increase Cloud Share... Attention Needed on Partnership Impact with MS

[Asia Economy Reporter Eunmo Koo] German enterprise software company SAP is expected to steadily increase its cloud business proportion. In particular, the partnership with Microsoft is anticipated to accelerate growth.

SAP is the leading provider of enterprise resource planning (ERP) and human capital management (HCM) software. Although it faced growth challenges due to the emergence of cloud software-as-a-service (SaaS) providers such as Salesforce and Workday, SAP has maintained its leadership in ERP and HCM based on a solid customer base, steadily increasing its cloud business share through cloud service launches and strategic mergers and acquisitions (M&A).

According to Hana Financial Investment on the 25th, SAP is expected to continue stable top-line growth while steadily increasing its cloud business proportion. Researcher Jaeim Kim of Hana Financial Investment stated, “SAP’s core product and representative ERP product, ‘S/4HANA,’ will discontinue support for previous versions starting in 2025, so revenue contributions from upgrades to the latest version are expected.” He added, “Particularly, the cloud service partnership between Microsoft and SAP should be noted for accelerating growth in the cloud segment of S/4HANA.” However, he also noted, “The policy that only SAP’s database can be used as the database for S/4HANA poses a risk factor due to the potential for customer attrition.”

Additionally, it is expected that SAP will reduce its less competitive infrastructure-as-a-service (IaaS) segment and focus on SaaS and platform-as-a-service (PaaS) software to improve cost efficiency and increase cloud profitability. Researcher Kim said, “The cloud gross profit margin (GPM), which was in the low 60% range in 2017, is guided to improve to 71% this year and 75% in 2023,” adding, “The expansion of cloud revenue share and profitability improvement are expected to drive overall profitability growth.”

Strengthening cloud capabilities is expected to support a stable stock price trend. Researcher Kim said, “Last year, sales increased by 12% compared to the previous year due to strategic acquisitions and partnership effects,” and forecasted, “Going forward, SAP will focus on service upgrades and expanding cloud business share through its existing customer base and strategic partnerships rather than M&A.”

He continued, “The mid-to-long-term annual average sales growth guidance through 2023 is 7.2%, which seems achievable considering SAP’s ability to execute strategies,” and added, “The steadily enhanced cloud capabilities are expected to underpin a stable stock price trend.”

However, he also noted, “Without clear momentum in existing on-premises sales or cloud business share, it seems somewhat difficult to expect the steep stock price increase seen last year again.”