HANA Creates a Big Advantage for SAP

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The world’s biggest business software developer, SAP AG (NYSE: SAP) reported its fourth quarter results in which revenues increased by 12% from Q4-2011 to $6.69 billion, but the new share based compensation plan coupled with the increased spending on acquisitions has brought the operating profit down by 5% to $2.11 billion. Excluding extraordinary items, the operating profit registered a 10% increase to $2.60 billion, which, according to data compiled by Bloomberg, hasn’t met analysts’ expectations of $2.66 billion.  Shares fell on unreasonable growth expectations and typical momentum-driven speculation.

The company’s shares surged in value by 51.8% in 2012. This has caused an enormous increase in the share related pay from just $1.33 million in 2011 to $245.6 million. SAP’s most prominent acquisition happened in May 2012 when it purchased Ariba Inc, a cloud-based commercial application developer for $4.3 billion. The Ariba acquisition came just a few months after the company acquired SuccessFactors, another cloud based business software developer, for $3.4 billion in Dec 2011. SAP is clearly turning up the heat on its much bigger rival Oracle (NYSE: ORCL), which has also spent billions in ramping up its cloud infrastructure, the details of which can be found in my previous article. The acquisitions have caused a short-term drop in operating margin; having slipped from 37.1% to 31.6% as both Ariba and SuccessFactor operate at lower margins than SAP.

However, SAP’s focus towards cloud computing does not mean that it is ignoring its primary enterprise business. In fact, SAP has even bigger plans to ramp up its database management business in which it competes not only with Oracle but with IBM (NYSE: IBM) and Microsoft (NASDAQ: MSFT). At a recent event held in California, SAP unveiled its latest development that can potentially push the company well ahead of its rivals. Its in-memory database HANA is now ready to support business applications. According to Gartner analyst Donald Feinberg, this means that SAP’s one in-memory database management system (DBMS) can now “perform data warehousing and transactions in the same database” --- something which no other firm has ever been able to do. HANA-powered DBMS’s will be far more efficient than its rivals as a single system can now perform both operations, data analysis as well as transactions. This will have far reaching implications on the entire supply chain of firms using such systems. Bayer AG, SAP’s pilot client has reported that not only is the new system nearly 10 times faster but it is also cost effective; the installation cost is 20% lower as compared to a conventional systems.

SAP’s rivals are also working to develop similar applications. Microsoft is gearing up for an update to MS SQL, but while HANA’s business suite will be generally available within six to twelve months, it will take Oracle, Microsoft and IBM somewhere between two and five years to launch a competitive product. HANA can also support databases built by SAP’s rivals. Moreover, clients willing to work with SAP on production can get HANA even earlier while SuccessFactors and Ariba are aiming to start HANA support starting in May.

SAP is expecting to reach sales of $26.55 billion by 2015. The markets have been clearly disappointed by SAP’s current release, but again sometimes a stock is a victim of its own success. Nonetheless, the current results are strong and with HANA, SAP clearly has a head start in the post-SQL database world. Ignore the short-term price wiggles and use them as an opportunity to accumulate. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>SAP</p> </td> <td> <p>Oracle</p> </td> <td> <p>IBM</p> </td> <td> <p>Microsoft</p> </td> </tr> <tr> <td> <p>Stock 6M</p> </td> <td> <p><strong>+30.32%</strong></p> </td> <td> <p><strong>+17.33%</strong></p> </td> <td> <p><strong>+4.21%</strong></p> </td> <td> <p><strong>-8.15%</strong></p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>24.6</p> </td> <td> <p>16.29</p> </td> <td> <p>13.84</p> </td> <td> <p>14.62</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>3.18</p> </td> <td> <p>2.13</p> </td> <td> <p>13.91</p> </td> <td> <p>1.85</p> </td> </tr> <tr> <td> <p>Yield</p> </td> <td> <p>3.18</p> </td> <td> <p>0.70%</p> </td> <td> <p>1.80%</p> </td> <td> <p>3.40%</p> </td> </tr> <tr> <td> <p>ROA</p> </td> <td> <p>12.70%</p> </td> <td> <p>11.74%</p> </td> <td> <p>12.06%</p> </td> <td> <p>14.21%</p> </td> </tr> <tr> <td> <p>ROE</p> </td> <td> <p>23.69%</p> </td> <td> <p>24.66%</p> </td> <td> <p>73.84%</p> </td> <td> <p>24.50%</p> </td> </tr> </tbody> </table>




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