German software creator SAP has come out publicly and said that they will invest additional capital into their blossoming cloud software portfolio in the next few years. Investment analysts have noted that this move will eat into SAP’s profitability. This investment may seem like a huge gamble. For an industry player like SAP, this investment into the cloud will reshape the company and allow it to stay at the forefront of high level business applications.
Last year, SAP’s profit margins stood firmly at 32%. The German software giant says they initially were going for a profit margin of 35% by 2017. SAP has since rescinded that statement and has said that they plan on using their profits as operating capital which will signal that SAP is completely ready to bring their apps into the cloud.
What does this mean for clients of SAP? Their clients will have to pay a smaller fee upfront and lower licensing fees for using SAP products. SAP plans on using the cloud as a means to begin restructuring client contracts so that they are cloud friendly. This will help SAP accountants better predict revenue as well as give their clients the robust capabilities of SAP software in the cloud.
SAP’s overall business is not dependent upon the cloud. In fact, analysts say that only 5% of SAPs revenue last year was cloud related. In 2017, it is expected that 15% of SAP’s revenue will come from the cloud. Peter Goldmacher is an investment analyst who follows SAP. In regards to SAP’s future with the cloud, he recently wrote, “The relatively small contribution of this business leads us to believe that management’s emphasis on this segment is meant to distract investors from weakness in SAP’s traditional applications businesses.”
You may remember that SAP has acquired two relatively large cloud companies in the past couple years. Both Ariba and SuccessFactors were acquired for about $8B total. SAP looks to parlay and grow these investments because industry research says that the cloud market as a whole will be worth around $130B by 2017. SAP is investing in this technology now so that they can enjoy the expected uptick in 2017.