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Analyst Blog

On Aug 14, 2014, we issued an updated research report on SAP SE (SAP - Analyst Report). SAP is the world’s leading independent software vendor with its flagship ERP software. SAP HANA (High-Performance Analytic Appliance) was launched in 2010 with a new class of solutions that power the next generation of business applications.

The SAP HANA database is an in-memory database that combines transactional data processing, analytical data processing, and application logic processing functionality in its memory. At present, SAP HANA forms the core of the company’s business as it seamlessly integrates all offerings by SAP into the cloud to give its customers a competitive edge over its peers. The company’s cloud offerings powered by SAP HANA are being embraced by an increasing number of clients as the HANA cloud subscription allows the companies to leverage their businesses without any upfront capital expenditure. Given its ease and benefits and that too at reasonable costs, the rise in demand for SAP HANA is likely to continue going forward.

For the past few quarters, SAP has been focused on growing its cloud business to become one of the leading players in the category. Moreover, the company follows an open ecosystem strategy, which enables it to better leverage its innovation by extending it to partners to drive additional customer value, based on their own domain expertise.

SAP reported strong second-quarter results with growth across both top- and bottom- lines. The company has been witnessing strong customer growth for the past few quarters. New customers included key players like Telefonica Brasil, S.A. (VIV - Analyst Report), Bombardier Recreational Products, Weir Minerals, eBay Inc. (EBAY - Analyst Report), BSH, Bosch and Siemens among others, which led to a brisk expansion of the company’s total customer base. Also, SAP has made some strategic acquisitions to strengthen its cloud portfolio, notable among which are Ariba, BusinessObjects, hybris, SuccessFactors, Sybase and Syclo.

However, the company is highly exposed to the negative impact of volatility in foreign currency as it establishes its operations internationally.  In the quarter, the company’s cloud subscriptions were impacted by 7 percentage points, whereas its software and software-related service (SSRS) sub-segment revenue had a 4 percentage point negative impact. Also, the ongoing political and economical crisis especially in the Ukraine-Crimea region can prove to be a headwind for its business going forward. The company’s professional services business has also been witnessing continued weakness owing to the demand shift in the consulting services business. SAP has undertaken restructuring to meet these challenges, but the transformation is expected to impact the results this year.

SAP currently carries a Zacks Rank #3 (Hold). Another better-ranked stock that can be considered at the moment isProgress Software Corporation (PRGS - Snapshot Report) which sports a Zacks Rank #1 (Strong Buy).

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