Growing or even maintaining global leadership in enterprise application software is not an easy thing to do given the fundamental changes in the competitive market structure and the rapid evolution in closely related platform technologies, both server-side and user-side. Based on Q4 FY2013 and full year FY2013 results released on January 21, however, SAP is still comfortably number one in enterprise applications software.
Shareholders appreciated the FY13 IFRS increase in operating margin by 1.6% and earnings per share increase of 18%. Though Q4 revenues were rated a slight miss on Wall St., causing a minor dip in share price, as well as one analyst downgrade that took place after SAP announced preliminary results on January 10th, sentiment towards SAP remains positive.
Co-CEO Jim Hagemann Snabe, who will leave the co-CEO role later this year, summarized SAP’s positive path since 2010 by saying, “Today, almost exactly 4 years later, we are celebrating the fourth consecutive year of double-digit growth and a successful reinvention of SAP.”1 Several executives mentioned the 2010 resetting of SAP’s strategic direction and how it has been responsible for SAP’s reinvigoration. Wall St. has agreed, with share prices rising from the 40s in January 2010 to the high 70s and low 80s four years later.
In this “What have you done for me lately?” world, however, what primary challenges and opportunities is SAP addressing to maintain its leadership going forward?
SAP has little control over currency fluctuation, except to emphasize that its FY13 reported revenues and profits were impacted negatively by 5 to 7%, depending on the category, due to currency headwinds, and that in constant currency non-IFRS terms SAP grew by 11% in software and relative services/support, and 8% overall at constant currency.
With total year FY13 non-IFRS cloud revenues reaching 758€ the world now has its next billion dollar cloud company, and a profitable one. The head start the likes of Salesforce.com and Workday had on SAP is melting away.
To further emphasize cloud, SAP will reorder the way it reports revenues going forward with its cloud business the top line of the top line. The on-premise franchises of software and support will follow, making it easy to track cloud versus on-premise revenues. While it was already easy, the arithmetic being straightforward, reporting revenue in that order is symbolic of SAP’s cloud focal point.
To underline is cloud commitment in another way, SAP estimated that its cloud business would reach between €3b-3.5 in 2017, based primarily on organic growth but with opportunistic acquisitions filling in some of the revenue promise. For 2014, SAP guided that non-IFRS cloud revenues would reach between 950m to 1b€, landing the growth rate in a ballpark range between 25%-33%. Citing 35 million cloud users, and Q4 billings up 50% in cloud, SAP stated that “In line of business — in HR, sales, procurement or finance, we are growing faster than pure play cloud players, like Salesforce and NetSuite, and growing around 1.5x the traditional software players like Oracle.” SAP also described its cloud growth as global, mentioning that its China business was up more than 40% in software and cloud.
Using an overly simplistic model, SAP earns about €15b of on-premise software, support, and services revenues it could convert to cloud over time. Because cloud revenue recognition tends to need a few years to catch-up to the old on-premise licensing model revenue recognition, SAP has decided to be conservative regarding margin guidance, keeping it flat until 2017.
The trick to SAP’s commitment to cloud, however, is not merely to convert customers, but to use cloud as a foot in the door to help customers further innovate their business processes. In fact, the entire SAP reinvention is based primarily on understanding how to help customers translate changes in technology, such as social, mobile, analytics, and cloud (aka SMAC) into business innovation. Lest we forget with all the talk about cloud and SAP’s in-memory database HANA, SAP’s primary value proposition remains helping businesses optimize their operations.
SAP executives pointed out “that innovative software is the growth driver in the industry, not hardware and not services.” SAP’s star child of software innovation has been SAP HANA, with executives saying that “Our performance in 2013 confirms the unique nature of the HANA opportunity. And [it] is the fastest-growing product in the history of enterprise software.” Ignoring that the claim is impossible to prove or disprove, SAP HANA, whether thought of as a database, an on-premise platform, or a cloud platform, has stoked the imagination of SAP’s value added channel. SAP cited Accenture and SAS as key partners for HANA, and that HANA accounted for €664m in non-IFRS revenues at constant currency in FY13, closing in on being a billion dollar business all by itself.
Perhaps the most telling moment of the earnings call came when Co-CEO Bill McDermott stated, “We want to elevate SAP to the trusted innovator of business outcomes. No company can do it better than us, and we really want to focus on that customer and their customer and the business results they’re looking to drive. We are, therefore, renewing our focus on industry and line of business solutions, retail, public sector, health care, financial services, to name a few. And when you think about the line of business executive in sales, human capital management, procurement, just to name a few, in the cloud, believe me, we’re going to be there with everything we got.”
My translation: The HANA hype of 2013 is not going away entirely in 2014, but it will become more focused on business innovation and outcomes. The trick is to continue to scale and infiltrate HANA into SAP’s applications, particularly but not exclusively in the cloud. The value of SAP’s many investments, from HANA to Jam (SAP’s social platform), from new efforts in terms of API management to the many SaaS acquisitions, and SAP’s commitment to the cloud, is not in the technology, it is what businesses do to better themselves. Customers’ business innovation, not merely technology innovation, with help from SAP, or from SAP’s value added channel, of other software vendors and start-ups using SAP platforms, or by the customers themselves, is SAP’s strategic winning formula.
For being the grandparent of enterprise applications, it is quite impressive that SAP has, over the course of the last four years, committed to, associated itself with, and delivered key innovations into the enterprise technology market. The staying power of SAP’s reinvention, however, rests in businesses reinventing themselves. If SAP and its partners are able to convince customers not just to move to cloud, but to use SMAC and other technologies as an opportunity for business reinvention, SAP will deliver on its lofty long-term promises to its shareholders.
1Source for quotes and paraphrases from the SAP earnings call is the SeekingAlpha’s SAP AG Management Discusses Q4 2013 Results – Earnings Call Transcript as well as the author’s own notes from the earnings call.