SAP: cautious optimism going forward

Following on from this morning's earning announcement, it was a calm, cautious but emphatic SAP board fielding a set of disappointingly soft questions on today's earnings call. First some selected quotes:Leo Apotheker, CEO: "Things are still tough...

Following on from this morning's earning announcement, it was a calm, cautious but emphatic SAP board fielding a set of disappointingly soft questions on today's earnings call. First some selected quotes:

Leo Apotheker, CEO: "Things are still tough...closure rates are more volatile then in the past...I am cautiously optimistic that the worst might be behind us. Buying behavior has not changed. We have been focusing on margin growth...we owe that to the strength of our business model...which include 55% recurring revenues. It will be tough to maintain the cost and run rate in the second half of 2009 [given the cost reduction measures the company took in 2008.] Our win rate is 80%...I don't expect the acquisition of SPSS by IBM to impact our relationship. It might simplify our overall offering."

Bill McDermott, executive board member: "Customers are cautious about their strategic investments...the pipeline in each of the regions is improving...The pipeline is becoming more robust...Volume selling is clearly the answer [where SAP packages smaller deal but requires higher sales productivity.]  We invest in our customer relationships. We're collaborating with our top 390 customers. Taken more than 400 customers through our Value Academy [where they are shown how to extract value from SAP investments.]..The majority are on enterprise support...MaxAttention is providing attention on critical processes for about 10% of this number."

The problem with any analysis of an isolated call is you can only interpret on the basis of what you hear. I was gobsmacked that the whole problem of maintenance and support was almost completely ignored by the financial analysts. Perhaps they're mollified by Leo's 55% remark. However, it doesn't provide any real insight into progress being made on issues such as Mittelstand or KPIs. Clues may be drawn though from Bill's discussion about the Value Academy.

As far as I can tell, sales people have been focused on explaining the value of enterprise support rather than chasing big deal shadows. This is now being bolstered through the Value Academy. I'll guess that what SAP hopes to do is demonstrate to the other 88,600 customers that if the top 400 customers benefit then they can too. Such a theory assumes that customers are lemmings, persuaded by their peers. That might have been true in the good ol' days of the SAP 'clubs' in industries like oil and gas. Recent consultations and discussions with colleagues suggest this is far from true today. Yes, customers keep signing those least risk maintenance checks but there is far more questioning about value delivered.

This should be questioned more closely because a continuation in the extreme weakness in top line software revenue sales will eat into downstream revenues over time. Not any time soon, but without a return to healthier deal flow, it will happen.

Leo's remark about SPSS makes sense. IBM is a competitor, customer and partner. SPSS has been a long term partner - in fact it is one that John Schwarz specifically mentioned during our discussion last week. SAP is arguably in better position to leverage the new dynamic, provided SPSS doesn't become yet another IBM maintenance revenue stream.

However, I am still far from clear what SAP's acquisition strategy is going to look like in the months and years ahead. What seems obvious to outsiders seems to escape SAP and to have seen both IDS Scheer and SPSS disappear from under its nose - albeit to partners - must be a matter of investment strategy concern.  At least to SAP's advisors.

The good news is that SAP seems to have a much firmer grip on its cost base and seems confident it can leverage what it sees as a leaner and more agile operation going forward. For as long as it continues to drive the bottom line and keeps plenty of free cash flow, the speculative wolves can be kept from the door. Including IBM.

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