SAP co-CEO hints Oracle distracted by hardware

A software-only focus has put SAP in good stead against its competition, but it no longer wants to be seen as a traditional software player and points instead to cloud as its growth market. 

SAP announced its second-quarter 2013 earnings Thursday, reporting an overall revenue growth of 8 percent to US$5.38 billion and and net profit growth of 5 percent to US$1.15 billion. While software revenue fell to US$1.29 billion, cloud subscriptions and support proved to be the German company's stellar performer climbing 171 percent year-on-year to US$240.4 million. Support revenue also increased 11 percent to US$2.87 billion. 

In a phone interview Thursday with ZDNet, SAP co-CEO Jim Hagemann Snabe said its cloud business was "booming" and approaching 1 billion euros (US$1.31 billion) run-rate. It has 30 million subscribers in the cloud, making it the largest base globally and four times bigger than the second market player, he said. 

Asked if he was concerned this would cannibalize the company's traditional software business, Snabe said: "First of all, we don't like to be in the category of traditional software players. We're now a cloud company. And as opposed to the competition, we didn't outsource the cloud to partners. We actually invested in cloud ourselves.

"We're not afraid of this worry that the world is moving toward the cloud. The cloud business model is a very attractive business model because you have a bigger relationship with your customer, more recurring revenue and as such, you get volume and it can be more effective than traditional business," he said. "So rather than try to defend the traditional part of our business, we're accelerating the pace to the cloud and offering that choice to the customers."

Snabe also dismissed suggestions SAP was becoming a two-trick pony with maintenance its revenue mainstay and Hana its primary focus. He noted that while support remained an important part of its business model, the company also put strong focus on software innovation as a growth driver.

Its "main competitor" had chosen instead to optimize its maintenance business, he said, adding its "different strategy" had led to three consecutive years of double-digit growth for SAP while its competition's had been flat or negative. "So clearly, we're happy with our maintenance business. We do believe our support offer is second to none, which is important, but our main value-add is in innovation," he noted. 

"If you look at the numbers from the competition, you'll probably find their hardware business is going down rapidly and they can't compensate that with software."
~ Jim Snabe, SAP

He also noted the decision to focus exclusively on software had allowed the company to stay ahead of its competitors, which got "defocus" by moving into the hardware business. "There's a radical shift of investment in IT from hardware and services into innovative software, and I think we chose wisely to stay a software company rather than go into other areas.

"If you look at the numbers from the competition, you'll probably find their hardware business is going down rapidly and they can't compensate that with software," he said. 

While he named no names, Snabe was no doubt referring to arch rival Oracle, which moved into the hardware space when it acquired Sun Microsystems in 2009. In its third-quarter earnings report in March, Oracle saw its hardware revenue dive 23 percent year-on-year to US$671 million. 

IBM this week also registered a 12 percent dip in its hardware revenue to US$3.8 billion in its second-quarter 2013 earnings, while software inched up 5 percent to US$6.4 billion. 

SAP, though, is not the leading software player. According to IDC stats, Microsoft led the global software market last year with US$58.45 billion in revenue and 17.1 percent share. IBM and Oracle ranked second and third with  8.5 percent and 8.1 percent market share, respectively. SAP placed fourth with 5 percent market share. 

Pulling APAC back up

The German vendor also saw softer performance in the Asia-Pacific region, including Japan, which Snabe described as the company's "only weakness" in its quarter results. 

Software revenue and cloud subscription revenue for the region dipped 7 percent to US$237.81 million. SAP attributed the below-expectations performance to continued macroeconomic challenges, in particular, China's slowdown in GDP which impacted IT spending by state-owned enterprises. 

Snabe, though, stressed the region's importance as it offered high growth opportunity, with Asian companies globalizing and in need of software with global reach to better run their business. The co-CEO had just returned from a two-week trip that brought him to China, Japan, and Korea, where he said there was strong customer interest to engage with SAP.

The company was seeing rapid growth in India and Korea, he said, adding that it will continue to invest heavily in the region.

Pointing to SAP's announcement in 2011 to spend US$2 billion in China, Snabe said the company had doubled its staff in the country. Its efforts in Asia also will continue to include focus on the small and midsize business (SMB) market, which is significant in the region, he added. 

"We need to accelerate our pace and most of all, we need to make sure companies in Asia understand more accurate data that's more real-time and more predictive in nature, is a way for them to manage a more difficult time in Asia. We need to show them we're the answer to the challenges they're facing in the economy," he said. 

The Asia-Pacific region contributed 664 million euros (US$872.42 million) to SAP's overall revenue in the second quarter. The Americas generated 1.69 billion euros (US$2.22 billion), while EMEA pulled in the largest portion at 1.87 billion euros (US$2.46 billion). 

Elizabeth A. Hedstrom Henlin, enterprise software analyst with Technology Business Research (TBR), said in a statement the flat growth in the region indicated that the German software vendor faced different growth paths this year. "We maintain SAP's recent sales reorganization around regional execution will be a critical lever to ensuring continued growth," Henlin said, pointing to the company's double-digit growth in the Middle East and Africa which is currently managed by sales head Michael Kleinemeier. 

"Improved performance and portfolio integration will allow regional sales teams to lead with focused positioning around local purchasing interests in second-half 2013, ssuch as cloud in the Americas, while positioning for long-term pull-through of core business assets," she added.