most colleagues went - what? At the time I said the devil is in the detail and that turns out to be true. On the analyst call and subsequent follow up with Jim Snabe, co-CEO, SAP dropped some heavy hints as to what is happening.
A key data point comes in Bill McDermott's remarks where he talked pipeline. Now - as anyone knows pipeline means nothing unless you are confident of close rates. On the call, McDermott said that the mobile pipeline is around €800 million while the HANA pipeline is around €1.5 billion. Crucially he also said that SAP expects close rates of around 30%. That is a number McDermott has mentioned in past meetings so there is consistency.
Crunch the numbers and you come out at something like €250 million for mobile (€220 million in the forecast) and €450 million for HANA. Snabe was insistent that he wants to keep HANA guidance at €320 million because the growth rates they're seeing while massive are not wholly predictable. The forcast is way below €450 million but sources are telling me that SAP is closing deals far more carefully than it might have done in the past. In other words, SAP is carefully managing deal flow in an uncertain economic environment. Behind the scenes, €400 million is the number the team would like to hit by years' end with €1 billion as a 2013 target.
If that blows your socks off don't run away with the thought that SAP has hit on a magic formula no-one else has found. The answer is much more prosaic. Services revenue is on the slide. Given that SAP was taking as much of HANA to itself in 2011 and the early part of 2012, that sounds odd. And when you back out some of the headline sales numbers you're left wondering how the heck is SAP managing to close such good numbers.
on the topic:
We are flummoxed by SAP's results; it's hard for us to imagine how a legacy on premise software vendor that generates 45 percent of revenues from Europe is printing such strong numbers when virtually every other legacy enterprise software vendor is struggling. We are even more perplexed by 60% reported growth in ASE, Sybase's $800 million legacy database business with single digit market share and an historical mid single digit growth rate. Are we seeing a resurgence in legacy tech or is SAP heading down a dangerous path of heavy discounts on large deals and creative product revenue allocation? We are inclined to believe its the latter.
Other analysts are less concerned. Morgan Stanley analysts for example had been bracing themselves for poor HANA results in Q2 but were not only pleasantly surprised by the expectation of €75 million for this quarter, they were more than happy to see €85 million posted. They have few fears that SAP will reach its numbers by years' end.
Snabe's explanation is that SAP has spent a good amount of time optimising implementations and cited RDS as one of the key planks in that strategy. As I said, we could have a good conversation on that topic alone. What I am hearing is that yes, RDS does simplify implementations, but only where you're prepared to implement SAP's version of best practices. We have yet to see substantial evidence from customers as to how that's working out.
Elsewhere, SAP says that it is continuing to optimise solutions so that in reality, the ratio of services to software declines. In turn, that should translate into better outcomes (but not always) which equates to happier customers more willing to open the IT wallet. That won't be welcome news to the SIs/VARS in SAP's ecosystem but it is good news for SAP because it means it can increase sales velocity. This is something we should all be watching because if Snabe's assessment is correct, then it has significant implications for both customers and the ecosystem of partners.
Personally, I would like to see SAP use this as a plank for (finally) bringing the ecosystem of partners more into line with modern thinking around service cost ratios in all implementations.
On cloud topics, I crunched the IFRS numbers against those SuccessFactors (SFSF) showed in its Q2 2011. My reading says there was a decline from $73 million as reported by SFSF last year (see image above) compared to $58 million (€48 million if all SFSF) this year. Internally, Snabe says that he keeps getting emails from Lars Dalgaard who runs SAP's cloud business who is cock-a-hoop at what the SAP brand brings to the table and is talking about doubling from 2011 numbers. That doesn't make sense when viewed against reported numbers. However, Snabe did acknowledge that the way SFSF used to count numbers is not the way SAP does. That reinforced guarded language on the analyst call where the company said it knows it needs to bring more transparency to the cloud business numbers make up.
Similarly, there was no real insight into when Business ByDesign will be offerd in its piecemeal 'version' that concentrates on providing lines of business with applications like financials, HR, CRM and procurement. I have said before that I don't believe this is a viable strategy. Nothing I heard today makes me want to change my mind. In similar vein, SAP has dropped its 'substantial contribution' from BYD by 2015 to a total €2 billion target for all cloud apps in that same timeframe. Right now the company is well off that pace.
One of the less than bright spots is analytics. SAP has been making a lot of noise around upgrades to its analytics portfolio but Snabe acknowledged there have been bug issues on some of the products. Some customers have been grumbling around complexity as well. Also, I questioned whether the more modern interface SFSF offers might hinder sales of its more traditional HR solutions which use the 'old' SAP UI everyone I know loves to hate. Prior to the acquisition, Snabe thought there was pull through opportunity for HR from SFSF but my interpretation of today's discussion is that is not really happening. Instead, the SAP brand is helping SFSF get into deals that would otherwise been lost to it.
One tiny tidbit worth mentioning. On the analyst call, McDermott was keen to mention having won a substantual deal against both Oracle and Workday. Anytime I hear Workday's name I know they're getting underneath someone's skin. Today was no exception.
Another tidbit. Now that IBM has cleaned up its act in Africa, SAP expects to see more deal flow in that region. Curiously however, Snabe said they're not seeing much in cloud coming from IBM. That doesn't surprise. With faster track, lower cost implementations, the incentives for IBM to go with cloud solutions are not the same as they are for SAP. That is despite the fact IBM has been bulking up its Workday practice, as has Deloitte.
SAP is less concerned now about managing the bottom line than it was in the past. It is heavily investing in putting 'feet on the street' to close out as much of the pipeline as possible. This is good news if you are a lover of growth. It also means that investment in the products can continue and, hopefully accelerate. Right now, my understanding is that as long as Vishal Sikka's group continues to drive HANA development at the crazy pace it has been the last year, then SAP is happy to keep pouring money into that line of business. In reality, SAP doesn't have much choice if it is to differentiate in the marketplace.
The question now comes, can the company keep firing on all (or most) cylinders and continue to defy gravity. We're already in Q3, a traditonally sluggish periond in SAP's European markets that did so well in Q2. It won't be long before we find out.
Endnote: my questions to Snabe were based upon a compendium of questions that I garnered from the following colleagues: Jon Reed, John Appleby, Cindy Jutras, Vijay Vijayasankar, Ray Wang, Vinnie Mirchandani and Frank Scavo. Thanks folks.