When SAP, I got the sense the company could hardly wait to get what it believes is good news out to the market. The market was less than impressed, dinging the shares 5 percent in the opening session on the day of the announcement. Today, on those earnings, claiming double-digit growth across the board. I had a call with Jim Snabe, co-CEO SAP, to get deeper into the numbers and get clarification on my interpretation.
In 2011 and under IFRS rules, SuccessFactors reported subscription revenue of $243 million for the full year. For 2012, SAP reports $360 million. That's growth of 48 percent overall. Impressive, you might think. But then SuccessFactors' 2011 growth was 49 percent. I expected that SAP would do better on the full year given that one premise for justifying was access to SAP's customers.
Co-CEO Jim Snabe told me that it took SAP six to eight months to bring SuccessFactors up to speed. He drew my attention to Q4 where there was significant growth that he believes will continue into 2013. He cited the ability to account for revenue from the likes of Pepsi, which signed a 300,000 employee deal right at the end of the year.
SAP has not delivered on what it said to us when we met Snabe a few days after SAP announced the acquisition.
Given what I know about SuccessFactors' pricing, that will mean something less than $8 million dropping into the revenue numbers. If SAP can continue that kind of momentum, then Snabe's concentration on volume growth may well turn out to be the right strategy.
Of deeper concern though is the reported segment profit. According to SAP's presentation, cloud gross profit contributed $237 million. In 2011, SuccessFactors reported $216 million or growth of a miserly 10 percent. Adjust those figures for sales and marketing cost and a reported margin of $64 million in 2011 turns into a loss of $70 million. That's a net movement of $134 million in the year. The whole cloud-segment revenue grew $120 million.
In other words, SAP has not delivered on what it said to us when we met Snabe a few days after SAP announced the acquisition. At the time, he said that SAP was convinced it could make SuccessFactors profitable.
Snabe's response is that this is a scale issue and that, in any event, there is no way for SAP to split out cloud R&D as it relates to HANA. Therefore, the numbers are skewed. Even so, he insists that SAP will meet its targets going forward and that the cloud unit will be more profitable than we are currently seeing.
If the company is successful given it is only projecting cloud at 10 percent of total revenue by 2015 and way off where the likes of Salesforce.com is today, then it will be the only company that has managed to make cloud apps profitable.
Turning to HANA, the company blew out its earlier guidance to achieve sales of $522 million. Excellent, you might think; and with aggressive targets for 2013, all the more to be pleased about. However, my understanding is that the year was made by a massive nine-digit deal done with one of the world's best-known retailers. Without that deal, SAP would have missed its HANA guidance by some distance. Snabe insists that isn't the case.
What's more, if you take a bare average of the 1,000 customers SAP claims have bought HANA, then the price it is achieving for this technology appears to be cratering. That should not be a surprise given that as a database, it has to compete with itself via the Sybase-acquired ASE, which I am told is being given away in some deals, plus the external competition from IBM, Oracle, and Microsoft.
Again, however, Snabe insists that SAP's "no discounting" policy continues to work. Instead, he says that in 2012, most customers were engaging in relatively small proofs of concept. He also says that most are stepping up to larger, enterprise deals and expects "a very high conversion rate" going forward.
Right now, the company is scrambling to build pipeline for 2013 with the emphasis on HANA being used to accelerate SAP's Business Warehouse.
As a sideshow, Vishal Sikka, the board member who describes HANA as "my little girl" is also reaching out to the broad developer community. This is meeting with some success but it is hard going to achieve market mindshare when companies like Salesforce.com already have significant momentum behind the Force.com platform.
To put this into perspective, revenue attributable to the Force.com is understood to be minimal in relation to the whole of Salesforce revenue. Even so, the vast majority of SAP HANA sales are to existing customers for the database-acceleration element rather than net new applications at this time.
Then we come to the core. Here, growth is in single digits overall with analytics accounting for "high" single-digit growth. Here Snabe says that going forward, the company expects the recently announced Business Suite on HANA to boost sales.
I find this hard to believe, at least for the short term. SAP customers have often invested many years into their SAP landscape largely with a view to achieving a stable state. They will not easily risk moving to a new platform, despite SAP saying that HANA provides a way for customers to massively simplify the landscape and attendant costs. Much will depend on early customers' success and my sense is that SAP will have to roll out credible stories by the time it gets to SAPPHIRE in May if Snabe's projections are to be met.
Many partners are viewing the SAP app store as a showcase rather than as a direct sales opportunity.
We didn't have time on the call to cover mobility where, once again, SAP reported good numbers. The problem I perceive here is that there are only so many customers who will pony up for Afaria, SAP's device-management offering, in what is already becoming a hot and competitive market.
Sanjay Poonen, the lead behind this segment, recently told me that he is confident the company can do well, especially when you take into account the growing number of mobile apps SAP and its partners are putting into the marketplace.
Again, I have reservations. Many partners are viewing the SAP app store as a showcase rather than as a direct sales opportunity. For them, the application is less important than the incremental implementation, despite the potential for achieving significant user scale. What we really need to see are some blockbuster applications.
On net margin, SAP is saying that it will get to 35 percent by 2015. Currently, margin is 31 percent, having fallen from 37 percent in 2011. Snabe says that the cost of acquisitions alone accounted for a full 1 percent fall and this cost will continue to impact SAP's results for years to come. Investors will have to get used to the fact that SAP will likely never return to the very high numbers reported in past years--but that is not necessarily a bad thing given the company's scale.
During the call, it was noticeable that SAP was not talking about market share in the way I would have expected. While all the talk of growth sounds impressive, my sense is that SAP is relying mostly on its existing customer base to get it to where it needs to be, recapturing customers in areas like CRM and growing the user base in HR and mobile.
The bigger question then becomes: how does SAP attract more new customers such that the incremental revenue has a noticeable impact on results? That is a question to which we will return.