Earlier today, SAP firmed up on its pre-announced results for 2011, producing a comparatively bullish forecast for 2012. This should not surprise. SAP did a lot of the right things it needed to in 2011. In turn, that allows it to make bold statements at a time when economic forecasts are far from rosy.
What follows represents my interpretation of a conversation I had today with Jim Snabe, co-CEO SAP, a brief discussion with Hasso Plattner, co-founder and VIshal Sikka, executive board member plus assorted snippets of conversation with senior SAP policy makers over the last couple of days.
- 176,000 customers on business applications means SAP does not have to move the sales needle that much in order for an uptick to show in top line revenue.
- HANA, which is a big ticket software and services item is moving from hype to reality much more quickly than many of us thought. The introduction of modest (by SAP standards) solutions like COPA accelerator (financial reporting) on HANA will speed up (sic) sales to customers for whom HANA has been out of reach. The new revenue guidance suggests SAP is accelerating conversion, moving rapidly from 1:4/5 to more like 1:3.
- Despite continuing grumbles around the cost of maintenance, SAP has done a solid execution job in persuading customers that 22% is a price worth paying through incremental but perceived valuable add ons. That becomes less defensible absent fresh solutions past 2012-13. Even so, when you work the numbers, it becomes apparent SAP's maintenance stream represents a very long tail: like 10-11 years. It's a heck of a soft, fluffy cushion when seen as a 90-95% margin line item.
- Its ponderous foot slog towards mobile has turned out to be fortuitous. With Apple recording insanely good numbers, SAP's reach should mean it benefits hugely via the halo effect. I have never seen so many Apple devices being toted in enterprise. There are lots of question marks around execution and SAPs ability to get partners onboarded but SAP is not having too many problems developing a healthy pipeline. It will need to push hard in this area with developers during 2012 to make that pipeline as fat as possible.
- The real shock is that some SIs are reporting heavy demand for new SAP implementations. That is as in major upgrades coming in at eye watering numbers - think $100 million. This is a short lived benefit for SAP because regardless of what the overall top line looks like, the core Business Suite trendline over time is down, not up. Not a problem in 2012 and 2013 but beyond?
- SAP is cautious about the impact of the SuccessFactors acquisition which is currently delayed for unspecified reasons but not connected to regulatory concerns. Flat in 2012 based upon SFSF 2011 numbers? That depends on when the deal is finally closed. We had expected the deal to close by now but the best they can say is 'Q1.' That has to blow SAP's cloud plans off course a wee bit but they have factored in for that very heavily. Downside yes, but tempered by conservative planning and forecasting.
- SAP has done a good job rebuilding goodwill with customers and, to a certain extent, developers although that last constituent could do with a good bit of love if SAP is to capitalise on its mobility and HANA potential.
What's not to like?
SAP's concentration on aggregated top line growth masks fundamental problems with keeping sales of the core apps moving along. Everyone knows that outside of the odd opportunistic deal or possible Oracle refugee, those deals are done. However, SAP also knows that if it is to have a credible future it needs to radically rethink business applications. That inevitably means cloud but how does it transition without giving the Street one heck of a fright? Here are two scenarios:
- It takes itself private while making the transition and the Street can go to hell until it is good and ready to re-emerge. This is an unlikely scenario but plausible as a way forward without finding itself horribly distracted.
- It uses the SuccessFactors acquisition as a way of setting profit expectations such that it can develop for the cloud without skittish investors punishing them too badly. Remember they are trading above the average of their peers so there is wiggle room. It is worth noting that the company announced it is deferring share buy back until it has paid down its SuccesFactors related borrowings. That sends the right signals to customers and investors that SAP understands prudent cash management. That's the current backdrop.
The problem is - how do you get the work done? There is really only one answer which SAP has alluded to in the recent past: China. It has made a commitment to invest $2 billion in that country. That is a huge amount of money but the potential rewards are equally huge. It is not so much a question of labor arbitrage but one of development resource. SAP needs thousands of developers. They are not going to find those as readily in other parts of the world. In short, they will have to learn from Apple's playbook. But this will only work if SAP can successfully leverage its very deep pool of engineering process experience to provide leadership and direction to tiger teams. The good news is that they've been here before when they transitioned from R/2 to R/3 in the 1991-3 timeframe. To date they are the only software company to have successfully made that transition. They can still lean on Hasso Plattner, one of the founders, to remind them what it takes to make that kind of change. Which leaves one more problem.
How will SAP compensate a future cloud salesforce? Every cloud vendor has the problem of not being super profitable and always appearing to live on the edge of profitability. A big part of that is the problem of compensating against revenue recognition rules that do not allow any cloud vendor to take full credit up front for what they sell while still having to set compensation based upon total bookings. There are no simple answers to this problem and in that regard SAP is not unique. In SAP's case it represents a horribly complicated puzzle because of the big ticket adjacencies. We will have to wait and see how SAP works its way around this issue.
Everyone I speak with is feeling good about SAP but not in an arrogant way. The company and its top partners are keenly aware of the many challenges ahead. Most important is that customers see a way forward with the company which was hazy at best a year ago.
The co-CEOs have done everything they promised and my sense is they are sufficiently confident to deliver again. The real interest lies in the hands of Vishal Sikka's development organisation. What they achieve in 2012 will provide more clues about how well SAP is preparing for a cloud/mobile transition. The ultimate test will be in the company's ability to persuade its best sales people that cloud sales will reward them as handsomely as they have been in the past. Time to change the brand of champagne?