SAP's blowout Q3: the detail

What happened during SAP's last quarter. The devil is in the detail. More important is the forward outlook.
Written by Dennis Howlett, Contributor

When SAP pre-announced their Q3 results, eyebrows were raised at the fact it exceeded expectations. Now we have the results, we can see what happened.

Software licensing, a key metric for assessing future maintenance revenue grew 27% from €1.757 billion to €2.226 billion. Software and software related services (read maintenance) grew 14% €5.093 billion. Operating profit grew 57%, largely as a result of a €711 million benefit related to the recent overturning of the original jury award in the TomorrowNow case.

The company is maintaining its earnings outlook at growth for the full year in the range of 11-14% but hinting it will hit the higher end of those expectations. Total revenue at the end of Q3 was already 16% of the same period last year.

Some commentators have said SAP needs to make another big acquisition yet the company has embarked on a share buy back program that saw it spend some €157 million buying back 3.6 million shares. The company said it is evaluating te purchase of more shares largely as a result of its strong cashflow.

During the earnings call, the company talked up HANA again, saying the pipeline has grown from €500 million to around €600 million. Conversion was relatively light at €35 million bringing the year to date total to €63 million.

There has been some confusion about the pipeline for the new lines of business. Some say the company's previous statements quoting €500 million only referred to HANA, others have said that includes mobile. During a conversation with Bill McDertmott,co-CEO SAP, he cleared that up saying the HANA pipeline numbers we have are in the right ball park on a rolling annual forecast basis and that in mobile that number fluctuates between €400 and €500 million making a €1 billion pipeline in aggregate. For the year, he said: "I guarantee we'll hit €100 million on HANA and €100 million on mobile for the year. That's a Bill McDermott guarantee."

I asked about the conversion rate and where the business is coming from because my inquiries in the field among the big SIs paints a different story with almost zero demand going into their pipelines for HANA. According to SAP, the company is making many of the new new sales itself. It acknowledged that while awareness is high, hence the pipeline build, conversion rates reflect the need for SAP to concentrate on getting customers beyond knowing about these new classes of solution and more towards understanding what the solutions can deliver in practice. SAP needs to be careful. Its pipeline may be strong but it will need those partners and their implementation expertise to convert pipeline into net new sales. Otherwise, there is the risk those pipelines will evaporate.

I also asked McDermott to speak to the future climate. Everyone I speak with in the field is reporting record business. That's hardly surprising following the lean years on 2008-9. At the same time those same people are cautious going into Q4 and out to 2012. McDermott said that despite the uncertainties he remains confident: "Why would we up our guidance.? I'd rather keep with what we've said and close out strong. We've still got a long way to go so..." As to the future: "I'm not a cautious kind of person but here's how I am seeing it. We don't expect tactical or commodity spend to be running more than the lowish single digits. For example, I can't get a single hand to go up when asked whether building a new data center is going to add shareholder value. Companies now understand that if they don't innovate then they're not going to grow. They have plenty of cash so now's the time."

Turning to the cloud, McDermott said that he still expects to deliver 1,000 new customers on Business ByDesign but that going forward, SAP will start to assemble a portfolio of solutions that are clearly segmented as cloud offerings. This is something the company has, so far, not done a great job in explaining so look forward to more news on that at SAPPHIRE/TechEd Madrid. "[Once we've done that,] we'll assert our will on the market," McDermottt declared.

The next couple of months are going to be interesting. Tensions are already building between SAP and its partners. If SAP closes out strong - and that's still a big if - then what happens going into 2012? Wil SAP use its current strong position to solve the partner ills of the past? I hope so.

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