SAP’s Q3 2012 results analysis: business as usual but not done yet

Earlier today, SAP announced its interim Q3 2012 results. There were no real surprises which will no doubt offend some looking for a massive revenue pop (they did beat expectations) but which will keep others happy looking for stability from a company that is sailing in largely uncharted territory. Charlie Osborne has the broads strokes. 

For me, the three key numbers were: HANA momentum, mobility growth and cloud acceleration. On a call with co-CEO Bill McDermott, we briefly chewed the fat on all three topics:

HANA: Revenue came in at €83 million ($107 million) with the company maintaining its guidance of €320 million ($412 million) in the full year for this line of business. I asked about two aspects: is the HANA pipeline showing signs of fragility and will HANA One on Amazon freeze the pipeline? McDermott said the pipeline is holding steady at €1.4 billion ($1.8 billion), a number with which he is happy. Given McDermott’s past guidance that pipeline conversion runs 30% that would still suggest a much higher close out figure for 2012. Even so, SAP remains conservative, suggesting that as the company runs out of large enterprises to which it can sell this premium ticket item, it will have to find more extreme application examples. I would go further. If SAP can nail one or two major ISV deals then that changes the landsacape. However, those deals take time and signififcant due diligence.

Looking forward and on the evidence I have seen among startups, SAP could enjoy a good chunk of HANA related revenue but that won’t pull through until next year and beyond. Some examples I have seen are addressing problems that run billions and trillions of dollars. You only need a small percentage of those with revenue tied to value for a big upswing.

On HANA One, McDermott said that was positioned such that the most common use case will be POCs and startup pilots. Even so, it would be great if SAP could announce 1 million development hours on Amazon by years’ end. The last number I heard was 200,000 hours. 

Mobile: €48 million in the quarter for what is little more than device management is not at all shabby. However, even at an anticipated €220 million for the full year, SAP has its work cut out. It really needs a succession of mega deals in a market that is becoming increasingly competitive and which will commoditise rapidly. The one bright segment is in BYOD. With so much chatter in the marketplace, SAP is well positioned to offer a coherent solution that will appeal to many of its more conservative customers. 

Despite what I have thought in the past, it doesn’t look like SAP will generate a great deal of revenue from applications a la AppStore. It may generate some revenue from upselling on premise applications where there is value in the upsell. I am starting to believe that any significant sales will come from SAP either building unique industry specific applications and/or relying upon its growing partner network. There will be numerous challenges around who builds what, who gets paid and how but the more important point is that there is a willing ecosystem of partners willing to bet on SAP’s mobile strategy. Again, some of the early third party ISV examples I have seen are outstanding in their forward thinking about 21st century problem solving. 

Cloud: Given past doubts on how this number works, this was one area where I wanted better visibility. Taking the year over year subscription figures that SuccessFactors reported in Q3 2011 and which SAP reported for Q3 2012, SAP has done a credible job growing the revenue top line from $65.8 million to around $103 million at constant currencies.

The press release was larded with talk of billings increasing fourteen fold and of course this is the number SAP wants us to concentrate upon. Right now we don’t have sufficient visibility into the make up but there is no denying that current deferred revenue, which currently stands at €2 billion. ($2.57 billion) represents an impressive backlog. However, we should be careful about this. Companies are increasingly signing multi-year deals but that doesn't mean those same deals end up the way they appear on a balance sheet. As time goes on, SAP will have to carefully manage those accounts to ensure there isn't any drop off towards the end of the contract term. 

Reports from the field suggest that SuccessFactors is doing well but that there is a shortage of skilled implementers for this product line. SAP already knows it simply cannot take its cadre of HR consultants and slap them on a SuccessFactors gig. How this works out in terms of potentially failing projects and the longer term impact on subscription revenue remains to be seen.

Looking out: 2012 is shaping up to be a banner year for SAP - at least from the investor standpoint. As I have said before, with so much technology coming down the pipe, one has to wonder how well SAP is corralling its assets into a picture that customers can readily understand. The one blot comes in the shape of licensing complexity. I have previously referred to findings from the UK & Ireland User Group where concerns on this topic are throttling buyers' ability to understand what they're getting into. Simplification iof the consumption model would go a long way to ensuring that SAP is able to maintain its grip on both key accounts and those that might otherwise slip into the hands of other vendors. It would also mesh nicelt with what we're seeing in the developer world where SAP has finally started to get over its angst about applying top dollar values to anything that moves. The 14 day Afaria test drive is a good example. 

One final thought - Ariba: One question I did pose to McDermott was on the likely impact of Ariba for the remainder of the year. The answer? 'Tiny.' However, I question the extent to which the Ariba network, which SAP has called 'the crown jewles' of the acquisition, will deliver as SAP imagines. The model takes money from both buyers and sellers. I see the supplier portion as a zero sum game because whatever they end up paying will be passed on in higher costs to the buyers. Far better to leverage the data coming out of the procurement cycle, give it a spin through the HANA machine and start evaluating the benefit of best practice metrics analysis. I'm 100% sure that buyers would be eager to pay for those services.