Luka Mucic, SAP's CFO talks cloud business model
- Summary:
- Luka Mucic, CFO SAP provides fresh insights into SAPs proposed cloud transition. Many challenges lay ahead.
[sws_grey_box box_size="690"] SUMMARY - In all the years I've been following SAP, this is the first time I've heard its CFO talk about the impact of a significant change in the company's business model. It was refreshing and revealing. [/sws_grey_box]
During today's oddly named SAP Cloud Deep Dive, on which more later, it was refreshing to see recently minted SAP CFO Luka Mucic talk in confident terms about the SAP business model and with a fluency around the product portfolio lacking in some of the other speakers. As far as I can recall, this is the first time SAP's CFO has chosen to be part of a session largely devoted to marketing SAP's broader solution portfolio strategy.
At the top of the session, we were advised that this was not a press conference but an education session. It was also an invitation only event. That in itself was odd but it meant pretty much everything we heard had already been said at SAPPHIRE Now 2014.
Even so, Mucic provided us with some nuggets that help put SAP's transition to a subscription based model into perspective.
We learned for example that the way SAP accounts for on-premises sales means they reckon to make 40% per deal. Mucic was quick to point out that puts pressure on the sales organization to deliver each reporting quarter. What he didn't say was that pressure has only existed for SAP the last few years since its past history has been one of (mostly) glittering growth. Today, SAP's core business is in secular decline which, depending upon which quarter you look at seems to be tailing off at negative 7-9% but which will accelerate albeit into cloud transactions as SAP transitions to the new model.
We also learned that SAP expects most customers to sign three year deals but that the company doesn't expect to break even on those deals until year four. That means SAP's cloud offerings will have a significant drag on profitability in the medium term.
SAP is clearly banking on its ability to offer solutions that prove to be sticky and/or up and cross-sell customers into new solutions. Right now, those new solutions are mostly coming from its acquired technologies, ie SuccessFactors, Ariba and hybris. but with a bit of SAP Jam thrown in for good measure.
From everything we know and such analysis of the figures as is possible today, SAP has a cloud/subscription run rate of just over €1 billion of which all but about €50 million comes from acquisitions. From what we heard today, there is little by way of what you might term productizied and developed solutions that add to the portfolio.
Mucic said nothing that leaves me thinking that trend will change in the next couple of years. He anticipates cloud and on-premises revenue to be on par by the end of the decade and that cloud/subscription business will total €3.0-3.5 billion by 2017 but note in the slide above - this is an ambition and a full two thirds of revenue will continue to come from the maintenance cash cow.
If Mucic is correct then SAP will continue to see an absolute decline in on-premises software business between now and then end of the decade based upon the full year 2013 results.
What else do we know? Both Mucic and executive board member for technology Bernd Leukert, who effectively replaced Vishal Sikka when he stepped down earlier on the year, were clear that the default model for SAP is 'cloud first.' That in turn implies SAP will attempt to persuade customers to buy into either its hosted model or public cloud model. Either way, it means 'cloud' in SAP parlance going forward.
Based upon those assumptions plus a customer retention rate claimed to be 98%, SAP projects a picture of business as usual but that is far from a given.
Does the model stand up?
During the various presentations, SAP repeatedly argued that with presence in 180 countries and numerous languages plus feet on the street pretty much everywhere, it is uniquely positioned to bring customers with it and where the competition cannot go. That is a huge assumption.
I see numerous issues in front of the company.
The presentation Mucic delivered was unquestionably confident and poised but it wasn't backed up by other speakers' presentation skills. In places other presentations were downright clumsy, lurching from one topic to another and often leaving some of us wondering whether we were in another HANA pitch or whether this really was a cloud exposition. There was little consistency in the messaging beyond 'Powered by SAP HANA,' something that starts to sound incredibly dull around the fourth time you hear it.
Phil Wainewright will address the cloud readiness issues in his assessment but in my eyes, SAP presents a confusing picture. As a buyer, I want certainty. I will also put aside the ongoing uncertainty about how customers get from 'here' to 'there' and especially in highly customized environments.
Related stories
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While there can be no doubt that SAP's global presence carries distinct advantages, it is not invincible. It can and is beaten in deals. It got a shock when Flextronics jumped ship for Workday HR and got an even bigger shock when HANA hardware partner HP jumped to both Salesforce.com and Workday. When Salesforce.com put Angela Ahrendts then CEO of Burberry, on stage at its annual Dreamforce show in 2012, SAP was quick to follow suit and had to act swiftly to ensure Salesforce.com only got a sliver of the overall CRM pie.
In other deals, we have seen SAP act with staggering complacency reflective of its long tenure in some accounts. In short, there are a bunch of accounts where it can and will lose by simply being lazy. Some of these accounts will be headline grabbers.
High profile wins and marketing coups have a marked impact and while SAP tries to look cool with its focus on sports alignment, it struggles to compete in marketing buzz (with Salesforce.com) and doesn't have the cuddly feel of a Dave Duffield backed and Aneel Bhusri led Workday. Add to that Mucic's acknowledgment that in a feature/function pitch, SAP will feel price pressure then what's left?
When SAP talks global payments and the 'financial network' then it is on much firmer ground as it counts both 100 banks and both Mastercard and Visa within its orbit. When it talks about continued outsourcing of procurement processes on a global scale then it is clear that the flywheel effect of SAP's global reach has genuine meaning and impact.
That retention rate leaves a very tempting 900 Business Suite customers potentially up for grabs. Who gets them is anyone's guess but there must be a significant rump of SAP customers that could go the way of third party maintenance. That would relieve pressure on hard pressed IT departments looking for funds with which to innovate.
When SAP talks integration across an expanded portfolio of solutions, it sounds compelling in a chaotic cloud world. But then if it was such a great deal then why do we see so few wall to wall SAP shops? They don't exist and. quite frankly, SAP is really talking about a future that has a far from clear time line as it relates to its own products or a roadmap to demonstrate how customers will get there.
Despite SAP's confidence and nods in the direction of startups that can leverage the HANA Cloud Platform, SAP is still a back office player. It is not associated with the engines of growth coming from the many new initiatives we see that meaningfully transform business. Instead, it is relying heavily on customers who will remain loyal without necessarily expanding overall market share although it can expand the footprint.
Perhaps the biggest impediment though is inside the customer groups themselves. Dick Hirsch ran a simple Google Trends analysis on the cornerstone HANA Enterprise Cloud (HEC) and HANA Cloud Platform (HCP) topics. Much of what we hear for the future appears dependent upon an HEC delivery model. But as Hirsch's review concludes, HEC is going nowhere as a trending topic. Nothing I heard today reverses that trend.
Verdict
I struggle to see how this translates into a model that investors will learn to love. SAP will be hard pressed to convince the market that it deserves to be rewarded when part of the business is growing while another is standing still. If Mucic can provide more clarity on the direct impact on profit then the market will be happier, if begrudgingly.
SAP is not generating enough cash to give it the leverage needed to make another monster acquisition. Many colleagues and other armchair quarterbacks believe SAP has to find €10 billion to make impactful acquisitions. For its part, SAP is hoping recent acquisitions, molded to fit the needs of core global customers will be enough to carry the day.
SAP cannot (yet) offer high grade employees the kind of stock option packages that have served the competition so well in providing cash flow benefit while attracting great talent. This is a hindrance in a market where the competition for talent is fierce.
SAP still has to craft a clear and concise message about cloud that resonates across all major constituencies. So far that hasn't happened but if we see more of Mucic performing as he did today then that perceptual gap might improve dramatically.