I imagine there will be smiles of relief across SAP as it 'wiped its face' in the final quarter of 2014. Closing out the year with a fractional decline of three percent in on premises software revenue for the full year was a solid achievement as the transition to subscription business continues.
However, as that transition continues, the extent to which the allocated cost of generating and managing those subscriptions impacts the bottom line will be on the minds of many as SAP prepares for its Q4 earnings call and subsequent investor day. Equally interesting will be SAP's commentary on how it is managing the decline in core revenue. My sense is that as the subscription numbers came into view, SAP was more willing to let on premise deals slide into what will likely be a challenging Q1 2015.
While SAP makes a big play of its cloud revenue growth, when you factor out the uptick from the Concur and Fieldglass acquisitions, the quarter itself was largely in line with expectations.
The impact of acquired revenues should not be underestimated. When you back out the Q4 acquired revenue from Concur, SAP's recorded 68% growth gets pegged back to 43%. However, SAP has demonstrated an ability to quickly ramp acquired revenue through aggressive selling into the existing customer portfolio. So for example, the company was able to talk about calculated cloud billings of €571 million for the quarter with an annual cloud revenue run rate of €1.7 bn or €2 bn, depending on which measure takes your fancy.
Going forward, I will be interested to see how aggressive the forecasts look for 2015 and beyond given that cloud competitors are all talking 30-40% and above for the coming year. Anything less will be disappointing.
It is perhaps interesting that analysts had pretty much written off Q4 based upon lowered guidance at the last earnings announcement. These numbers certainly cheered some investors with the share price popping a full four percent on the announcement.
In a pre-announcement note, Walter Pritchard at Citi said:
Although there is significant investor angst around the event, we are still biased to thinking that unveiling of long-term targets is more likely a slightly negative event. We expect after backing away from or adjusting the last two targets, management will ensure new targets give room to maneuver around uncertain on-prem / cloud mix. We see most likely 2020 revenue of >€24B and operating profit of €8B is lower than most expectations.
That shouldn't surprise. SAP is working hard to position itself as the natural choice for buyers looking to cloud solutions but the company has yet to set its vision for how the piece parts contribute to the whole. While it is natural for SAP to concentrate on building the acquired revenue generators as fast as they can, we have yet to understand how the much talked about network effects from Ariba and (presumably) Concur will work together. For example, I'd like to know how the billings engine that SAP got with Concur will fit into the Ariba framework.
As always with these things, the devil will be in the detail. Rather than speculate further, I am looking forward to the full year presentation.