The numbers (image above) are interesting for what they don't say as much as what they do say.
Let's start at the end where the company reiterates earlier guidance about the full year outcome. That's definitely a positive position to adopt and allows us to make further assumptions based upon that outlook.
It's also interesting to note that SAP highlights strong regional performance in cloud across all territories. Japan was 'below expectations' for software and software-related service revenue. It cratered - while China made a mysterious 'strong double-digit software revenue growth.' I'd like to know more about success in China, especially as this is a huge addressable market. Latin America did well in places. Not a surprise given that certain of those countries are leapfrogging technology albeit they remain tough places to get full value. As might be expected, the strongest area for cloud adoption was...North America and I am guessing that SuccessFactors plus Jam related products are leading the charge. Again, no surprise.
SAP is now accounting for hybris in these numbers but it doesn't appear in the comparatives. That has the effect of making a like for like comparison with Q1 2013 a bit difficult. When acquired, it was estimated that hybris had revenue of around $150 million pa. One can assume that has grown to some extent since acquisition. If so then the underlying growth from SuccessFactors plus HANA Enterprise Cloud was not quite as sparkling as might be imagined.
Speaking of HANA, SAP is silent on this occasion about HANA revenue. To date, we are led to believe that most of HANA revenue sits inside the traditional on-premise category. If that's the case, then based upon past indications, either HANA is making weight for a more dramatic fall off of traditional ERP software sales, or HANA sales themselves are declining. If HANA continues to grow well then the ERP drop off must be much steeper than SAP is revealing in these figures.
The other missing mention was mobile. A couple of years ago, this was one of the LOBs that was top of mind in analyst calls. It has all but been forgotten, along with discussions about Sybase. Have these fizzled?
Based upon conversations with sources 'close to events' it is more than likely that traditional ERP is on an accelerating rate of decline with no obvious end in sight. HANA will need to keep selling in its different guises to offset that decline but as a technology play, one wonders if it is running out of gas. This must mean that there is attrition risk around core financials as well as the much feared competition in HR from Workday. Some will worry about this. I don't. At least not for the moment. Why?
The inevitable pain of a business model transformation is now well under way. SAP is doing its best to control expenditures so that the bottom line - and therefore cash flow - is not significantly impacted. Check what they say about this crucial element:
Operating cash flow was €2.35 billion (2013: €2.16 billion), an increase of 9% year-over-year. Free cash flow was €2.22 billion (2013: €2.05 billion), an increase of 8% year-over-year. Free cash flow was 60% of total revenue (2013: 57%). At March 31, 2014, SAP had a total group liquidity of €5.06 billion (December 31, 2013: €2.84 billion), which includes cash and cash equivalents and short term investments. Net liquidity at March 31, 2014 was €750 million compared to -€1.47 billion at December 31, 2013.
In short and unlike many other competitors with one very notable exception, SAP continues to have the cash cow attributes that allows it to support itself while it bleeds the old business and replaces with whatever the new has to offer.
- The above remarks have to be tempered by the fact we've not heard the company's remarks in an analyst call so some of my comments could be off base. That call will follow in a few hours.
- The fact SAP did not pre-announce and scheduled a relatively early earnings announcement suggest they are quietly confident of meeting the forecasts upon which analysts are currently relying. The fact they are confirming when we're already in Q2 should be comforting since most of those deals will be pretty well baked at this stage.
- SAP needs to talk more about the on-premises business and how it plans to protect its core financials solution. If that comes under serious attack then things look very different to what we see today since they don't have an articulated and defensible cloud strategy for that LOB.
- The substantial impact that SAPs acquired cloud businesses must be having on SAP is not to be underestimated. This is a company where the culture moves very slowly and yet it is operating in a highly dynamic market. Questions about managing that change should figure high on anyone's agenda, along with questions about how SAP is growing the necessary talent to execute in those LOBs.
- SAP developers, consultants and SIs should be concerned. SAP is keeping as much of the HANA services to itself as possible. Where is their future beyond a long tail of patching and tweaking. Perhaps more of them should be thinking about HANA than is obvious today?
UPDATE: I am seeing reports that talk to the headwinds coming from the strong Euro. This is a side issue because SAP almost ALWAYS talks about reporting in 'constant currency.' That has the effect of evening out currency movements in an attempt to assist in making like for like growth comparisons more easy. I fundamentally disagree with that approach as it is not real. SAP for its part has warned about continuing currency issues. So on the one hand it is using constant currency to talk growth but IFRS when it talks net income. You cannot have it both ways.
The SAP press release is here.
Disclosure: SAP is a partner at time of writing.