These are the first obvious signs that SAP is in the middle of a genuine business model shift in a quarter that should be the best of the year. This has been on the cards for a long time. The speed at which this shift occurs and the impact of competition from Workday and Salesforce.com in particular will be questions on everyone’s lips at the forthcoming analyst call.
Earlier today, we saw more detail on the accounts and had an opportunity to hear the company discuss the results.
While SAP downplays the decline in SAP core revenue, it is much more dramatic than has been previously implied from reported figures. In the final quarter, SAP booked €1.902 billion in software sales compared to €1.937 billion in Q4 2012. This was a drop of two percent.
However, if you extract the amount attributable to HANA, which itself was below previous forecasts by 2.7-9.5% for the full year, depending on which number you choose to measure against, the picture changes dramatically.
Using that measure, you get €3.883 billion in software sales for the full year compared to €4.272 billion. That's a fall of 9.2%.
In fairness, cloud subscriptions and support for the full year climbed from €270 million to €697 million. When viewing the results in total, SAP grossed €16.817 billion, ahead four percent on the previous year. Of that €594 million rise, €502 million relates to maintenance revenue.
In short and despite the impact of HANA as a new revenue line item (which was short on guidance given three months ago) and acquired revenue from SuccessFactors, Ariba and hybris - SAP is effectively standing still as it moves into transition mode. Where was the weakness and what is SAP's answer?
The press release doesn't provide much detail but as regards the Americas, SAP said:
The Americas region grew single-digit in the fourth quarter in non-IFRS software and cloud subscription revenue at constant currencies. This was the result of the transition to the cloud and a tough year-over-year comparison in software revenue.
In other words, competition from cloud vendors is now starting to seriously bite into SAP's core business and it is scrambling to make weight with its own offerings.
Looking forward, SAP says that it is pushing out its ambitions to achieve or rather maintain margin at 35% for two years to 2017 in favor of aggressively growing the cloud business and transforming all its solutions to cloud subscription models. This is because the company will see less revenue on the short term but will carry the same costs as it does today. It is however maintaining its guidance of achieving €2 billion in cloud revenue by 2015 and is guiding €3-3.5 billion by 2017. Given what it is saying, one can only assume SAP is anticipating a significant and further fall in core on-premise business over the course of the next 2-4 years.
At first viewing, I find this combination of statements difficult to square away.
One financial analyst's viewpoint
In a recent research note from Citi, the analysts question whether SAP is signalling a faster transition to cloud or simply lowering the numbers. It develops four scenarios going forward.
Among other things, Citi argues that SAP's customers are far less likely to move to cloud - e.g. BusinessSuite on HANA because many of them are in stable state and/or, have little appetite to move towards a model that will likely end up more costly than staying as they are and paying maintenance. That makes sense for many customers but will likely be viewed differently by net new customers who are already familiar with cloud economics.
On SaaS acquisition Citi says:
The challenge with building a SaaS business through acquisition is two-fold. First, it is more challenging to integrate and sustain a line of products that are acquired. Secondly, at valuations between 8-12x recurring revenue and less than zero in net cash, we believe it is impossible for SAP meaningfully move the mix of revenue towards SaaS / Cloud through acquisition.
We conclude it is unlikely that there is a fundamental driver of a revenue mix shift towards SaaS / cloud that would meaningfully depress revenue and margin over the next 12-18 months.
SAP has done a credible job accelerating SuccessFactors revenue but its Employee Central solution is far from integrated to other offerings in a manner with which SAP customers are accustomed. Ariba should be integrated to take advantage of the potential for advanced analytics but so far, that business has been low key in terms of the attention it receives. Any fresh acquisitions will likely distract further from integration efforts but may well be necessary given SAP's aggressive cloud growth aspirations.
The competitive threats
In the meantime, competitors in the shape of other cloud and third party maintenance providers will see opportunities to eat into SAP's revenue streams.
Alongside all these threats, SAP has to start talking about new applications developed for HANA. The impression today is that HANA is a pure technology and platform play. Most analysts look upon this as a bad idea. I don't. I see this as an essential stepping stone towards creating the kind of extended applications market that has served Salesforce.com very well and which will continue to fuel that company's ability to embed itself inside companies of all sizes.
For SAP HANA, I see 2014 as the year when it must get better at developing an eager, willing and empowered ecosystem of serious enterprise developer businesses that can build the myriad of use case solutions that HANA promises. From where I am sitting, this is the one place where SAP can truly claim organic growth.
An alternative view
In another call with analysts who are sell side, I asked about the delicate balance SAP has to strike between cloud, HANA and the on-premise business. My respondent (who preferred not to be quoted directly) said that in his view, SAP is going in a direction that will satisfy investors but that the key will come in making HANA the central technology around which everything else spins. If there is any weakness in that approach from a market and messaging perspective then SAP could run into trouble very quickly. The next couple of quarters will tell us how well the company is executing upon its strategy.
What is SAP's response? In a conversation with Jim Hagemann Snabe, co-CEO SAP, we touched upon a number of these points.
On HANA licence revenues falling short:
"There were no specific issues but I think we made a mistake in not guiding on constant currencies which we do with every other part of the business. The good news is that we have 750 customers on Suite on HANA which is twice as many as I had forecast. [Half are net new customers.]"
On questions around the core and HANA:
"We have planned for a growth in the core, including suite and analytics on HANA. We have a platform play, basically a vision for HANA to be a platform with developers and new applications. I was concerned about our ability to maintain speed on the move to HANA but we're doing much better than forecast."
Talking about the benefits as a selling point:
"We currently run our financials on HANA and the footprint is 10x less than on the traditional database. In the next enhancement, we will have a footprint that is 30x smaller. It drives TCO down and then you can start to think about a move towards real-time optimisation of processes like logistics and so on. That's when it becomes truly powerful. We are already beginning to see a simplification of the transfer to HANA. The actual port itself is relatively easy, testing is the biggest cost and will remain so."
One disappointment during our discussions was the fact SAP will not split out the HANA specific revenue in 2014. The rationale is that it is no longer a separate category but part of everything SAP does.
"We need to have a proxy for success for HANA and I don't want that just to be revenue. I want to leverage HANA in everything we do."
On the accelerated move to the cloud and HANA Enterprise Cloud (HEC):
We are trying to get a little bit away from HEC, we prefer to talk about SAP Cloud. We are offering two types of cloud, an installation per customer for core applications plus line of business of acquired solutions. It is a mix of private and public cloud which is the right thing for our customers. We know best how to simplify our applications in the cloud. We can set the bar for the most efficient infrastructure for HANA based systems. We're running our own company on this infrastructure so have a proof point customers can understand."
It is clear from the projections that SAP is planning a much faster move to the cloud than was originally anticipated. This was something I have advocated as the only viable way for SAP to not only meet competition but carve out its own defined position. This is reflected in some of the growth projections the company is making.
"We are moving faster to the cloud because it is the right thing to do for SAP, its customers and stakeholders."
SAP has done the right thing by setting expectations based upon an accelerated move to the cloud. The financial analysts will be assuaged for the time being but more important, customers will have a good reason to at least listen to SAP's story at a time when competitors are running as fast as possible.
This is a very delicate time for SAP. It has a highly complex business model with many moving parts. Trying to keep things simple will be far from easy and precision in messaging has to be at the core of how it presents itself.
Regardless of how the company spins its story, having a credible cloud HR alternative that not only looks convincing when stacked against competition but gives long term customers comfort that they can sacrifice their on premise investments, will remain a challenge. We see early moves in that direction.
I've already made my case for a HANA ecosystem but this will take time to flesh out. 2014 will be a pivotal year.
Note: the full press release covering this earnings release can be found at SAP investors' section of its website.
Disclosure: SAP and Salesforce.com is a partner at the time of writing