December 2011 has been a terrible month for the quality of SAP news. Or perhaps a reminder that some modicum of research and interest is required to produce a half decent article on a topic. Last week I hammered TechCrunch’s covering of the SAP and SuccessFactors acquisition with: Why TechCrunch is boring, SAP is not, and the world has gone mad.
Today I’m on the warpath at Julie Bort from Business Insider, who wrote a piece entitled: The Awful Economy Is Really Going To Hurt SAP, Says BofA. Now to be fair it is Bank of America analyst Chandra Sriraman who is at the centre of all this. Some of the article is speculation and that’s fine. It’s the facts that worry me. First, here’s a quote on SAP’s biggest innovation in 2011.
HANA was hailed as groundbreaking when it was introduced about a year ago. It sits in a computer’s memory so it literally runs while the computer processes transactions.
There’s just one problem: No one is buying it.
When SAP CEO Bill McDermott told us last year that they were going to sell $100m of HANA in 2011, we thought he was being a bullish salesman. The product didn’t even exist and wasn’t released to market until July. But over 60% of that $100m was done already done by Q3, and Q4 is traditionally SAP’s biggest quarter by far. There aren’t any official numbers yet because some deals have not closed but insiders I talk to suggest that Q4 could be as big as the rest of the year combined, for HANA.
SAP’s revenue for 2011 is likely to be around €13.5bn (actually I think it will be more, but that’s the advisory, so work with me). Of this about 22% is license revenue – about €3bn, give or take. So of course even if it’s $120m or $150m of revenue from HANA, that is less than 5% of license revenue.
But Chandra totally misses the point. First, 5% isn’t bad in my books for year one of a product that wasn’t properly available until Q3. And second, HANA is really limited in its use cases right now. It was first available as an analytics appliance, and has just been made available as a data warehouse database. But soon, it will be available as a replacement to Oracle, Microsoft and IBM databases for SAP – and non-SAP customers. The available market just increased 100 fold. Steve Lucas – Global GM for Business Analytics & Technology at SAP told me this week that he wants to be the #2 database vendor by 2015.
“Although we remain positive on HANA, it contributes less than 3% of 2011 licenses and will not be able to offset any slowdown in the core applications market,” says Sriraman.
Well SAP’s license revenue for 2011 year to date is $2.2bn, up from $1.8bn in 2010. Thats 23% increase on 2010 (overall revenue is 16% up) and SAP have put an advisory for meeting the original 9% – rather than uplifting the revenue advisory. This is likely to be due to the worrying macroeconomic trends in the Eurozone meaning there is no up-side to increasing the advisory. My thoughts are overall revenue will be closer to 16% than 9% with a good chunk of that coming from software licenses.
The reason for that is multifold. First, the last of the old ERP licenses out there are being replaced with Enterprise Agreements – because support for the old R/3 software runs out in March 2013 and a lot of customers are planning upgrades. Second, Business Analytics is phenomenally strong under Lucas’ leadership and they made 50% of Line of Business sales in 2010. Third, Mobile and HANA will have added 6-8% to the top line.
Now it’s theoretically certain that ERP license sales should be on the decline, although SAP is still performing pretty well in that area too. But let’s say they do decline. If so, the question is can SAP increase revenue from Analytics, Mobile, in-Memory, Cloud and whatever else they decide to get into by acquisition or innovation – faster? Based on the evidence above, I say yes – and I wouldn’t have been this bullish myself, a year ago. And if you don’t believe me, meet Steve Lucas and his equivalent in Mobile, Chris Maclean.
Although SAP has been the “best performing Software and IT Services stock in our coverage portfolio up 15% YTD vs. the sector down 23%”
Yes – quite.
As a final note, I talk to a number of financial analysts on a regular basis and exchange notes on the markets. It’s a great gut check because they see life from a different perspective. They also don’t like to talk about this but the financial analyst market is under massive pressure and there will be big redundancies next year (I heard 50% of all analysts will leave the market for good). So in a few weeks you may end up reading: The Awful Economy Is Really Going To Hurt Analysts, Says BofA.