What financial analysts think about SAP does (and doesn’t) matter

Some weeks ago, Frank Scavo wrote a piece where he chided Motley Fool analyst Richard Saintvilus for a failure to fully understand Oracle’s cloud play. At the time. I said to Frank that financial analyst opinion is important from the ‘due diligence’ perspective because the tech industry is littered with great ideas that fizzled. When companies bet on technology they are assuming there is a longevity to the solutions into which they are buying and so when financial analysts piss on any company we should take notice.

However….financial analysts have a specific set of agendas: either to pump or short a stock valuation. They usually have little clue about buyer behaviour and, if my observations are correct, blank out observations that challenge their position based models. At their worst, financial analysts presume to know what is happening inside a company based upon thin data which is then extrapolated to represent ‘fact.’ Such is the case with Peter Goldmacher’s ‘analysis’ of SAP’s revenue.

He successfully goaded Arik Hesseldahl on AllThingsD to write the provocative headline: SAP Accused of Inflating HANA Growth Numbers. This was followed by Larry Dignan basically reprinting Hesseldalhl’s story. Goldmacher claims:

“If we take management at its word and believe that HANA’s two-year license growth [rate] through FY13 is about 120 percent, then this means that the other 90 percent of SAP’s license business, Apps and BI, is growing at … roughly 2 percent, materially below category growth rates,” Goldmacher wrote. “Our research and experience lead us to believe that SAP is allocating product revenue subjectively and that this is resulting in an inflated HANA growth rate. This could give the appearance of market momentum that doesn’t yet exist.”

On its face this is a damning assessment but is it as bad as Goldmacher would like us to believe? SAP’s latest results have been in the public domain for some weeks. At the time, I noted:

Then we come to the core. Here, growth is in single digits overall with analytics accounting for “high” single-digit growth. Here Snabe says that going forward, the company expects the recently announced Business Suite on HANA to boost sales.

In an earnings conversation with Jim Snabe, co-CEO SAP, he acknowledged to me that growth in the core business was in ‘low single digits.’ So what’s new here? Nothing.

SAP has known for some time that core apps growth would at best be flat to marginally accretive. That is because the latest iteration of the big money spinners are really upgrades to old products. SAP is instead pinning its future on HANA as much more than a database and anyone who is bucketing in the database camp is utterly missing the point.

HANA is much more than that. While it might have started out as a poorly thought out (Oracle competitive) database play, it is a development environment that is providing ISVs with extraordinary opportunities to rethink business processes as well as providing the real time platform for both analytics and the transactional systems. This is a big topic and given the attention span of most financial analysts, it is hardly surprising that they come to screwy conclusions.

The fact that Goldmacher finds it difficult to find solid examples of HANA momentum doesn’t mean they do not exist. The fact Goldmacher fails to back his conclusions with anything other than speculation should tell you all you need to know.

From my own experience I see plenty of HANA based innovation (Disclosure: SAP is a video client for partner innovations. We have filmed around 50 examples so far. Small potatoes in the SAP context but indicative of future momentum, some of which represent multi million dollar opportunities.)

The real problem is that SAP has yet to find a model where partner innovation can be scaled so that everyone in the ecosystem benefits. SAP is keenly aware of this and is working to fix the problem. When (not if) it does, then I suspect the doubting Thomas’s will be made to eat their words.

In the meantime, the ever positive Morgan Stanley jumps to SAP’s defence, albeit acknowledging the possibility of discounting in other areas to sweeten the HANA pot.

There’s a few things I know about SAP that are worth reiterating:

  • SAP is paranoid about getting revenue recognition wrong – there’s a team of some 70 people working on this topic.
  • SAP marketing is often haphazard. One minute HANA is an Oracle killer, next it is the future of the Business Suite. I have little sympathy for these mis-steps yet understand why they occur.
  • SAP’s obsession with ‘beating out’ Oracle is self defeating, drawing attention away from what it does best.
  • Getting HANA POCs converted to enterprise licences as Snabe has promised is the real metric to which people should be paying attention.
  • Seeing Business Suite on HANA momentum is SAP’s next main target. Watch for SAPPHIRE Now announcements. If they are thin on the ground then SAP is stumbling. If not, and customers are talking value, then Goldmacher’s worries disappear.

13 thoughts on “What financial analysts think about SAP does (and doesn’t) matter

  1. My question is not whether Peter is right or not, but why is SAP not aggressively trading old revenue for new? Not a rev rec accounting issue but a pricing policy mater

    If it wants to cling to older ECC/BI revenue and generate a new set of HANA/cloud/mobile revenue it should be aiming for new customers, not going to existing customers. If incumbent is focus (and appears to be for HANA as faster ERP apps), it better be willing to horse trade. I mean even a rookie car salesman knows to ask you what are you trading in?

    My POV at

    http://dealarchitect.typepad.com/deal_architect/2013/04/sap-allocating-product-revenue-subjectively.html

    • For all we know that us exactly what SAP is doing. That would be one interpretation of ‘low single digit’ growth. On pricing policy they have been very clear – no discounting for HANA so they presumably have to give something away elsewhere. All part of the game.

      @vinnie – you forget that SAPs DNA is all about suite sales. Stand alone is a new thing for them. There are plenty of examples where they are succeeding but the real problem is their IBUs don’t ‘get’ industry verticals (where HANA plays incredibly well) to the extent they believe – which fits your theory of their only touching 30-40% of the apps landscape. Those opportunities run many millions of dollars but they are new to the market.

      I hear you on new sales but where will those come from? The G2000 are done – they’ve placed their bets. SAP is better going back to existing to get the proof points and then go after competitors. Assuming that’s possible with Oracle in the other corner touting Exa- and Fusion.

  2. The jury is still very much out on whether HANA will scale to SMEs. HANA hardware costs are simply ridiculous. Hosted HANA is not a practical option due to performance and sizing limitations, as well as the Amazon fees which make the HANA costs seem like nothing be comparison. If HANA doesn’t find its way downscale, SAP will quickly tap out the few large customers willing to spend big bucks on it, and the growth will dry up fairly soon. This story still has a few chapters yet to be written…

      • @Vinnie – there is no need to promote your thoughts – you do that very well for yourself. The fact they are flawed as it relates to the way most business is thinking is another topic.

    • I think this is a pretty confused comment. I’ll try to address a few of your points:

      – HANA hardware is commoditized. You need memory equivalent to your DB size and it’s available at commodity pricing.
      – AWS costs are less than the equivalent on-premise HANA.
      – Yes, HANA has to come downscale, but that’s a technology maturity thing. It will come with reduced DRAM costs, with wider-scale apps like Suite on HANA.

      There’s definitely chapters to be written and they’re not just all about HANA: there will be imitators and so on. But it will be fun to see.

  3. BTW SAP should be careful about association of HANA with Big Data. Jeff Nolan objected to my describing as Big, Union Pacific’s 20 million temperature readings a day using rail side sensors. He came back with Google does over 5 billion text searches, eBay does 1 billion transactions, Twitter, 400 million tweets, Facebook users upload 350 million photos – PER DAY.

    • At 3 separate replies, some might accuse you of being a troll, Vinnie.

      Either way I am currently working on a customer where we are dealing with the billions of pieces of information a day quantity with HANA, with the ability to provide real-time analytics.

      Though personally I hate the phrase “Big Data”. It’s so meaningless.

  4. Pingback: With SAP HANA, will “Big Data” cease to exist? | Mint Jutras | Making Enterprise Business Systems Pay Dividends

  5. well, John since you are making me respond yet again, I would call it entrapment of a troll!

    good to hear about your project but how many HANA projects come close to that scale? And agree Big Data is an overused,overhyped term. As I mentioned I was glad Jeff called me and compared some of my examples to those out of consumer tech

    • 🙂 Troll entrapment indeed.

      I’ve been accused of being a fanboy by some but I’m convinced that HANA is the start of a new category of technology. And if there’s one problem that HANA has, it’s that it’s really really hard to understand how a new category of technology can change your business.

      So the short answer is – not enough. We’re in the early adoption stage for in-memory computing, though I feel that Vishal Sikka’s comment that HANA has “crossed the void” feels close.

      Though in-memory for biggish data isn’t there yet, the hardware is too expensive and takes up too much space. In 2013-2014 we will see Intel’s Ivy Bridge platform and DDR4 memory, which will massively increase the density and reduce the cost. Plus, hybrid in-memory databases are on the way which will provide the best of both worlds for mixed workload. I think this will bring it to the mainstream.

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