SAP Announces 4Q Revenue Shortfall. Is it Time to Discount HANA?

SAP reported today slowing revenue growth for its full-year 2013 referencing the impacts of currency fluctuations and its shift to the cloud.

SAP pre-announced revenue of €5.11B, an increase of 1%, but slightly below the consensus estimate of €5.18B.  Software license revenues were €1.9B down 2% and below the consensus estimate of €1.94B.  Cloud revenues were €210M, up 32% while HANA revenues were €664M at constant currencies which fell in the guided range of €650M-€700M.

SAP’s Cloud business did well but, moving forward, it will be very interesting to monitor the pace at which the Cloud business continues to grow relative to the pace at which traditional on-premise software revenue declines.  With an incredibly large customer base to which SAP can market and sell Ariba, SuccessFactors, and its other Line-of-Business Cloud applications, SAP has a relationship advantage that has been leveraged quite nicely to this point.  It is hard to tell exactly where the majority of the success has been, but from what we have been seeing in the market, it has been primarily with Ariba, and SuccessFactors (varying degrees of success here as far as solution breadth).

From what we are seeing within the existing customer base, our point of view is that SAP has been a bit challenged as far as extending additional on-premise solutions.  SAP has strong relationships with its customers, and this enables them to compete on many different point solution areas, but as of lately and within UpperEdge’s client base, they have been struggling to win in these competitive events.   In several of these cases, the Cloud functionality wasn’t ready for prime time, so SAP had to present an on-premise solution.  In these cases, SAP’s on-premise point solutions did not get evaluated as favorable to the competing Cloud-based solutions due to lack of innovation and overall user experience.  It is important to note, UpperEdge does not claim to have a full lens into SAP’s extensive customer base, however, we believe the proof points and feedback we receive within our client base represent interesting insights and thoughts to share with other SAP customers which can influence their purchasing and negotiation strategies.  Existing SAP customers need to be aware of the pressure on software revenues and leverage this information in their sourcing events.

A final significant note in SAP’s pre-announcement was that HANA’s revenue landed at the lower end relative to its previous guidance.  SAP has been very aggressive in pushing and hyping the growth attributed to HANA on all of its prior earnings calls.  UpperEdge has consistently observed interest from our client base in HANA but such interest has been limited to specific use cases and pilots as opposed to broad, widespread adoption.  In addition, now that HANA has had enough soak time in various customers for various use cases, feedback is now available regarding the benefits achieved relative to the cost.  From what we are hearing, customers like the technology but have concerns regarding the cost.  This type of feedback will likely spread within the user groups prompting SAP customers to seriously consider comparable, lower cost solutions.  Could this be enough to finally drive SAP to discount HANA?   We believe it is something SAP is seriously considering.

SAP will report its preliminary fourth quarter and full year 2013 results on January 21^st.  UpperEdge will publish its commentary and full sourcing analysis shortly thereafter.