Sunday, January 24, 2016

Reading into the SAP Q4 Interim financial results

I decided to dust a little bit my financial analysis skills and took a look at the recently released SAP Q4 interim results. Some interesting information can be gathered from the stack of numbers, and more particularly regarding their cloud business.

Software license still grow strong : +15% vs Q4 2014 while cloud subscription jumped by 81% in the same period. However, for the same period, the cost of revenue for cloud and support increased by 89%. Which is almost 10% faster cost growth vs revenue growth rate. From these numbers it seems that the cost of running SAP cloud operations increase faster than the revenue. There is two way to look at this divergence: 
  • SAP is not yet able to benefit from the economy of scale as its operations grow their cost increase per new customer rather than shrink. This type of behavior might hint in a lack of capabilities to deliver its cloud operation efficiently.
  • SAP over-provisioned its operations in order to be able to satisfy future demand.
SAP is feeling the difficulty of providing cloud solution as the cost to revenue revenue for its cloud operations represent a total of 44% while it is only 15% for “traditional” licensed software. This ratio stayed stable from 2014 to 2015. However, as more business sale transfer from licensed to cloud, SAP might find it difficult to maintain its operating margin unless it is able to bring its cost of revenue down significantly.
These numbers are not as bad as Oracle ones. In Oracle's Q4 financials, their cloud software as a service and platform as a service revenue "only" increased by 32% while their cost of revenue increased by a whopping 70% from 2014 to 2015. That's a 120% growth rate difference, combined with a cost to revenue ratio of 52% their SaaS operations doesn't really look that healthy in comparison. This result is difficult to understand as Oracle run and sale its own IaaS solution while SAP doesn't. One would have expected Oracle to have benefit from the synergy between the two solutions.

Another interesting nugget is the numbers of the SAP EMEA product revenue vs cloud revenue. Product grew faster (Q4 = 5.7%, Year=6.6% of mix). Maybe this is due to a stronger adoption inertia in EMEA or the customers are turning to other cloud solution provider ? It would be interesting to compare with other competitors in this region.

All in all, SAP is making its transition to cloud type solution with the crossing of the symbolic 10% threshold. However, it needs to carefully watch its operations efficiency or it will end up suffer heavily as it cannot repeat the blunder it suffered in its previous “cloud” product foray.