Will the economy hurt SAP? BofA/Merrill thinks it will, I seriously doubt it


Today morning, I saw this news  http://www.businessinsider.com/analyst-sap-headed-for-rocky-patch-2011-12 and then this article in Forbes ( written by someone in Forbes Staff, not advoice)  http://www.forbes.com/sites/ericsavitz/2011/12/16/sap-merrill-downgrades/?partner=yahootix

BofA / Merrill Lynch analyst Chandramouli Sriraman downgraded the stock from Buy to Neutral.  And when I checked the stock for SAP AG, it seemed to be trading about 2.6% down.

And few minutes ago, my buddy John Appleby defended SAP in his blog . http://peopleprocesstech.com/2011/12/17/sap-2011-results-analysis-the-awful-economy-is-really-going-to-hurt-financial-analysts/

Just a few days ago, I was in Boston,MA attending SAP Influencer summit. If anything, SAP executives were more bullish than usual – not less. And they have good reasons to be that way. SAP outperformed the industry, and had a great Q3.  SAP also has made significant investments into the future – in-memory, mobile, cloud etc.

SAP has some of the best sales leaders on the planet, and it shows in their results. The first year of its existence, they aimed to sell 100M of HANA . And they probably will. And remember, this is the 1.0 version of HANA – something that just supports datamarts, the simplest of usecases.  What I am trying to say is – it can only become better from here.  Now BW works on HANA, and they are building other stuff on HANA – and eventually they will make a strong enough case for HANA that it will pull in enough money to be a material contribution to topline.

Steve Lucas told us in a public forum at the influencer summit that we should mark his words that SAP will be number 2 database vendor in 2015 by revenue.  That is a pretty bold statement to make given the leadership Oracle, IBM and Microsoft has in that market.  Short of SAP saying their products will not work on anything else other than SAP’s own databases – I find it hard to believe SAP will become number 2 in database market. But Steve is an amazing leader – he is on target to sell 100M of HANA this year, which is no mean feat.  So he might pull it off. Seeing is believing, and I will be watching this space closely going forward.

Mobility has a good story too. SAP has not come out of the starting block quite as fast as they usually do for cloud. So they are in catchup mode for now. But with Success Factors acquisition, they should be able to catchup quickly and hopefully lead.

But the bulk of SAP’s warchest is filled from perpetual license revenue from on-premises software sale and maintenance. 22% maintenance is a gift that will keep giving for next several years. But what about new sales? I always thought this will have to die down. However, that is not what I am seeing at the moment. Several customers are still spending on big Business Suite, CRM and analytics  projects – mostly due to two factors. One – these companies had a spending freeze, and are now opening up their purses. And two – there is a lot of M&A and Divestitures happening due to macro economic factors, and these  need ERP spending.  So while it might not look like mid 1990s – I do not expect SAP to suffer really bad. And by the time Business Suite does slow down – Analytics, Cloud and Mobility should have become mainstream. It is SAP’s game to lose – and seeing the people in charge, I don’t think they will drop the ball.

There is a bit SAP can do too to help its own cause – which is in easing off the pressure on the marketing gas pedal a bit, and focus more on execution. If you look at the blogs and speeches that came out in 2011, you would think SAP is now making billions off HANA, not that 100M they were actually targeting :) .

All said, the Merrill analyst is entitled to his opinion, just as SAP, Appleby and me are entitled to ours.  But any one analyst does not make or break a company’s performance in the market. What I am watching now is if any of the other big name analysts will post their advisory on SAP in line with the Merrill guy, or whether they will remain bullish.  I also wish these analysts substantiated their opinions with more research so that investors can make informed decisions.