The News That SAP Will Have More Sales of Cloud Solutions Than Those Using the Traditional Licensing Model in the Next Year Or Is a Bit of an Eye-Opener
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The news that SAP will have more sales of cloud solutions than those using the traditional licensing model in the next year or is a bit of an eye-opener. This is because SAP has been one of the more solid, careful vendors who has been reluctant to jump into new ideas before their time. It also has a large number of major corporates as customers, which means they too are jumping on the cloud model and are not afraid to commit their data and systems to it. In many ways, this, plus the news of IBM's revealed 35% of current sales in cloud, mobility and security business as it too undergoes a transition, shows just how fast things are changing. As we finalise the agenda for the European Software and Solutions Summit in April in London, we are aware of the pressures of the stock market and how it dominates business news, but we think these fundamental shifts, as evidenced by major IT companies, will somehow be more important in the long run. SAP SEES CLOUD OVERTAKE TRADITIONAL MODEL IN TWO YEARS SAP had “exceptional momentum” in the fourth quarter with fast growth in cloud and double-digit growth in its core license business, it has confirmed, updating guidance earlier this month. For the full year, cloud and software revenue grew by 20% or 12% at constant currencies and exceeded the outlook of 8% - 10% growth at constant currencies. New cloud bookings increased 103% in the full year to €883m and 75% in the fourth quarter to €344m. "Our strength in 2015 shows that the S/4HANA innovation cycle is well underway," said Bill McDermott, CEO of SAP. "Our completeness of vision in the cloud has distinguished SAP from both legacy players and point solution providers. We beat on cloud and software, we beat on operating income and we are ever confident that SAP will remain a profitable growth business well into the future." "Our tremendous 2015 results validate our strategy of innovating across the core, the cloud and business networks to help our customers become true digital enterprises," said Luka Mucic, CFO of SAP. "We have transformed our company and made it leaner by shifting investments from noncore activities to strategic growth areas enabling us to capture the tremendous growth opportunities in the market. This puts us on a strong path for the future reflected in an increase of our 2017 ambition." EMEA region had an outstanding performance in the fourth quarter, it says, with an 11% increase in cloud and software revenue including a strong double-digit software license performance in Germany and Russia. Non-IFRS cloud subscriptions and support revenue in EMEA grew by 53% with very strong double-digit growth in new cloud bookings. Looking beyond 2016, SAP is raising its 2017 ambition to reflect both the current exchange rate environment and excellent business momentum. By 2017 SAP continues to expect its rapidly growing cloud subscriptions and support revenue to be close to software license revenue and is expected to exceed software license revenue in 2018. Assuming a stable exchange rate environment going forward SAP now expects non-IFRS cloud subscriptions and support revenue in a range of €3.8bn - €4.0bn in 2017. The upper end of this range represents a 2015 to 2017 CAGR of 32%. SAP continues to anticipate that the fast-growing cloud business along with growth in support revenue will drive a higher share of more predictable revenue. Given the current software license revenue momentum it now expects the total of cloud subscriptions & support revenue and software support revenue to be in a range of 63% - 65% of total revenue in 2017. IBM MARGINS LOWER AS IT AIMS AT SAAS SCALE The need for scale in cloud and software sales has been made most strongly by IBM's latest results. Shares in IBM dropped after the company reported that its Q4 revenue fell year-on-year for a 15th straight quarter; it also cited currency exchange headwinds. The decline, however was mainly in the US and AsiaPac; Europe rose 1%. The profitability has been affected by its move to cloud. It is a business in transition, as it admits, reporting Q4 revenue of $22.1bn, down 9% on year ago numbers. IBM is showing cloud and analytics expansion, but the growth isn't strong enough to offset declines elsewhere. The company said total cloud revenue was $10.2bn, “as-a-service” sales were $4.5bn. IBM said it has a run rate of $5.3bn for cloud delivered as a service, with analytics revenue up 7% from a year ago. CEO Ginni Rometty (below) said IBM now derives 35% of its sales from cloud, analytics, mobile, social and security. “Europe returned to growth, led by continued growth in Germany, France, and the UK. In fact, Germany posted double-digit growth and in December, we announced Munich as the headquarters for our new Watson IoT business, as well as our first European Watson innovation centre,” she added. Martin Schroeter, IBM’s Senior Vice President and Chief Financial Officer: “IBM is a high margin solution company. For the as-a-Service component of that, the margins are a little bit lower than that. Now a lot of that is because we don’t yet have the scale that we’d like or it’s that we’re investing very heavily in order to drive that platform into our clients’ environment. And so, we’ll see margin improvement as we go into 2016 as we add more scale or take advantage if you will of the investments we have made. So in total the strategic imperative revenue over time will not have a dramatically different margin profile than what we see today.” The topics of scale and cloud transition for software companies are on the agenda of the European Software and Solution Summit set for April in London, details here RED HAT GOES AFTER TELCOS IN EUROPE Red Hat – set to be a $2bn business soon, and still growing at around 20% a year is drawing up its list of targets for sales in Europe this year, and it looks like telecomms companies are top of its list. EMEA GM Werner Knoblich (below) talked to IT Europa this week “There is a telco push this year – we are recognising the potential in the market, and the move to using OpenStack. The telcos want a system that can cope with moving resources around their networks – similar to enterprise use of virtualisation, but able to cope with changing workloads,” he says. OpenStack is the Open Source Cloud computing platform aimed at public and private clouds, and backed by the likes of Red Hat, HPE, Cisco, IBM, Intel, Dell, EMC, and NetApp....... “We see OpenStack for telcos in the same way as we saw Linux for financial services in the late '90s – the investment banks made Linux mainstream; it was all about trading platforms, and they just got faster speeds and lower latency with it. Linux became accepted in the enterprise not because of cost, but functionality. They legitimised it and we can see the telco industry doing the same for OpenStack.” The telcos as an industry seems to have decided that OpenStack will be the technology to virtualise the networks, he says. And it is a huge business with even bigger potential. So far Red Hat has sold just to the IT departments of telcos but, on average, 10% of telco technology spend is on IT and 90% in the network area. Telcos are looking to roll out services on their networks so they must have the management and flexibility; telcos today are all about appliances, running dedicated software from the NEPs, he explains. This means dedicated systems, and potential lock-in. So as bandwidth use rises, they need to be able to move resources around to match traffic. “It is like what VMware did, abstracting hardware from software; this gives much higher utilisation and this is fundamentally what they are doing – everything becomes software defined and become a VNF – virtual network function, which become software appliances, sitting on a neutral platform. They want to mix and match applications from the other vendors and today this is almost impossible.” They see Red Hat as in a strong position, he says “We are independent and neutral – we don't have any hardware and there's no lock-in, and that is why there is now a big drive for this. From an OpenStack perspective in Red Hat, telco is a really important market – we have reorganised and from March 1 will have a dedicated force in EMEA.” This is not just in go-to-market and sales, but on the product side he has dedicated engineering teams, and is advancing the telco requirement upstream. “We don't want to create a version of OpenStack for them – like the carriers wanted their own version of Linux and we resisted that. This is important – they don't need a carrier grade OpenStack – they need an OpenStack that is carrier grade. It is a subtle difference. We ensure they get advances and perhaps telco-specific features earlier but it is not a different product. This then goes into the mainstream product.” OpenStack is the plumbing but even hotter is the overall digitalisation and the differentiation of products which comes from software – it is the communication and integration platform for the future. Openstack is so popular with vendors because nobody wanted to see the repeat in cloud of what happened in virtualisation where VMware became a dominant player. IBM, Intel, HP, Cisco, etc.