SAP Innovation Halo Drives Strong Quarter

SAP reported its 11th consecutive quarter of double-digit growth on Wednesday, and the vast majority of the revenue came from its core on-premises enterprise applications. Nonetheless, most of the credit for the strong growth goes to SAP's innovation strategy around in-memory computing, mobile, and the cloud.

SAP's innovation halo can be compared to the "iPod halo effect" tech pundits talked about in the middle of the last decade. That halo effect supposedly elevated Apple's line of desktop and laptop computers and fueled Apple market share gains. Then the iPhone became a juggernaut business all on its own, and soon, Apple dropped the "Computer" from its name and the rest (including the iPad juggernaut) is history.

The 11 quarters of growth coincide with the co-CEO era of Bill McDermott and Jim Hagemann-Snabe. They launched the in-memory (Hana), mobile, and cloud strategy that make up SAP's innovation story, and McDermott and Hagemann-Snabe said on Wednesday that these three areas are responsible for half of SAP's growth in the more recent quarter.

Where do things stand where new products vs. core apps revenue are concerned? Software and support revenue accounted for 3.13 billion Euros ($4.04 billion) in revenue out of total of 3.95 billion Euros ($5.10 billion) in revenue reported in the third quarter ended Sept. 30. So software and support represents about 80% of revenue whereas the 63 million Euros ($81 million) in cloud subscription and support revenue represents about 1.6% of the total (with services revenue making up the difference).

[ Want more on SAP's cloud strategy? Read SAP Launches Cloud Platform Built On Hana. ]

With this quarter, SAP became one of the first major IT industry vendors to explicitly break out its cloud computing revenue, and it's to be commended for doing so. IBM, Microsoft, and Oracle haven't taken this step as yet, so who knows whether their cloud computing claims really hold up?

Despite the small cloud numbers, co-CEO Jim Hagemann-Snabe told analysts on Wednesday that SAP's cloud business is now on an 800 million Euro ($1.0 billion) run rate, having just completed the acquisition of Ariba (a cloud-based supply chain services vendor that had $444 million in revenue in 2011 while posting 35% growth). Snabe predicted SAP's cloud revenue will reach 2 billion Euros ($2.6 billion) by 2015.

Database & Mobile Success

SAP doesn't formally break out Hana or mobile from the rest of the software revenue, but SAP said Wednesday that Hana sales hit 83 million Euros ($106 million) in revenue for the quarter while mobile revenue was 48 million Euros ($62 million). That means these innovation areas now account for 2.1% and 1.2% of total revenue. That doesn't sound like a lot, but SAP says looking exclusively as new software growth (and not support revenue), Hana and mobile alone drove nearly half the 17% third-quarter increase.

SAP executives say innovation is having an outsized influence on overall revenue and that innovations tend to go together. "We've come so far in pulling these [innovation] pieces together that customers are starting to see the vision," said Rob Enslin, SAP's President of Sales and member of SAP Global Managing Board, in an interview with InformationWeek. "Mobile is becoming the user's front end… but if you're still running batch processes overnight, what's the point of mobile delivery? If you can deliver real-time insight [with Hana], you would want that information wherever you are."

SAP has tweaked its in-memory sales pitch to be a broader database story, reflecting that the company intends to aggressively sell the Sybase ASE, Sybase IQ, and Sybase SQL Anywhere databases alongside Hana. At its TechEd event in Las Vegas last week, SAP laid out the details on the SAP Real Time Data Platform (RTDP) it's developing and demonstrating to customers. The idea is put transactional workloads on ASE, real-time workloads on Hana, history-intensive analytic workloads on IQ, and mobile workloads on SQL Anywhere.

SAP is developing federated data access, common administration and management tools, and common data modeling and design approaches that will run across the platform, and it's also saying it will be open and easily integrated with third-party applications and databases.

What I like most about RTDP and what SAP is saying about it is that they recognize that Hana is not the right database for every challenge. Yes, Hana can drive real-time performance, simplification, and breakthrough applications. But when a low-cost conventional transactional database (and spinning disks) will do, ASE can fill the bill quite nicely, and at a lower cost than competing databases such as Oracle or IBM DB2.

In the vein, SAP also announced Wednesday that high-profile customer Procter & Gamble is "planning to migrate its existing SAP ERP environment to ASE database.” P&G currently runs SAP on Oracle, and it also uses Oracle Exadata for data warehousing. If P&G follows through with this plan, it would be a financial blow and, more significantly, a big symbolic blow to the industry's biggest database supplier.

McDermott said ASE is quickly becoming "a Trojan Horse." The idea is that SAP customers select ASE for its cost advantages, but once they're comfortable with SAP as a database supplier, they discover that it's part of a nuanced and workload-specialized RTDP. Using the familiar administrative and data-management tools, they can move low-latency workloads onto Hana, analytic workloads onto IQ, and mobile workloads onto SQL Anywhere.

SAP would like to think that its innovation halo is just beginning to shine. But SAP's database, mobile, and cloud businesses have a long way to go to become powerhouse businesses in their own right. If that happens, SAP will truly be more than an ERP company, just as Apple became more than a computer company.