Discussion Between IBD and Bill McDermott about SAP Growth and Ongoing Battles with Oracle

McDermott recently spoke with IBD about SAP's growth strategy and its ongoing battles with Oracle.

IBD: This was SAP's best quarter in terms of software revenue growth. Is that significant?

McDermott: We delivered double-digit growth across all regions, including Europe, in spite of a pretty volatile global economy. It's a validation that our broad portfolio of industry-specific solutions and services is really differentiating SAP. Software sales (as opposed to services and support) is the greatest predictor of future demand because it pulls along the services revenue with it.

IBD: Is the slow global economy affecting SAP?

McDermott: No. This is (my) 10th consecutive quarter as a co-CEO of SAP where we achieved our double-digit growth objectives.

We are well on our way to being a 20 billion euro ($24 billion) software company by 2015 (vs. $19.5 billion last year).

Information technology needs to (be thought of as) business technology, because executives have to get results. (Companies) are not going to get any better results by buying somebody's hardware or adding another services contract. They have to change the way they run their business.

We think that we can make (businesses) run like never before. Strategic investments are going to business software and not to some of the commodities of the past.

IBD: Which parts of your software business are growing fastest?

McDermott: The biggest growth area is clearly SAP HANA (for high performance analytic appliance), which is our in-memory database (a data analytics tool that puts data to be processed in random access memory, which can be accessed and processed more quickly).

Also, we acquired Sybase (a mobile database provider, for $5.8 billion in 2010) and that business is now growing at 60% year over year. You get a mature business like a database growing at 60%, that's exciting. Our mobile business is growing in triple digits and our cloud business is growing in triple digits.

IBD: Oracle CEO Larry Ellison said this year that SAP has no cloud strategy. How do you respond?

McDermott: I think we responded very handily with our business results (on July 24). Our customers have voted with their wallets. (Sales show that) HANA beats the Oracle database front, left and center. We are two times larger in applications, nearly two times larger in analytics and we have millions more users in the cloud than Oracle does.

If you are on the defensive and on the run, you'll say almost anything to discredit your rival. We take all of our rivals seriously. We just keep out-innovating them. We let our results and our customers' success do the talking.

IBD: Did SAP have a cloud business before buying SuccessFactors?

McDermott: Yes. It was small. Business ByDesign was our flagship (cloud) product for small and medium-sized companies.

The cloud developed quickly. We really needed to scale it up, and M&A was a very good move for us. Not only did we get a No. 1 company (SuccessFactors) in terms of users in the cloud, with 15 million, but that number is five times that of (cloud rival) Salesforce.com (CRM), so you can imagine how many more it is than Oracle. It also gave us some size and scale and the leader we needed to run our cloud business.

IBD: How much of SAP's revenue is cloud-based?

McDermott: It's still a single-digit business (less than 10% of total revenue). It's growing in triple digits and we are on track to be a 2 billion euro ($2.4 billion) cloud business by 2015. We are close to closing our (business-to-business cloud platform) Ariba acquisition and now we will control the business network between buyers and sellers on a global basis. They are really excited about partnering with SAP.

We also have a lot of organic innovation around Business BuyDesign, and we have a sales-on-demand product and a financials product coming out.

Combine that with our talent and our supplier products and you have got yourself a real cloud powerhouse. All of our software is cloud-ready. It's about what our customers want.

IBD: Was acquiring SuccessFactors and Ariba a faster way to build the cloud business faster than trying to do it organically?

McDermott: That's exactly right. Because the cloud was moving so fast, you had to get yourself in the game at scale as fast as you could. Then you put the cloud into the SAP channel network and it will scale even faster than it did on its own. Timing is everything in life.

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