Jim Hagemann Snabe – Co-CEO
SAP AG (SAP) Credit Suisse 2013 Annual Technology Conference December 3, 2013 9:45 AM ET
Good morning everyone. Very excited to kick off the conference with two back-to-back software keynotes and in my takeaway I got some survey is that software does indeed rules. And so, no better way to start-off with keynotes from two really powerhouse CEOs.
The first one, Jim Hagemann Snabe from SAP. But before I welcome Jim to the stage, I do have the mandatory disclaimer to read. So please note that except for certain information that is discussed during today’s presentation may contain forward-looking statements which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations, the factors that could affect SAP’s future financial results are discussed more fully in SAP’s most recent filings with Securities and Exchange Commission.
So with that, I would like to invite Co-CEO of SAP, Jim Hagemann Snabe to the stage where we will start with the fireside chat. And then afterwards, I am going to leave sometime for Q&A from the audience. So, Jim, please come on stage.
Jim Hagemann Snabe
Jim, I guess, just the level – thanks for the crowd here. I am not sure if everybody realizes this, but several years ago, when you are first named Co-CEO of SAP, Credit Suisse was actually the first conference that you attended. So I think it’s fitting that now that you are going to be moving on from the Co-CEO role that this will be also your last investor conference in that role. So, thank you for your support of our conference and thank you to SAP for really, like Jim was saying, it makes this conference special when we get exactly excited yourself here.
Jim Hagemann Snabe
Well, thanks very much. Thanks for the invite. I have enjoyed at every time. I know Bill has as well. And we’ll stay committed to this conference which is I think one of the best collections of the tech industry that you have. I love the pooling and the wisdom of the crowd here. So I am always listening very carefully to what you guys to leave is going to happen in the industry as we look into this. Thank you.
So, let’s think about your time as CEO, there has been a lot of change in the company for the better since you took over and thank you for that as a personal up – on you during your timeframe.
But, in the past, I would say, 12 to 18 months in particular we’ve really seen an acceleration of the rate of the change at SAP. Maybe just the level of such things here, maybe walk us through sort of the changes at SAP you buy Success Factors, you buy ARIBA, you introduced HANA. Sort of where are we right now, and then how do you see the sort of the strategy playing out going forward.
Jim Hagemann Snabe
Well, it’s always good to reflect a little bit back on what has happened and use that as a base for the future. If you look back in 2010, when Bill and I got into office, we kind of found a successful software company that was limited to two categories, ERP and Analytics. And, it had a fantastic installed base, but was getting a little bit slow on innovation. And we fundamentally plan to reinvent the company based on three radical changes.
Number one, we realized that the long-term success of a company in software is about innovating faster than competition. And so being slow was a big risk and we decided to kind of reinvent how we build software. If you look in 2010, we were, in average 14.7 months between releases, between cycles and we said we need to be at six months to be competitive if innovation is our strategy which was of course the call of today.
So we reinvented the way we build software, aligned with what small companies do, add their software methodologies, it’s very rapid iterations on prototyping which most large companies had failed to implement and we did that, we have 20,000 employees.
And today, we had seven months in average of innovation cycle, which means we almost at the six months goal and if you calculate that, it actually means that with the same amount of developers, we delivered twice as many innovations in one year. And we can be leading innovation rather than a follow-up. So that was number one.
Number two was about becoming much more relevant to the customers, being limited to the business application software, the advanced processes in 25 different industries and analytics; these were two very synergistic categories.
But we felt new technologies will change the way business was conducted and the strategy of innovation and growth was really about adding three additional categories. The database which really needed a reinvent with this enormous amount of big data coming out as we could no longer allow the disk to be so slow and therefore we set out to invent a new database in memory.
Competition was laughing at us and now with HANA, we actually have reinvented this layer which was a pretty mature market at the time. At a stage where HANA at the end of this quarter will probably have a revenue near the €1 billion mark since it’s launched.
So that is the fastest growing product in the industry ever and hence a true recognition of a radical reinvention of the database layer. We added mobile at the front-end to simplify the interaction with users. Make it much more user-friendly, but also reach more users and finally, of course cloud and that I think is the third big change with it.
It was all about changing the business model. So getting faster, getting more relevant and having a complete stack from the data to the user all the categories in between and then finally, changing business model where the dilemma was how do we become a cloud-based company.
Why was that so attractive? Because cloud is a 100% recurring revenue. The traditional business model is a 22% of the revenue recurring. It would be great to get to a 100% recurrent, but it’s very hard to go from an upfront license part business to a cloud business and so the whole strategy was about how do we evolve our business model.
So as we become a cloud company, we don’t ruin our current business. And we’ve actually been able to build now a €1 billion run rate in the cloud without jeopardizing our core business, it’s still growing very solid and have an enormous attractive maintenance base that has not been in anyway damaged by the move into the cloud.
So these are the fundamental changes that we did and with that, I think we have come much more relevant to the customer. We’ve become fast enough to compete against start-ups and we are now applying the new business model on cloud which clearly is where the market will go not everything will be in the public cloud but cloud will be a preferred way of consuming advanced software.
Got it. Well, let’s focus on two items of your statement. So, HANA of course and then cloud. Let’s start first with HANA. Just, where are we right now? When you think about your big customer base is business suite, business warehouse, the existing, own customers of the SAP application. Where are we, in this end of some life cycle of those two?
Jim Hagemann Snabe
So, HANA actually was delivered in three stages. Stage number one was, 2011, so three years ago more or less, we delivered HANA as a side cost, so it was additional to the row-based, disk-based, database. We would replicate data into HANA and use the speed of HANA for analytics typically.
Then the second phase was when we were able to replace the database of the business warehouse with HANA, which mainly became not an additional infrastructure but a replacement, we could takeaway stuff and HANA then allows simplification, so the TCO would reduce on the analytical side.
And the big move and I think that’s where your question is going as well as when we were able to launch this year through a very, very big effort on engineering to move our entire core application set to the business suite on to HANA, which means now the entire transactional world runs on HANA and with that comes a massive opportunity for the first time in history to not just take away the relational database on disk from the landscape but to start a process of radical simplification of landscapes.
Many of the disk-based databases are installed because they want to compensate for the slowness of the disks. So you saw the data in multiple ways in order to get a reasonable fast response to a query from a customer.
And the moment you have everything even in the transactional world in main memory, in columns, you can take a lot of this complexity away. So, where is this now? It is now at a stage where it can replace all the database in a company any size. And I think SAP is the best example of that.
So we decided to drink our own champagne and we installed our BW. We replaced a relational database with HANA end of last year. We moved our own CRM system that we used for 15000 professionals on the roads in February this year and we moved the entire ERP.
So everything that runs SAP, all financials, all logistics on to HANA in August this year and the consequence of that has been a radical boost of the performance of the application and in parallel and this is where HANA’s architecture is so unique.
A TCO reduction of around 30% on the hardware infrastructure, 60% on the operations and three times less data stored because of the simplicity that comes through the architecture of HANA.
So it’s now ready for prime time. Now since the launch of business suite on HANA, by the end of Q3, we had 450 customers who signed up for that, which is way ahead of my expectations, because that’s like rocking the solid board of companies, the thing that runs their business and moving that on to HANA is something which I had expected companies would hesitate where until they saw others through it.
But we actually had a radical uptake of that, 450 customers already in the first three quarters of – sorry, since May, general availability, by the end of Q3, 450 customers signed up for that, half of them being installed-base customers who replace their relational database with HANA and get a TCO reduction and half of them new customers who sign up for the business suite, because the business suite on HANA is so much more competitive and so our win rate in competitive bids is much, much higher.
And with now the ability to deliver all of that infrastructure in the cloud with our HANA enterprise cloud, we actually can take the burden, the complexity completely away from the customer and offer a radical cost reduction with a very, very competitive set of applications.
So let’s that take a step further and let think about your competition what they said about HANA. First, it was, you guys are on drugs, and that this will never take-off and then it was like, okay, well, maybe they can sell it to the BW base.
But no way it will run transactional applications, no way, then it was 450 customers, so, okay, maybe people will run transactional applications on top of HANA and now your competition will say, but nobody is going to use HANA as a platform, now. So where are we in this further next stages of platform?
Jim Hagemann Snabe
Yes, I truly believe, if you look at the history of the industry, it’s clear that those companies who were able to establish platforms like businesses where you are not just using the technology for your own stuff, but actually allow others, even your competitors to use it, have been the companies that have been creating the biggest transformations of the industry and the more sustainable business models.
And so we actually said, well, it’s not enough that it runs the SAP software. We need it to be a platform of choice for companies and we have actually three efforts that does that. First of all, we have been able to convince large-scale software companies to consider HANA as their preferred platform.
I think the most significant announcement we made, little over a month ago in Las Vegas that the ticket that we had were at SAS Institute, one of the leading still independent analytical tool providers, said that they will move their tools on top of HANA, because it gives them a better performing set of tools at a lower cost of ownership.
And they will basically testify based on their test on HANA that HANA is the effective standard for the future of analytics. But I think that was a very significant proof that HANA is becoming more than the installed-base software, the installed based platform for SAP.
Secondly, we have run a start-up program to inspire start-up companies in the industry in general to start looking at what they could build in terms of innovative applications if they had the speed of HANA. And we have more than 500 start-ups now who have bet their business on building stuff on top of HANA, everything from DNA analysis in real-time in healthcare to individualize treatment in cancer, very advanced optimization algorithms to support the internet of things.
So you can nowhere your entire value chain is and optimize in real-time not at night. We have everything SAP-related and non-SAP related all the way to three dimensional star maps. Again the compute power and speed of HANA becomes the key differentiator for the company.
So more than 500 independent start-up companies, many of them of course in the Silicon Valley have bet their life on HANA and they are basically saying, we couldn’t have built this application without the speed of HANA. And then finally, out of more than 2100 HANA customers, more than half of them are non-SAP customers using HANA for non-SAP stuffs.
One very advanced example is in oil and gas where a very large oil and gas company is using HANA to speed up the seismic data analysis to increase likelihood of finding oil, a business environment which we would normally not be in as the ERP company, now we become the platform of choice because that analysis is enormous amounts of data and the real-time is, it allows you to simulate rather than wait for hours for a response.
So these are three examples, customer, partner and big isles who are building on HANA and we will of course accelerate the speed of that, because that’s how you create a true platform that is not just for SAP, it’s really for the world.
Great. Let’s switch gears a minute to cloud and talk about your success back and obviously two big acquisitions, big commitment by SAP to this space, as well as you have had some of your internally developed – line of business on the applications.
Maybe walk us through this, how you feel about the cloud portfolio right now? What components you have? How are you doing for the integration and evolution of that product set?
Jim Hagemann Snabe
I think it’s a hugely important question, where HANA of course is the biggest transformational technology from a technology point of view. The cloud is the biggest transformation of the business model and hence it was a difficult path to find a way to become a cloud company while at the same time, staying on a growth pattern and a profitable pattern.
We decided to acquire because in order to build a cloud business, no matter how successful you are from scratch, it takes a while before the exponential curve, because of the nature of subscriptions, because that takes up – before that takes up to be a big number that matters in a company of our size, we were too many years into the future.
So we did two very big acquisitions and very strategic ones. Success factors which gave us a very important lead in human resource management, a dimension that has largely moved to the cloud. There are best-of-breed players that we used to be competing with on premise which is really hard, now we compete in the cloud.
And interestingly enough, because of our commitment to integration, because HR is not a standalone task, the skills in the HR database is to be used to plan projects and make sure you get the right compensation to stay its people, et cetera, et cetera is an integrated process, well, because of that commitment, of course the power that we put behind Success Factors where we added more engineers and did not integrate but rather execrated our stuff in to their DNA.
We’ve been able to accelerate and from a win ratio of Success Factor standalone at around 50% in competitive situations, where now at the SAP installed based, we had eight out of ten wins which makes us now see the acceleration of momentum as we bring the power of SAP and the global scale and the customer relationships into the very nice application set that Success Factors have.
And so that was a very, very important move and the second was ARIBA. ARIBA offers kind of the same, but in procurement, but then again they have even an additional business model which is not just the cloud-based application set that gives us a subscription fee.
But also the business network effect of having a – a business network of 1.2 million companies connected that trade more than $500 billion U.S. annually and we get a click fee on that trading, which is I think a third business model and probably the most undervalued asset in our – today.
The network effect we have seen in the consumer world, but not really in the business world and I think it’s a gravity game, it’s the winner takes it all and I think it’s a huge asset as we add more capabilities to that network.
So, with these two acquisitions and then in parallel building out our own financials and our own CRM, we have today a run rate in the cloud of €1 billion measure in the Q3, which means we are now the second largest cloud player. In terms of revenue, we overtook Oracle at Q3.
You’ve seen both of the acquisitions accelerate as part of the SAP family, because we didn’t killed them with our culture. We gave them more power, more fuel, and more access to market. It happened typically three to four quarters after the acquisition.
So you saw ARIBA is not accelerating in Q3 and I think with that, we have – we are playing now in all the four major markets in the cloud. In addition, we added the hosted cloud which is really the attempt to solve the problem that for the core business companies that are likely to outsource that to an infrastructure share with competition.
They would have different trading capabilities that they want to control, but they still want to get benefits in the cloud and that’s why we offer now the HANA Enterprise cloud where if the customer is running on HANA, it can host the entire stack for them and with that offer them a very, very efficient way cloud-based cost for the infrastructure without losing the control of the app for the customer its behind his firewall.
And with that, I think customers feel very, very comfortable that we can solve end-to-end in the cloud is that’s what they want.
Let’s talk about go to market then for the cloud and some of that you said earlier on, how do you manage being historically a licensed company then obviously cloud being more subscription to high recurring rates. How do you manage the got to market? I know you talked about trying to be cloud first, but, what does that mean, I guess, this is the kind of the question from the go to market side of things?
Jim Hagemann Snabe
Yes, we have basically seen two phases, phase one is, when you acquire a company that has the DNA of the cloud, you want to make sure that the people who are on the same cloud are dedicated to go and fill the cloud sources and that’s what we’ve been trying to do since the acquisition of Success Factors and ARIBA and of course adding our own capabilities in that.
We have made some great hires from competition in the cloud to help us accelerate on our cloud-based go to market. But you’ll find yourselves in a situation where the moment we have the entire portfolio in the cloud which we have now including our core business can be consumed in the HANA Enterprise cloud.
Then you want to become a different company, you basically want to be the cloud company that goes to the customer and says, here is my solution to solve your business problem. We can allow you to consume that in the cloud end-to-end or you can buy it if you want and install it on premise as well. It’s up to you.
We are at that stage now and that’s why we have been accelerating the – we are accelerating the idea of positioning SAP as the cloud company. The alternative today is one line of business solutions where nobody has the end-to-end solution actually to be delivered, we can do that now.
And so the second phase of this is really converting to the cloud company where every sales person of SAP will go up to a client and say hey, we have the best solution for your industry and by the way it’s your choice of deployment in the cloud or on premise. That’s where we are now and you’ll see us convert to that model beginning of next year.
And with that, we suddenly get all the 14,000 sales professionals to carry a cloud message, a quota where they don’t differ between the on premise or the cloud and I think this will be a massive opportunity for us to accelerate and become really the cloud company, not as a separate unit that does cloud, but everything becomes cloud-oriented.
And one of the questions I get from a business model perspective of this is, like are you guys deploying an Adobe, it’s like it’s everything go in subscription suddenly, I mean, how do you think from a business model perspective, I think, you laid a pretty straightforward strategy from a go to market, but when you think about evolving the business model, with this, it seems like there are multiple options, you are going to do nothing, Adobe was over here, where are we in that spectrum from a business modeling you think?
Jim Hagemann Snabe
Well, actually, the hardest part was the last three years when we went from nothing in the cloud to now a €1 billion run rate in the cloud in euros. To do that, you normally or often companies have done this over.
They actually sacrifice the on premise business to move into the cloud and the consequence of that has been two things. First of all, a radical delay of revenues with the impact on revenue and margin, but also a radical cost increase to fund the infrastructure and fund sales forces and that’s why most cloud companies have been suffering either being a cloud company or trying to become a cloud company.
We’ve been able to pull off a double-digit growth scenario in software plus cloud. The core is very healthy. It’s not growing double-digit but if you include maintenance, it’s a very solid single-digit business that is not likely to move away soon. And the reason is multiple, first of all, the move to the cloud happens geographically at different pace. North America, it’s very, very present.
In Europe, it’s not very present, in Asia, it’s even further out the same is too in Latin America. Secondly, we’ve been adding more value in the core for instance in financial services which is the fastest-growing industry solution we have and large banks run their own datacenters also today and they invest heavily in software to help in transform.
And so with that, we have actually been able to keep a solid healthy growth in the core while accelerating the cloud. So where are we now? Well, we are at a stage, where I would say the cloud is now such a critical part of the business.
If I could, I would always prefer a cloud subscription revenue to an on premise revenue for the simple reason that it’s a 100% recurring. So, the simple math in an on premise world, you get a 100% upfront and then 22% every year in maintenance. While in a cloud world, you get 40% every year.
So it’s a 100% recurring, it’s not a 100% but it’s 40% and you don’t have to be a math genius to figure out that the net present value of that revenue stream is significantly higher and so it is benefit for the customer and it’s benefit for SAP. And with HANA, we have the lowest possible cost of infrastructure, which makes us able to run a very profitable cloud business.
So we are currently trying to accelerate the pace in the cloud and we have two benefits where none of our typical cloud players have, one, we already have the infrastructure. You will not see our cost of infrastructure explode as we explode our revenues in the cloud.
We have the largest IT center in Europe, one of the largest infrastructures in the industry today and so the service we are adding to run the HANA Enterprise cloud really means nothing in the size of a company where you won't be able to see a radical growth there and number two, you won’t see us accelerating the cost in sales either, because we already have a very, very powerful and productive sales force.
So the moment we can switch them on to sell cloud, we just get the benefit of scale in the cloud without these extra cost that all of our competitors are seeing in the cloud space and that’s why they continuously report loss-making business. We will be profitable.
Now, one of the things we’ve talked about in the past, the two of us is, the hybrid cloud and so the uniqueness of SAP strategy of having obviously on premise but also the cloud offering, maybe talk through sort of how you think that positions you versus just a pure on premise guys, the pure cloud players out there?
Jim Hagemann Snabe
Yes, I think, first of all, we need to probably separate the market in two. The cloud that we talk about most of the time is, I brand as a public cloud. It’s the cloud where you have one installation for many customers. So you upgrade that installation, all our customers upgrade at the same time.
It’s typically very narrow functional scope in non-differentiating areas. So, how you do your traveling expense? In most companies, it doesn’t differentiate you, so you are willing to share the infrastructure cost with your biggest competitor, even automating your sales force activities with the calendar activities and so on, you can put out there, probably not your pricing.
You want to keep your pricing close, but the activity, the sales force automation you might, human resource management processes not just talent, but the process itself. These are very narrow functional scope, non-differentiating, relatively simple to standardize across multiple industries.
That’s the public cloud space, we are in all four categories, CRM, procurement, human resource and finance. The challenge at least in large companies is that they don’t want to give up the differentiating parts of the business but they like the idea of cloud, so they want to have a – what we call a hosted cloud, they want to benefit from the infrastructure of the cloud but not lose the configuration and control of the app.
And that’s where we came up with the HANA Enterprise cloud. Why HANA Enterprise cloud? Because if they move to HANA, we know that TCO growth will adequately down and we want to have that benefit when we are offering cloud-based infrastructure and for us it means that all systems that you host are all the same.
That’s normally not the case in hosting. Every customer has an individual configuration of IBM hardware, IBM database or HP hardware, an Oracle database in various different versions. It’s a very costly support model.
In our HANA Enterprise cloud, all the systems from an infrastructure point of view are the same, they are all based on HANA, they are all based on the same hardware and we just buy hundreds of these servers and add them and we can actually even use the computer power dynamically while still having the installed individually per customer.
So that’s our assumption that large companies want to control their own destiny in the core. They want to outsource the edges to a public cloud where they can be sharing the cost with competitors and we wanted to be the only company that can offer both as an integrated end-to-end solution.
The consequence of this is very close to what the introduction here was on the statistics that the consequence of that will be that the cost for infrastructure and hardware for individual companies will radically go down as we are managing datacenters that have no brand hardware and that are being utilized much more.
And as a consequence, we can monetize the software portion more as we help companies reinvent their business with mobility, within memory computing, or do these while things with data analysis and seismic data and so on. Certainly we play on both sides of the equation.
That's why believe in the hybrid model and I think many large suppliers believe that as well and I think that you will see the public cloud vendors will now master one string, will figure out that the moment they go and do the core, that the complexity of what they are dealing with is radically different than mastering one very narrow snippet in a public cloud offering like human resource management.
As an example, one installation at a very large SAP customer and we have many of them, you take one of them, is typically biggest than the entire sales force cloud. That’s why I am arguing that this is a different beast than a narrow functional scope in the cloud in a public cloud and that beast, we can now offer with cloud benefits in the HANA Enterprise cloud and radical reduction for cost implication is hardware cost go down and the opportunities for software increases.
Software eats the world.
Jim Hagemann Snabe
Software eats the world.
I have got multiple - more questions to ask you, but I want to pause for a minute for questions from the audience. So if you could raise your hand, but before we do pool the audience for questions, I do have one question for you, just to wrap things up from my side.
So I guess as you look – we are going to look back again, if you look back over your tenure, what would pan out in something that you’d wish you’ve sort of done differently, I guess, or accelerated or just what would you’ve done differently?
Jim Hagemann Snabe
That’s a good question, I actually spent quite a lot of time on trying to learn from what we did. I think that, in hindsight, the speed in which we were able to transform rather large companies was faster than most people had anticipated and probably because we were two, we could cover more ground and get more action on radical change of a company that was historically successful and now again, I think, very, very relevant.
Would I have done anything different, I think if there is anything I would have acquired Success Factors earlier, because they would have given me maybe yet another year in that exponential curve of revenue which is so attractive in the cloud. So if I could have done it again,
I would have done that. At that time, it didn’t seem so critical from a timing point of view, today I realize how important it is to become a cloud company that’s the mission that we are on as a company.
Got it. All right, like I said, I have multiple more questions, I pass from the audience, if you bring the microphone up to the front here and then the next one at the back there.
Thanks, Jim. On your HANA installations, give us some context, what is the size of the customers - of HANA customers from the install base. So I don’t know if you want to talk to us about employees or users of a specific application and how does that compare to the new business suite users who are new customers, who are utilizing HANA? Thank you.
Jim Hagemann Snabe
Yes, so I would say, there is kind of two types of HANA customers. There is the ones that bought the technology and then there is the ones that bought it as a run-time license to run SAP. So, two very different ones, the technology, the enterprise license for HANA to use HANA for non-SAP stuff and the run-time we use it only for SAP.
The size of the company is the normal distribution of the size of customers we have. So, I gave you a couple of examples, McLaren is a very interesting sports car, Formula One technology company. They run today their business suites, their business warehouse on HANA in the HANA Enterprise cloud and they take the data from two race cars on a Formula One weekend.
80-terrabytes of data in real-time into HANA, so that they can recognize opportunities to optimize and simulate strategies during a Formula One race and change outcomes in real-time where the engineers sitting in London and the race happening in Kuala Lumpur. That’s reality today. All of these three items are in the HANA Enterprise cloud.
They have one license for HANA, they have the SAP stuff on top of that and then they use HANA for this non-SAP data from 120 sensors in the race car. That’s a relatively small company. On the other hand we announced a quarter ago that we won Salzburger. Salzburger was a competitive win. We won the business suite. We won a couple of line of business cloud solutions like HR and they decided of course to run the business suite from day one on HANA.
Why wouldn’t you if it’s the same price as the database, yet much cheaper infrastructure and a much better performing application. So that’s a several tens of thousands of employees around the world. A massive undertaking to transform the company and become a real-time enterprise and we have all these variations.
We feel, we could take on any size company with HANA and I think the big innovations right now in HANA is the move of HANA into the banking industry for analytical banking, we are almost done and then for the core banking where we have banks with 500 million accounts. We feel that the speed of HANA would be a radical boost of technology.
Yes, hi. Now that you explain that you’ve got more scale in the cloud, does that mean M&A is not a big driver in the cloud space and also, is it tougher to integrate new acquisitions if the cloud gets bigger and bigger? Thanks.
Jim Hagemann Snabe
Thank you very much. So on the acquisition side, I feel that with the two acquisitions we made, we have today, combined with our own innovations in the cloud and the HANA Enterprise cloud offering, we have the most broad and deep portfolio in the cloud than any company.
So that makes me feel, I don’t need large acquisitions. That being said, the cloud business is one that moves at very high pace. There are many small startups with some very innovative solutions that could easily be bought and integrated into what we have.
You have seen many of the cloud, the pure cloud players do tuck-ins like that and we should definitely continue to do that as well as SAP. We recently bought Hybris, a very important piece in reaching the end consumer and redefining CRM. So CRM today is about sales force automation.
But we think CRM tomorrow is not about automating your sales force, it’s about reducing the importance of it through e-commerce and e-marketing so that you reach your customer directly not through a sales force, but electronically. And that’s one example of a tuck-in that radically improves our portfolio in CRM and in the cloud.
So you will see us continuously moving ahead on buying smaller pieces in the cloud where we see that they will accelerate our pace. We currently don’t have any large acquisitions planned.
There are not that many attractive targets out there and I do believe that the cloud market will have to consolidate just for financial reasons that all of the cloud players are making losses and they are making losses because they have a huge investment upfront.
The revenues comes later and at some point in time, this market will mature, we believe that maturing is beginning to happen. This means some changes, some game-changing moves in the industry and of course we will be ready if something like that happens, but right now, no big acquisitions planned.
Your second question was, what’s the output of integrating? Well, the benefit of the cloud is that, you have to integrate anyway, nobody has the complete solution in one place in the cloud. So, we will always have to integrate cloud-based offerings with on-premise and I think we have proven with the acquisitions we’ve done that the technological integration is done relatively swift and instead of integrating the companies.
We’ve actually been able to keep the DNA and accelerated by adding more power to the acquired companies rather than integrating them and cutting cost. And I think this will be a model going forward as well.
Can you just comment on the business environment generally either, some companies talking about weakness in emerging markets. Obviously, the NSA scandal, the recent some of the U.S. companies sound more negative. Can you just talk about that generally?
Jim Hagemann Snabe
Yes, you can look at short and long-term. If you look a little bit longer, there is no doubt in my mind that of the IT spend, the software portion will increase and it’s not because the IT spend will increase double-digits, it’s because we are moving cost from hardware and services into software.
This trend, I think is a long-term trend. If you look at how is the business environment we are in, it’s very different geography-by-geography. In North America, there is a very positive market if you have cloud offering. We see our cloud numbers exploding in this market and it’s one of the reasons that we will rebrand the companies to be the cloud companies and deliver everything we have in the cloud to capture that trend in North America. This is not the case in Europe.
We have been able to produce double-digit growth rates in Europe, why, because the market realizes that it needs to consolidate on fuel suppliers, in particular in difficult times and the European companies, at least the big ones realize that their competitiveness is about being global.
So they are actually leveraging software to help them globalize their business and accelerate their momentum and be more efficient. Asia, has been a slowdown which was unexpected. We had some difficulties like everyone else in the first half of the year. I believe that half of that was due to execution from our side. I always look at myself before I argue market.
But the other one was actually the slowdown of growth rates in China made the surrounding countries replan and in that replanning phase, there was some investment stops that we saw – very likely deals that simply got stopped.
We had a return of growth in Asia in Q3 and I believe Asia continues to be the biggest growth opportunity in software in many years to come. It won’t be a fast pick up, it will be a slow pick up, but it would be a long-term growth opportunity in Asia.
There are millions of companies in Asia who don’t have world-class software today and who are kind of jumping at generation of technology to be world-class and global players. And we saw the growth in Asia in Q3 driven by China. So we are now performing extremely well in China I think that’s an interesting data point, because most American companies have had big issues in China lately. I can’t judge why.
I can say that we feel fortunate that Macko has spent so much time with the political side in China over many years. I think she is the Global Head of Space that has spent most time in China. I had the pleasure of going with her twice. And the relationships are very close and SAP has huge opportunities in China, no doubt.
And then Latin America continues to be a market of great growth opportunities, much more on premise than in the cloud. We are growing very rapidly. I was recently in Brazil. Huge opportunities in Brazil, in Mexico and also in the newer countries like Argentina, Chile, et cetera, there is enormous opportunity for growth.
So that’s my sense. It’s kind of a mixed picture based on the geography. Overall, it’s great to be a global company. Now to the NSA, it has made some, most companies in Europe very concerned about where is their data and we get the question today from customers in the cloud, we have further 3 million users in the cloud and so, in that sense we are the biggest cloud player, they are all asking where is my data?
Can you guarantee my data in a certain location? So far, the IT industry had said no, I won’t leverage the infrastructure in my ways to get maximum cost benefit. We have the benefit of having datacenters on 12 locations and growing. So we can actually, if customers want, guarantee a certain location of data and the management of the data in that location whether that’s the U.S. or Europe or wherever including Asia as well.
So that gives us a competitive advantage in the cloud today where most of our competitors are American-based datacenters only.
All right. One last question from me in the last two three minutes there, but I guess, as you transition out of your current role, it kind of gives you an opportunity to think about the future and instead of worrying about the day-to-day execution operations, what are you going to be focused on? And I guess one of the things with this conference is, what is the next big thing you think or what are you going to be thinking about?
Jim Hagemann Snabe
Well, I have come to the conclusion that, over the last ten years, the value creation from technology largely went into technology companies. If you look at- we were here with a big technology conference and the value of technology companies over the last ten years has radically increased. In 2003, if you took the ten – top -10 market cap companies in the world, 21% of that market cap was IT companies. Today, it’s 43%. So, a radical growth in the technology sector itself and the value creation there why because, there is so much opportunity to deploy new technology and there has been iterations of technology change on the mobile side and the cloud et cetera.
I believe that we are at the rim of a tipping point where that value will move into non-tech industries as well. That doesn’t slow down the value opportunity in the technology industry but, companies in 25 different industries can rethink their business models when they think digitization.
Whether it’s in healthcare with digitized and individualized treatments, I just joined the board of Siemens, a huge opportunity for a heavy lift in the industry to begin adding technology to where they think their product and their services and this is true in banking and insurance and public sector all these industries, all 25 will be rethought based on technology.
And my mission is, first of all, of course, I am proud to hopefully be elected to join the supervisory board of SAP and continue the success story of SAP, one way you once in a while need to radically rethink and challenge your assumptions and we’ve done that the last three, four years.
And help the traditional industries understand the opportunity that lies in digitization and with that create more value also in non-tech companies. This does not take away the opportunity for the technology sector. I think we are just at the beginning of a relatively radical transformation of the way we work and the way we live and technology will be the lever for that.
So it’s a very exciting moment for me. Still 48, so young enough to help accelerate that transformation not just being in IT, but maybe also helping other companies take advantage of IT.
Perfect. Well, I think that’s the perfect way to leave it. Jamie, thank you for your time today. Thank you for the time over the years with us and best of luck in the future.
Jim Hagemann Snabe
Thank you very much. Thank you.
[No Q&A session for this event]
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