SAP CEO Bill McDermott wants those who follow SAP’s earnings—and you know who you are—to understand that the software company’s strong first half puts it in position to deliver on its targets for the full year ahead. “Thanks to the continued trust of our customers, we are a profitable growth company. The key growth drivers performed as we expected they would in the first half, giving us enormous confidence in our top line for years to come,” he said during the earnings call on Thursday, July 18.
That’s reassuring news for Wall Street, but what do the results mean for SAP customers and how are the big hitters in SAP’s product lineup performing with them—e.g., SAP S/4HANA, the cloud product portfolio, and the new-kid-on-the-block Qualtrics XM?
“ASUG continues to work on behalf of our members to ensure they are getting the most value from their SAP investments and that we provide a path for all SAP customers forward,” ASUG CEO Geoff Scott said. “The Q2 results demonstrate customer interest in the cloud, SAP S/4HANA and IaaS platforms, and we are here to help customers use these technologies to help accelerate their businesses.”
1. Where’s the Revenue Coming from—Cloud or On-Premise?
Cloud versus on-premise revenue comparisons do provide an indication of where customers are headed. In the Q2 2019 results, SAP announced cloud revenue grew by 40% year over year (37% in North America), compared with a 5% decline in software-license revenue year over year. At the 30,000-foot level, this does signify that more companies are transitioning to the cloud and adopting SAP’s software, cloud platforms, and management services. SAP also mentioned its focus on “closely partnering” with the IaaS hyperscalers—Amazon, Microsoft, and Google—a trend that continues to gain momentum among customers.
That said, the revenues from on-premise software and support continue to “keep the lights on” at SAP. For the first half of 2019, SAP generated $8.2 billion in software licenses and support versus $3.6 billion from the cloud category.
2. Are You Experienced?
McDermott proclaimed that the clear headline for Q2 is that SAP continued to grow fast in the cloud, and “experience management is the new front end to every segment in the enterprise application software industry, including HCM, CRM, ERP, and beyond.”
Since its $8 billion acquisition of Qualtrics last year, SAP has hedged its bets on the experience platform and what it can add to its expanding portfolio. In Q2, SAP pointed to two new customers—Chalhoub Group and U.S. Department of State—that selected Qualtrics to “intelligently combine with SAP solutions to move beyond systems of record to new systems of action and achieve breakthrough results.” As evident in news from SAPPHIRE NOW and ASUG Annual Conference, SAP will continue to invest in integrating “experience” within all its solutions.
3. The Road to SAP S/4HANA
Although SAP announced that Q2 was definitely one of the best quarters ever for adding SAP S/4HANA customers—600 for the quarter, up 29% year over year and reaching more than 11,500 customers in total—the announcement stopped short of sharing how many of those customers are actually live.
The last numbers we received were at SAPPHIRE NOW and ASUG Annual Conference when Sven Denecken, SVP and head of product management for SAP S/4HANA, shared the number was at about 3,000, but the expectation was that it would continue to grow this year.
“ASUG believes that if you’re an SAP customer who wants to grow your business, remove inefficiencies and technical debt of the past, and take advantage of the latest capabilities of SAP software for your business, then you need to move to SAP S/4HANA,” ASUG’s Scott said.
One other thing to note: In its Q2 filing, SAP claimed that approximately 50% of SAP S/4HANA customers were net-new, which is a fascinating stat when you consider all of the current SAP customers yet to make their move and the decision between SAP S/4HANA cloud or on-premise. SAP noted that “a growing number of companies including MercedesBenz EQ Formula-E Team have chosen SAP S/4HANA in the cloud.” In addition, SAP pointed to Hitachi, Colgate-Palmolive, and Deloitte and Touche Southern Africa that have gone live on SAP S/4HANA Cloud.
4. Digging Deeper
There weren’t any big surprises in the Q2 announcement, and for the most part, ASUG members have been well aware of the push toward cloud, experience, and SAP S/4HANA. But as Den Howlett of Diginomica put it, “the devil’s in the detail.”
Howlett points to a few things of importance, including the fact that SAP is not changing any of its projected metrics despite the recent investment by Elliott. He also points to the news that the market did not react well to the earnings call. Reuters confirms this and reported, “Shares fell 10% at the open as revenue and operating profit came in below expectations.”
5. On the Margin?
We’re halfway into the year, and the verdict is still out as to how all these trends will play out during the rest of 2019. McDermott reassured: “We’re poised to continue fast growth in the cloud. We’re focused on expanding our margin profile. Promises made will be promises kept. Our XM intelligent enterprise strategy is winning big time. Our partner ecosystem is fired up and our employee morale is very high. Our brand value is higher than ever.”
SAP is promising margin expansion for its investors, but could that have any effect on customers going forward? Time will tell, but SAP has repeatedly promised to be more customer-centric than in the past, and the Q2 earnings call was no different, with statements by CEO McDermott and CFO Luka Mucic that affirmed the company’s pledge of customer orientation.
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