5 Things You Need to Know from SAP’s Q3 2019 Results

Sharon J. Rehana
Sharon J. Rehana in Opinion October 27, 2019

At the start of its Q3 2019 earnings call, SAP welcomed its two new co-CEOs, Jennifer Morgan and Christian Klein. Both praised former SAP CEO Bill McDermott for his contributions over the last decade but were also ready to move the needle in a new direction.

“It’s an honor to write SAP’s next chapter and follow Bill,” Morgan said. “The fundamentals and future of SAP could not be stronger.”

SAP announced double-digit growth across revenue, profit, and cash flow due in large part to new cloud business, a partnership with Microsoft, and its newest billion-dollar acquisition—Qualtrics. “Our third quarter results reflect the momentum we’ve built entering the final quarter of the year and more broadly where we are on our journey of growth and operational excellence,” Klein said. “We are excited and energized to write the next chapter in SAP’s story alongside the best workforce anywhere in the technology industry,” Morgan added.

ASUG News identified these five things that customers should know based on the discussions in the SAP Q3 2019 earnings call.

  1. Who Were the Big Players?

SAP reported revenue of $7.5 billion, a 13% increase year over year. But who were the big players in this revenue hike and how did they contribute? In Q2, SAP announced that cloud revenue grew by nearly 40% year over year. The trend continued in Q3, with new cloud bookings up 39%, and up 51% excluding infrastructure as a service.

SAP also announced a new partnership with Microsoft, which contributed 18% to the total new cloud bookings growth. “This is representative of the strategic choices we’re making,” said SAP CFO Luka Mucic. “We’re doubling down on the partnerships with hyperscalers to drive a healthy and highly profitable business, both in the cloud platform and SAP S/4HANA.”

SAP S/4HANA was also a big player in Q3. Adoption rose 25% year-over-year, adding 500 new customers in the third quarter and bringing the total to nearly 12,000 customers who have purchased licenses. The announcement, again, stopped short of sharing how many of those customers are actually live, but the most up-to-date number—3,000—we have is from SAPPHIRE NOW and ASUG Annual Conference.

Last, but certainly not least, is the newest kid on the block—Qualtrics. “We made a bold move with the acquisition of Qualtrics, and customers are excited about the holistic experience management platform it provides,” Morgan said. Since May, SAP has added 300 customers to the Qualtrics platform. It also recently announced a new human experience management (HXM) platform, which is accelerating adoption of SAP SuccessFactors Employee Central, adding more than 150 customers in this quarter alone.

  1. How Are Partnerships Leading to More Growth?

Although SAP stated that it will continue to give its customers a choice when it comes to picking a hyperscaler, Morgan noted that, “Many of our enterprise customers have chosen Azure, and in response, SAP and Microsoft established a partnership to move on-premise SAP ERP and SAP S/4HANA customers to the cloud through industry-specific best practices, our joint reference architecture, and SAP cloud delivered services on Azure. This partnership will both accelerate and simplify customer migration to SAP S/4HANA on Azure.”

A new set of partnerships called project Embrace was first announced at SAPPHIRE NOW and ASUG Annual Conference. The recent announcement solidifies a three-year deal between Microsoft and SAP in which both companies will ideally address the difficulty to shift from SAP’s traditional on-premise model to remotely hosted services.

“By putting the customer first,” Morgan said, “we've combined innovation with Azure to create the optimized environment for SAP S/4HANA to enable the integration, orchestration, and extension of SAP systems in the Azure cloud. As always, choice will prevail as we recognize that many of our customers also run SAP on Amazon Web Services (AWS) and Google Cloud Platform (GCP). In this case, our customers will still have the benefit of the best run SAP and their public cloud of choice.”

  1. Why Does the Experience Matter?

In the third quarter, segment revenue in customer and experience management was up 75%—in no small part due to Qualtrics and SAP C/4HANA—to $413 million year-over-year.

SAP will continue to invest in its customer experience portfolio and extend it into SAP Ariba, SAP Concur, and SAP Fieldglass. “Qualtrics has allowed us to redefine how we’re having conversations,” Morgan said. “It’s allowing us to start conversations in places we wouldn’t traditionally go.”

The company is putting its money where its mouth is by using Qualtrics to track its own employee experience. “Our employee engagement index is near record high, but we won’t stop there,” Klein said. “In addition to further simplifying our internal processes, we are currently conducting our annual employee survey using SAP Qualtrics technology. It will give us detailed insight into everything. Employees are critical to our success.”

  1. What's the Word on the Street?

The reaction around the Q3 earnings report has been mostly positive and well-received. Diginomica’s Stuart Lauchlan noted that it’s a solid Q3 and a good launching point for the new co-CEOs to build upon. But not everyone was fixated on the numbers.

Industry analyst Josh Greenbaum focused more on the untold part of the Microsoft announcement, tweeting, “SAP is picking Azure as its preferred cloud platform for the Embrace program, which at one time was to include GCP and AWS. This is a rare, exclusive agreement that is going to have huge repercussions.”

In response to the news, ASUG CEO Geoff Scott said that “SAP customers make a decision on a hyperscaler based on a variety of important factors. We continue to see this segment of the market as very fluid and encourage our members to consider all options when it comes to making this very critical decision for their organizations.”

ASUG News will provide more information as it emerges and will watch vigilantly for customer repercussions if they arise.

  1. Where Is SAP's New Leadership Focusing?

Although Morgan and Klein have been co-CEOs for a little more than two weeks, they’ve already hit the ground running.

“I'd like to point out three focus areas that I believe will be critical for our success in the next chapter of SAP,” Klein said. He called out the value of feedback, saying, “SAP has always been best when we listen to our customers,” The second was innovation. “Our continued growth through innovation is based on our ability to leverage R&D resources effectively and efficiently. We will further strengthen core innovation with our customer to realize true business value with the help of new technology,” he said. And the third was SAP’s employees. “It is our colleagues that drive innovation, provide value to our customers, and consistently promote our quality and profitability.”

Morgan and Klein aim to continue cloud revenue growth into 2020 and more than triple it by 2023, which is a bold plan. We will hear more on how they will do that after Capital Market Days, being held Nov. 12. ASUG News will follow that story and report as we learn more.

Join us for discussions like this with ASUG leadership at one of our national or regional ASUG Executive Exchange events near you to network with other executives looking to get more value from their SAP systems.