The night before its first-quarter earnings call for 2020, SAP announced that effective April 30, Jennifer Morgan would step down as co-CEO and that Christian Klein would be the sole CEO of the software company. As news made the rounds, Klein dialed in for an audio-only webcast of the Q1 earnings (along with CFO Luka Mucic and Customer Success Chief Adaire Fox-Martin) to report that, despite the COVID-19 pandemic, overall profit was up 7% year over year.
“More than ever,” Klein said, “the current environment requires quick and determined action from companies, and it needs a very clear leadership structure.” He went on to thank Morgan for her leadership and contributions to the SAP ecosystem before jumping into the numbers and forecasts for the year ahead.
The company reported $7.1 billion dollars profit for the first quarter, with cloud revenue representing 31% of that. It also reported an operating profit of $1.31 billion, up 1%.
Three Focus Areas for SAP in 2020
As businesses around the world navigate the pandemic, Klein identified three focus areas for SAP, including resilience, balance, and emerging stronger than ever before.
“The current crisis shows that our intelligent enterprise strategy is more relevant now both for our customers and for SAP,” he said. “It enables business continuity. Our more than 400,000 customers worldwide make the world run, and we enable them to do so.”
SAP has positioned itself to run as a virtual company with more than 96% of its workforce working from home, as well as to make sure its essential operations such as data centers remain functioning in accordance with public health ordinances.
As for the rest of the conversation, ASUG identified these five things that customers should know based on the discussions in the SAP Q1 2020 earnings call.
1. The Cloud Business Saves the Day
In the last quarter of 2019, SAP doubled down on pivoting its cloud business toward the software as a service category, which typically delivers more predictable revenue streams. The company’s cloud and software revenue grew by 7% year over year to $5.9 billion.
Although COVID-19 has caused some customers to postpone cloud and software licensing contracts, Klein emphasized the current cloud backlog has increased by 25%. “We expect cloud revenue to continue its rapid growth in 2020,” Klein added.
“As our ASUG member surveys show, SAP customers are seeking lower costs, top-notch support, and a reduction in complexity and integration challenges when moving to the cloud,” said Geoff Scott, ASUG CEO. “Those value drivers must be made crystal clear for software-buying customers, given the level of business uncertainty today.”
2. Is SAP S/4HANA Still on Track?
Although some businesses have put the brakes on moving projects forward, particularly with on-premise deployments, SAP reports it added an additional 300 SAP S/4HANA customers in Q1, which was up 23% year over year.
“We are continuing to build our customer base amidst this crisis, especially with SAP S/4HANA Cloud,” Klein said. “We saw about 500 customers go live with SAP S/4HANA Cloud in Q1, underscoring our partners’ and our own remote service delivery capabilities.”
There are several factors that lead to postponing an SAP S/4HANA project, “but the time is now to move forward,” warns industry analyst Josh Greenbaum. “Companies need to understand that a platform like SAP S/4HANA leads to a way to do more flexible planning and more strategic analysis. That is what it’s for. I think the momentum for SAP S/4HANA continues, and in fact, the justification for SAP S/4HANA becomes a lot stronger under these circumstances.”
Fox-Martin reminded listeners on the earnings call that the SAP S/4HANA Movement program is virtual, as are many other resources meant to help customers with their implementations.
3. Customer Success Is the Path to Success
SAP continues to put an emphasis on customers and customer success—even more so during these uncertain times. As more companies begin to hold back spending and reassess priorities, the question came up as to where SAP falls in helping customers stay on track.
“We will continue to look to strike a healthy balance,” Klein said. “We want to be empathetic with our customers, and we will look for proper solutions that drive business continuity.” He added, “We are looking at smart combinations of measures to help our customers.”
SAP leaders claim that the company remains in lockstep when it comes to focusing on customer centricity. “We recognize that all of our customers have unique arrangements with SAP, and we are dealing with each case-by-case,” Fox-Martin said. She added that prior to the emergence of COVID-19, SAP had already made a significant change in its sales structure and created a customer success board area. “We have set up our sales organization as well as our customer-facing organization to introduce simplicity for when our customers and partners engage with us.”
As the sole CEO of SAP, Klein is now responsible for how the company, as well as its customers, will navigate through COVID-19.
“We will emerge even stronger by remaining focused on our customers and their success and by delivering the intelligent enterprise,” Klein said. “Companies need intelligence to deal with disrupted supply chains, restricted travel, and the new ways of working. In short, only an intelligent enterprise can deal with uncertainty and rapid change. Digital transformation is no longer an option—it is essential.”
4. A Newly Unified Leadership Strategy
The news about Morgan’s departure took many by surprise, especially as they are dealing with changes in every aspect of their own businesses.
Den Howlett of diginomica outlined what the news could mean for the company going forward, noting: “SAP’s stated plan appears optimistic. But what’s clear is that SAP has, once again, found that the co-CEO leadership model doesn't work well for them. My concern is that, if anything, the concentration of power within SAP back to Walldorf will embolden those who believe ‘SAP knows best’ at exactly the time when it needs to learn from others.”
Greenbaum echoed the sentiment by saying SAP has had a complicated leadership model for a long time. “It is not what we have learned to love or at least tolerate in the U.S., but I can understand the need to now streamline everything. To the extent that Klein can consolidate the complicated structure and present one unified strategy, then that’s a positive,” he said.
Greenbaum added that SAP should be placing a very strong emphasis on customer empathy and customer success. “In fact,” he stated, “it needs to be stronger than ever before.”
5. No Cuts to Innovation
Overall, SAP is positioned to remain strong through this crisis and has adjusted where necessary. Its business outlook has been revised to account for any revenue decreases, and according to CFO Mucic, “SAP will slow hiring and restrict discretionary spending to ride out this crisis.”
Although Klein noted that the company saw a meaningful amount of new business get postponed because of COVID-19, there was no reason to believe the company had lost business. “We view most of it as just being pushed out,” Klein said. “I have no doubt that revenue will ultimately come to SAP.”
Klein confirmed its 2023 ambition previously outlined in the last quarter, adding, “We will not make unpopular trade-offs between 2020 profitability and future growth. Our customers have placed long-term trust in us, and they have every right to expect unchanged, high-level innovation from us. We won’t cut innovation and R&D.”
Register today for ASUGFORWARD on June 22–25 to learn, exchange ideas, and gain practical information you can put into practice immediately.
Special note to ASUG members: Register to listen on demand to the webcast with ASUG CEO Geoff Scott and ASUG VP of Content Strategy and Research Ann Marie Gray, who dive into the results from the ASUG Pulse of the SAP Customer 2020 study.