The year 2020 has proven to be full of surprises—both good and bad—for organizations across the globe, including SAP. Earlier this year in its first quarter 2020 earnings call, SAP announced that Christian Klein would take the helm as sole CEO of the software company. Despite the pandemic, company leaders shared that overall profit was up 7% year over year.
Klein assured customers, partners, and investors at the time that he was ready to make the decisive and quick decisions required to weather the storm ahead. According to the announcements that came out of the Q2 earnings call, he has done just that.
“This is our second quarterly earnings call during the pandemic, but our first full quarter under the COVID-19 impact,” he said. “And given the situation, it was a fantastic one. Our results reflect the progress we have made as a company since the pandemic hit in March. And we have adapted to the situation by truly transforming into a virtual organization and allowing customers to continue with their businesses.”
The company reported a $7.9 billion profit for the second quarter, with an operating profit of $1.5 billion, up almost 2 percentage points.
4 Focus Areas for SAP
Organizations and consumers alike have been working to better navigate the current business landscape and understand what it means in terms of future growth and resiliency. Klein pointed to four specific areas of focus for SAP, which included concentrating on SAP’s existing markets, accelerating growth by expanding into new markets, promoting sustainability and Climate 21, and last but not least, providing new options for customers to move to the cloud.
“The results from Q2 show, yet again, how well our intelligent enterprise strategy is resonating with customers,” Klein said. “They completely understand that digitalization is no longer an option, but a must.”
As for the rest of the Q2 earnings call, ASUG identified these five things that customers should know:
1. The $8-Billion Elephant Is About to Get Bigger
SAP dropped some big news on the evening before the Q2 earnings call: Qualtrics is going public. SAP is in the process of preparing Qualtrics for an IPO, while assuring customers that it will retain a majority ownership of the experience management platform.
Qualtrics’ revenue went up 34% year over year to $197 million in Q2. With 11,800 customers, Klein pointed out, “Qualtrics had yet another fantastic quarter with strong growth and is helping us to differentiate our core applications by adding experience management.”
Although SAP is still in the process of finalizing the IPO, which will depend on market conditions, Klein noted that he and Qualtrics cofounder Ryan Smith “are convinced that the proposed partial IPO marks a win-win situation and creates the best setup for Qualtrics to fully tap the potential of a fast-growing experience management market.”
2. A Steady Flow Upward to the Cloud
According to CFO Luka Mucic, cloud revenue increased 19%. This reflects the strength of SAP’s contractually committed cloud business, which was partially countered by lower “pay as you go” transactional revenue, due to the COVID-19 crisis. “This cloud revenue growth—together with our consistent software-support revenue stream—demonstrates the resilience of our business model,” he said. “In Q2, our cloud and software revenue grew by 3%. For the first six months, our cloud and software revenue were up 5% or 4% at constant currencies, a very strong showing given the impact of COVID-19.”
In the first quarter of this year, Klein suggested that although COVID-19 had caused some customers to postpone cloud and software licensing contracts, the cloud backlog at that time had increased by 25%. His expectations were that this business would continue to see rapid growth in 2020.
“Go-lives in the cloud are happening now in weeks rather than months,” Klein said during the Q2 earnings call. “This shows how SAP enables our customers to react with agility and speed in this crisis. As we have said before, SAP is crucial to the business transformation of our customers, and we are working to emerge stronger out of the crisis.”
3. SAP S/4HANA Is at the Core of Intelligence
Earlier this year, SAP saw customers postponing their SAP S/4HANA projects due to uncertainty around COVID-19. But it appears that more organizations are now comfortable with keeping things moving. SAP reports to have added more than 500 new SAP S/4HANA customers in the second quarter, resulting in a 22% increase year over year. “Nearly 40% of the 500 are net new,” Klein stated. “We have also seen more than 700 customers go live on SAP S/4HANA in Q2.
According to a joint study between ASUG and DSAG, COVID-19 has not led to a change in SAP S/4HANA adoption. In fact, both user groups report customers are planning to move within the next one to five years.
“I’m very excited about the November 2020 release coming for SAP S/4HANA public cloud,” Klein said. “There will be again major improvements including new business configuration, as well as the opening up of more features and functions.” Klein added that by the end of the year, 90% of the integration planned for SAP S/4HANA will be completed. “This will not only be a technical integration,” Klein added, “but it will include harmonizing our data domain model, as the semantics of the data have to fit together when you talk about seamless business processes.”
“We know from our 2020 ASUG Pulse of the SAP Customer survey that integrations—both with SAP and non-SAP products—present the number-one technology challenge for ASUG members,” ASUG CEO Geoff Scott said. “The complexity of our technology landscapes today is too constricting. That being said, SAP has made a commitment to improving integration challenges, particularly between its own products and with SAP S/4HANA.”
4. Word on the Street
All things considered, this was a positive earnings call. As many organizations are taking hits this year, SAP has been able to rise above the uncertainty and present numbers reflective of growth. “It proves that digital transformation is a recession-proof concept,” said industry analyst and SAP observer Josh Greenbaum. “It [digital transformation] may even be tragically favored by recession. If you've got the capital, this is the moment to clean house and get ready for the next recovery. That’s a story that we saw in this earnings call.”
Although digital transformation is still top of mind for many organizations looking to navigate this new business landscape, it wasn’t lost on anyone that SAP slipped in the Qualtrics announcement without much detail.
Diginomica’s Den Howlett penned his thoughts in the early hours as the news broke. “Just as I was hoping to get a rare good night’s sleep, SAP announced its intent to IPO Qualtrics,” he wrote. He provides several different rationales for the move, including that perhaps experience management is a poor fit for SAP right now. And an IPO would provide SAP with much-needed cash flow. Howlett concludes that this is not a done deal and there is still more to be revealed.
Greenbaum, on the other hand, noted that he thinks the news is a positive move for both SAP and Qualtrics. “I think it was a bit of a tight fit to get these two companies together on a cultural level. This move involves understanding the value and splitting the two entities apart, but without really divorcing completely. It's a nice compromise.”
“Right now, there are still more questions than answers on how this will affect customers,” ASUG’s Scott said. “The quality of the Qualtrics product remains high, and there’s much trust in Christian and the leadership team to do the right thing to take care of all SAP customers. ASUG will be working with SAP to ensure that customers’ Qualtrics questions are answered in a timely fashion.”
5. Transformation Leads to Innovation
Klein started the year calling for bold moves, and so far, he’s following through. SAP remains positioned for resiliency and growth through this year and will likely continue to adjust when necessary. “Our broad solution portfolio, our unmatched industry and geographic diversification, coupled with our strong base of more predictable revenue have allowed us to weather the COVID-19 crisis this quarter,” CFO Mucic said. “Our quick response to the crisis on the cost side drove strong operating profit and margin expansion. With disciplined investments in strategic growth areas, we are confident we will not only weather the crisis but emerge from it even stronger.”
Klein stated that the 2023 ambitions SAP set out at the beginning of the year have not changed. “That said,” he noted, “we are in the process of updating our strategy. We are refocusing the company, identifying growth areas, and evaluating additional business opportunities.”
By 2023, SAP wants to triple its cloud revenue and bring in more than $41 billion in total revenue.
“Let me make one thing clear,” Klein said. “We will continue to manage this company for value, not short-term margin maximization. If we believe a strategic move is wise, if we think it makes sense to accelerate the cloud migration of our customer base, if we see an opportunity to grow where we have a way to win, we will investigate, and not pass by default just because revenue mix shift might have an adverse impact on operating margin in the short run.”
ASUG members can join us for discussions like this with ASUG leadership at one of our virtual ASUG Executive Exchange events to learn and network with other executives looking to get more value from their SAP systems.