SAP announced its third-quar­ter results for 2020 and report­ed that total rev­enue was down 4% to $7.7 bil­lion year-over-year. As COVID-19 con­tin­ues to play a role in the econ­o­my and in how busi­ness­es trans­form — or don’t — SAP looks to adapt and reimag­ine its strat­e­gy going forward. 

The soft­ware com­pa­ny addi­tion­al­ly report­ed that although cloud rev­enue con­tin­ued to grow by 10%, it was down from 19% in Q2. SAP has also revised its 2020 fore­cast and pushed out its 2023 ambi­tions two years to 2025. The pan­dem­ic has affect­ed near­ly every busi­ness, large or small, and SAP is no excep­tion. With that not­ed, SAP has com­mit­ted to co-inno­vat­ing with part­ners and rein­vent­ing how busi­ness­es run in a dig­i­tal world. 

“COVID-19 is an inflec­tion point for our cus­tomers,” SAP CEO Chris­t­ian Klein said. ​“For most of our 400,000 cus­tomers, resilien­cy is achieved not just by accel­er­at­ing the move to the cloud, but, more impor­tant­ly, requir­ing a fun­da­men­tal change in how their busi­ness­es oper­ate end-to-end. It means trans­form­ing every process for the dig­i­tal world, from the cus­tomer-fac­ing go-to-mar­ket func­tion all the way to sup­ply chain man­age­ment. And SAP is unique­ly posi­tioned to part­ner with our cus­tomers to make this trans­for­ma­tion happen.”

ASUG iden­ti­fied five things that cus­tomers should know based on con­ver­sa­tions with indus­try ana­lysts and based on what we heard in the SAP Q3 2020 earn­ings call. 

1. SAP S/4HANA Remains at the Core 

Accord­ing to a joint study between ASUG and DSAG com­plet­ed ear­li­er this year, the biggest ben­e­fits to adopt­ing SAP S/4HANA include improved per­for­mance and opti­miza­tion of exist­ing busi­ness process­es — both of which are impor­tant, espe­cial­ly dur­ing a time of uncer­tain­ty. So it comes as no sur­prise that SAP report­ed that it added more than 500 SAP S/4HANA cus­tomers in Q3, tak­ing the total adop­tion to more than 15,100 cus­tomers — up 20% year-over-year. Of these cus­tomers, more than 8,100 are live. 

Accord­ing to the Q3 2020 quar­ter­ly state­ment, more than 45% of the addi­tion­al SAP S/4HANA cus­tomers were net new. ​“This speaks, first, for the com­pet­i­tive­ness of the solu­tion,” Klein not­ed. ​“But sec­ond, that in the years to come, we will win fur­ther mar­ket share not only in SAP S/4HANA, but we also will dou­ble down on HR, pro­cure­ment, and on focused areas in cus­tomer expe­ri­ence. We also will inno­vate in the indus­try cloud.” 

ERP is at the core of the SAP Intel­li­gent Enter­prise, and SAP needs to con­tin­ue to focus on inno­va­tion as well as on inte­gra­tion to remain com­pet­i­tive. Den Howlett of Dig­i­nom­i­ca wrote, ​“While it [SAP] has con­vinced itself that cus­tomers want to remain on-premis­es for its core SAP S/4HANA solu­tion, the tide of archi­tec­tur­al design says oth­er­wise. It is no longer the case that cus­tomers can­not get off their on-premis­es soft­ware, it’s a case that they must. In SAP’s case, this means it has to archi­tect for the cloud rather than sim­ply hand­ing over the infra­struc­ture com­po­nent to the hyper­scalers and assum­ing that lift and shift will save the day.” 

2. The Big Move Is to the Cloud: Pack a Bag!

Although cloud rev­enue decreased from Q2 to Q3, it is still on the upswing, as is SAP’s com­mit­ment to focus on it. Among the pos­i­tives, SAP con­tin­ues to see rapid growth in cat­e­gories such as com­merce, sup­ply chain, Qualtrics, and the SAP Busi­ness Tech­nol­o­gy Plat­form. The com­pa­ny did see a decline, how­ev­er, with its intel­li­gent spend busi­ness management solu­tion, as well as with SAP Con­cur. None of this should come as a sur­prise, con­sid­er­ing the cur­rent busi­ness landscape.

Dur­ing the earn­ings call, Klein not­ed that SAP will ​“accel­er­ate tran­si­tion to the cloud,” tar­get­ing more than $26 bil­lion in cloud rev­enue by 2025 and expand the share of more pre­dictable rev­enue to approx­i­mate­ly 85%. 

As the pan­dem­ic has forced a change in the way busi­ness­es oper­ate, SAP believes there has been and will con­tin­ue to be a shift in cus­tomer pref­er­ence to cloud con­sump­tion and sub­scrip­tion licensing. 

“We have always been the lead­ing on-premise appli­ca­tion plat­form,” Klein said. ​“Thou­sands of part­ners and cus­tomers have built appli­ca­tions and exten­sions on SAP for almost 50 years. Our inten­tion is to repeat that for the cloud and to posi­tion SAP as the lead­ing cloud plat­form to trans­form and change the way enter­pris­es work in the dig­i­tal age. To get there, we have put a lot of work into our cloud plat­form, and we will con­tin­ue to invest in innovation.” 

“ASUG’s research of SAP cus­tomers has shown that the cloud is the future for the major­i­ty of our mem­bers, and I don’t see that chang­ing,” said Geoff Scott, ASUG CEO. ​“The tran­si­tion to the cloud for many SAP cus­tomers has, in many cas­es, accel­er­at­ed dur­ing 2020, as the neces­si­ty of flex­i­ble tech­nol­o­gy sys­tems and oper­a­tions has come to the forefront.”

3. The Shift from a Soft­ware Licens­ing Mod­el to a Sub­scrip­tion Licens­ing Model 

As part of its strat­e­gy to move its large-scale, on-premise ERP work­loads to the cloud, SAP is also mak­ing changes to its licens­ing model. 

SAP CFO Luka Mucic not­ed, ​“the first impor­tant point to under­stand is that what we’ll be doing now is dif­fer­ent.” Mov­ing cus­tomers from on-premise to the cloud will require also mov­ing them out of the upfront soft­ware licens­ing mod­el and into the rat­able sub­scrip­tion licens­ing mod­el. Mucic added, ​“This makes finan­cial sense because we’re increas­ing cus­tomer life­time rev­enue as we’re expand­ing our role from a soft­ware ven­dor to a cloud provider for a sig­nif­i­cant part of our port­fo­lio. This means we not only deliv­er soft­ware and sup­port ser­vices, but also the required IT infra­struc­ture and oper­a­tional services.”

Aside from expand­ing its upfront share of the purse, SAP will now have the poten­tial of upselling its busi­ness tech­nol­o­gy plat­form, as well as addi­tion­al SAP solu­tions and part­ner appli­ca­tions devel­oped on top it. But what does this mean for customers? 

Fun­da­men­tal­ly chang­ing your busi­ness mod­el is bound to be a tricky tran­si­tion­al bal­anc­ing act. SAP, for its part, has pledged to invest in its cus­tomers and in con­tin­ued inno­va­tion. ​“We are now tak­ing the final step in mod­ern­iz­ing and har­mo­niz­ing our cloud deliv­ery,” Mucic said. ​“This will fur­ther increase the sta­bil­i­ty and resilien­cy of our cloud solu­tions, and [it] speeds up inno­va­tion even in the appli­ca­tions, dri­ving cus­tomer success.” 

Indus­try ana­lyst and SAP Observ­er Josh Green­baum added two impor­tant caveats. ​“There are two key things that need to hap­pen for SAP to be suc­cess­ful with this,” he said. ​“First, SAP needs to con­tin­ue its focus on inte­gra­tion and het­ero­gene­ity. Sec­ond, SAP needs to do a bet­ter job of being the go-to plat­form for new soft­ware development.” 

4. The Mar­ket Reacts: Too Quick or Just Right? 

Soon after SAP released its quar­ter­ly state­ment and held its Q3 earn­ings call, the mar­ket react­ed and SAP stocks fell more than 20%. ​“Do not pay atten­tion to Wall Street. Stay away from that poi­son,” Green­baum insist­ed. He found it odd that the mar­ket react­ed the way that it did, and as quick­ly as it did, con­sid­er­ing third-quar­ter num­bers are not tra­di­tion­al­ly the best for any com­pa­ny. But even more than that, he not­ed that this should have been expect­ed. ​“It’s actu­al­ly good that SAP took the hit now, because every­one is going to take it at some point.” 

Bri­an Som­mer, a tech­nol­o­gy indus­try ana­lyst and con­sul­tant, dis­agreed and said the mar­ket react­ed accord­ing­ly. He not­ed that many orga­ni­za­tions are still deal­ing with the com­pli­ca­tions of COVID-19, and although CIOs will green­light small­er, more dis­crete projects, larg­er imple­men­ta­tion projects aren’t happening. 

Some­thing that slipped under the radar this year — and that per­haps the mar­ket is not con­sid­er­ing — is that SAP is no longer under the watch­ful eye of activist investor Elliott Man­age­ment. As of May 15, Elliott Man­age­ment filed a 13F-HR form, dis­clos­ing own­er­ship of zero shares of SAP. This is impor­tant because it puts SAP in a bet­ter posi­tion to make deci­sions based on inter­nal pro­jec­tions and goals, as opposed to those of an activist investor. 

That said, although the change in strat­e­gy isn’t one placed on SAP by anoth­er enti­ty, Som­mer cau­tioned the move isn’t enough. ​“SAP needs to stream­line its con­tracts, make them sim­pler, and make pric­ing scale up and down,” he said. 

Green­baum sug­gest­ed ASUG mem­bers and SAP cus­tomers should focus more on the fact that the SAP Board of Direc­tors is ded­i­cat­ed to the con­cept of long-term val­ue. ​“But also,” he not­ed, ​“ASUG mem­bers and SAP cus­tomers should con­tin­ue to lob­by for that to remain the focus of the board and for SAP over­all. SAP needs to be pushed in the right direc­tion, and SAP cus­tomers need to remain active par­tic­i­pants in mov­ing this nee­dle forward.” 

5. Where Should ASUG Mem­bers Focus in the Next 2 Years? 

It has been one year since Chris­t­ian Klein came on board as a CEO for SAP and just six months since he took the reins as sole CEO. Dur­ing the Q3 2019 earn­ings call he said, ​“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.” 

Cer­tain­ly, a lot has hap­pened to the world since that state­ment was made, but Klein has remained stead­fast in push­ing for­ward trans­for­ma­tion for both SAP and its cus­tomers, while tak­ing quick and deter­mined actions to do so. 

Accord­ing to the Q3 2020 quar­ter­ly state­ment, SAP projects that by 2025, it will have more than $26 bil­lion in cloud rev­enue, $43 bil­lion in total rev­enue, $14 bil­lion in oper­at­ing prof­it, and a sig­nif­i­cant expan­sion of the company’s more pre­dictable rev­enue share to approx­i­mate­ly 85%. 

“Over the next two years, we expect to see mut­ed growth of rev­enue accom­pa­nied by a flat to slight­ly low­er oper­at­ing prof­it,” Mucic said. ​“After 2022, momen­tum will pick up con­sid­er­ably, though, and the ini­tial head­winds of the accel­er­at­ed cloud tran­si­tion will start to turn into a tail­wind for rev­enue and profit.” 

Som­mers stat­ed that SAP cus­tomers should remem­ber they’re in the driver’s seat. ​“Now is the time to play hard­ball in nego­ti­a­tions. Now is also the time to get clar­i­ty and sim­pli­fi­ca­tion from SAP on indi­rect access,” he said. ​“And final­ly, this is the time to push for SAP to pro­vide scal­able and flex­i­ble arrange­ments with its customers.” 

Klein end­ed his sec­ond Q3 earn­ings call by stat­ing, ​“As the CEO of SAP, I firm­ly believe that pri­or­i­tiz­ing sus­tain­able val­ue cre­ation has to be our top pri­or­i­ty. There­fore, we will not trade the suc­cess of our cus­tomers and the sig­nif­i­cant growth poten­tial of SAP against short-term maximization.” 

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.