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.

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