SAP: After Brutal Q3, Will it Stumble Again or Bounce Back Boldly?

Is SAP’s Q3 nightmare that zapped $35 billion in market-cap value a harbinger of deep troubles, or will the company be able to rally behind the customer-centric vision of CEO Christian Klein and emerge as a true cloud powerhouse?

(SAP is #5 on my Cloud Wars Top 10 weekly rankings.)

As is so often the case in business, it will all come down to the CEO and her/his ability to keep morale (and revenue!) up even as chunks of residual debris keep raining down following SAP’s recent lowering of future expectations.

Here are some thoughts on whether SAP’s suffered a mortal blow (I don’t believe that for a second), and on Klein’s response to what must be termed at least in the short term disastrous news. I’m basing these on my transcript of SAP’s Q3 earnings call with analysts last week.

1. Klein was confident, prepared, and did not blink. Klein and his executive team were surely fully aware that investors would react immediately and angrily to the sudden lowering of future growth expectations, particularly since many of the other Cloud Wars Top 10 vendors have maintained or even boosted their growth rates in Q3. On the earnings call, Klein came across much as he always does: in total control of the numbers, confident in SAP’s complex journey from the world’s biggest supplier enterprise apps to a cloud vendor trying to keep a foot in both worlds, and fully unafraid to step forward and take full responsibility for the company’s performance. While his demeanor alone can’t bring SAP back, it is surely something that made an impact on employees, customers and partners.

2. Klein based his core argument around customers. In a few different instances during the call, Klein stated emphatically that SAP is and will continue to focus on the long-term and highest-priority needs of its customers. At one point in his opening remarks, Klein said, “We are convinced that the real value driver of intelligent enterprises in the cloud will be the ability to adapt and run business models holistically end to end with one consistent data model.” At another, he said this, which was intended to describe what’s going on among SAP’s customers but also applies quite precisely to SAP itself: “Resiliency and sustainable long-term growth and profitability comes only by transforming the company to the needs of the consumers and employees in a digital world.” And later he bound himself and his company to those existential customer concerns when he owned up fully to the forecasting change: “As the CEO of SAP, I firmly believe that prioritizing sustainable value creation has to be our very top priority. Therefore we will not try to trade the success of our customers and the significant growth potential of SAP against short-term margin maximization.”

3. Does customer behavior match Klein’s optimism? From the earnings call, here are some numbers regarding the uptake of some vital SAP products:

• S/4HANA now has 15,100 customers, up 20% over last year;
• of those, 3,000 have deployed on S/4HANA Cloud;
• in Q3, SAP added 500 S/4HANA customers and 45% of those were net-new to the company
• SuccessFactors now has more than 4,000 customers, with about 225 of the Fortune 500 running on the Employee Central core solution; 
• in the 9 months since the pandemic rocked the world, SAP has had 28,000 customer go-lives; and
• not including its Intelligent Spend business, SAP’s SaaS and PaaS revenues were up 26%
  

4. SAP is innovating in not only technology but also go-to-market plans. Taking a page from Oracle’s very successful Cloud@Customer strategy, Klein and SAP have rolled out the HANA Enterprise Cloud Customer Edition for customers that want private-cloud services in their own data centers and managed by SAP. Seen from a distance, this might seem like an obvious move because lots of customers in regulated industries are finding great appeal in such solutions. But seen from within SAP and its culture of careful control built up over almost half a century, this is a huge—and welcome and much-needed—departure.

5. Klein delivered a precise set of deliverables on which he will certainly be judged. Describing the company’s decision to accelerate customers’ moves to the cloud and the resulting negative impact on SAP’s financial results over the next 14 months, Klein said, “Our ambitions are based on moving our large on-premises ERP workloads to the cloud and on gaining market share for our leading cloud applications; establishing our platform as the basis for business transformation in the cloud; winning in new markets; increasing our R&D investments to deliver new innovations in Industry Cloud; and a strengthened focus on our customers’ success to ensure adoption, higher renewals, and ultimately lifetime value.”

6. And among those deliverables on which Klein will be judged, none will be more essential than the rate of S/4HANA customer migrations to the cloud. One analyst asked Klein, “What’s the right KPI for us to look at during this transition point around that cloud revenue?” And Klein immediately said it will be the volume of customers that make that accelerated move to the cloud. “As you know, we have slightly more than 30,000 classic ERP customers,” Klein said, with many of those 30,000 customers running more than one SAP system. “And we have 15,000 customers for S/4HANA with, as I said, close to 3,000 of them in the cloud. So  that means another 12,000 basically that have licensed S/4HANA on-premise. In the next couple of years, we want to move many thousands of those customers. And then, of course, also net-new customers to our core ERP cloud solutions. So we intend to give you in the future absolutely regular recurring updates as part of the earnings process on those numbers and the progress that we have achieved across the different deployment forms. That should give you the confidence that we are arriving fully in the cloud come 2025.”

7. Klein built his case on what customers want; now it’s up to him to make sure SAP delivers. “Look, as the CEO of SAP, I cannot hold on to a midterm financial ambition that actually goes against the needs of our customers. When they want to move, when they want to transform, when they want to see more organic innovation from SAP, then I will commit for the long term that this is the right thing to do for SAP. And this is actually my top priority as the CEO of this company, and this is why we’re doing this change” (emphasis added).

Disclosure: at the time of this writing, SAP was among the many clients of Cloud Wars Media LLC and/or Evans Strategic Communications LLC.

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