While SAP’s decision to sell its large stake in Experience Management (XM) leader Qualtrics will surely be a boon to shareholders on all sides, I believe SAP’s primary objective is to use those anticipated billions to hypercharge the future development and growth of its red-hot S/4HANA Cloud ERP business.
It would be hard to overstate the significance, size, and impact of the cloud enterprise resource planning (ERP) market, which, while still in its early days, is already showing that it could become the biggest enterprise-applications category ever.
And while SAP was and remains the runaway leader in on-premises ERP, the company faces a very serious competitor in the cloud ERP wars in longtime nemesis Oracle.
Here’s what’s at stake for those two companies and any others looking to be the cloud-based hub for corporate operations in the digital economy:
- SAP’s massive on-premises installed base. SAP has about 25,000 on-premises customers that have not yet fully committed to the cloud. Can SAP retain those customers with streamlined cloud migrations and enhancements, or will Oracle’s intense competitive efforts succeed in peeling off a big portion of those 25,000 prospects?
- Huge SMB (small- to medium-sized business) opportunity. Midsized and small businesses that have not used either SAP or Oracle in the cloud have become a huge market opportunity for both companies as cloud economics have made cloud ERP solutions affordable for those organizations. Will SAP or Oracle grab the lion’s share of those first-time buyers?
- Follow-on sales for HCM (human capital management) and CRM (customer relationship management). The “attach rates” for cloud ERP are soaring because business customers want to gain the high-value advantages of working across a single data model, a single set of user interfaces (UIs), and a single security framework, as well as other advantages, rather than going with disparate best-of-breed solutions that require the customer to shoulder the burdens of expensive and long integrations. So for Oracle and SAP, a cloud ERP win carries with it the very high likelihood of HCM, CRM, and industry-specific solutions as well.
SAP recently reported that S/4HANA Cloud revenue for the year was $2.27 billion, up 91%. For Q4, it was $720M, up 101%, meaning that the customer demand for and growth rate of SAP’s cloud ERP solution was accelerating in the final quarter of the year, a trend that runs counter to what most major cloud vendors have been reporting.
On the Oracle side, while the company does not break out revenue figures for its individual cloud applications, it reported that for the three months ended Nov. 30, SaaS (software-as-a-service) revenue was $2.8 billion and strongly indicated that cloud ERP was the biggest contributor. So extrapolating, say, $1.5 billion from that total $2.8 billion as coming from Fusion cloud ERP and NetSuite cloud ERP, I believe it is safe to say that at this point, Oracle’s cloud ERP business is twice as large as SAP’s.
But, SAP’s cloud ERP business is growing much faster than Oracle’s: 101% for SAP and in the low 20s for Oracle.
And I believe that as Christian Klein and his team have reviewed those numbers, and have analyzed the reactions and intentions from their S/4HANA cloud customers plus the ongoing strength of their unmatched Rise program, Klein and company have decided to go all-in on turbocharging S/4HANA cloud’s growth.
And while that’s a fine intention, how will the company fund it? Wall Street is looking for better margins and higher profits, the company is laying off 2,500 employees, and expenses are being monitored across the board. So again, where will the money to fuel that heightened growth and competitive capability come from?
Enter Qualtrics, and the very large stake SAP holds in the company following a very successful IPO last year.
Here’s what Klein had to say about the Qualtrics asset and opportunity on last month’s Q4 earnings call. I’ll break his comments out into two parts, because while he gave a fairly basic overview in his opening comments, Klein later in the call was much more animated when replying to a question about Qualtrics.
From his opening remarks, the key points: “SAP believes that this potential transaction could unlock significant value for both companies. For SAP, it would allow us to focus more on our core business and profitability; and for Qualtrics, to extend its leadership in the XM category that it pioneered. Since the acquisition, Qualtrics has increased revenue by 3.5X to $1.5 billion while also delivering profitability, and has significantly expanded its offerings and adoption among enterprise customers.”
Then, during the Q&A session, Klein offers a more-revealing glimpse into what could happen.
“In Q3 or Q4, we were together with the Qualtrics management team and we said, ‘Hey, what we’re currently doing we can continue to do also in the future by embedding Qualtrics in our products and in our go-to-market programs, while we can also consider a sale,’ ” Klein said.
That would allow SAP, he said, “to free up investments and efforts to double down on our growth in the core, which is super strong. You have seen the S/4HANA cloud numbers. The platform is booming.”
Final Thought
Some leaders might have felt that after spending $8 billion on Qualtrics a handful of years ago, SAP was compelled to ride that investment out. To the very great credit of Christian Klein, he was neither seduced nor sidetracked by such narrow thinking.
As a result, by selling off its high-value stake in Qualtrics, SAP can remain a very close partner of Qualtrics while also generating a huge stash of cash with which to turbocharge the business that will in large part shape the future of the company: the S/4HANA Cloud business.
Larry Ellison has very publicly stated on multiple occasions that Oracle is fully committed to vigorously recruiting many thousands of those 25,000 SAP on-premises customers to Fusion Cloud ERP. And Ellison’s history shows that he does not say such things lightly.
So I say kudos to Christian Klein for seeing the big picture and making the decision to cut Qualtrics loose in exchange for funding SAP’s next round of investments in its cloud ERP and related core business against what is sure to be the most-intense competition SAP has ever faced.
And to all you business leaders out there evaluating a move to cloud ERP: If ever there were a buyer’s market, this is it — enjoy the opportunity!
