SAP Doubles Down on the Cloud and Customer Focus in FY2019 Results Release

By Robert Holland, VP Research and Publishing, SAPinsider

On January 28 SAP conducted their Fourth-Quarter and Full-Year 2019 Results Release, and announced that they had met all of their 2019 revenue and profitability targets – albeit with their cloud numbers only passing the post because of a single very large Q4 transaction.

Source: https://news.sap.com/2020/01/sap-announces-preliminary-fourth-quarter-and-full-year-2019-results/

In discussing the results, co-CEO Christian Klein noted that SAP is seeing an increasing number of large transformational deals in the cloud space, with those with over €5 million representing a third of the total deals. Klein also reported that the overall number of SAP S/4HANA customers has increased to 13,800, and a notable number of large companies are implementing SAP S/4HANA that have no previous SAP deployments. However, SAP wants to continue to expand the reach of SAP S/4HANA Cloud beyond its current 2,300 customers. Addressing cloud adoption in general will be a goal for SAP in 2020 as they look to accelerate the integration of acquired cloud assets. SAP also plans on increasing their vertical solutions in the cloud during 2020, though Klein did not provide any specifics on those solutions.

Adding to the message that Klein delivered, co-CEO Jennifer Morgan emphasized that SAP’s priority for 2020 is “successful and satisfied customers.” In Morgan’s words, SAP plans on “cross-pollinating their engineering teams to drive better integration, pushing for a higher adoption of solutions, and a focus on operational excellence.” Furthering this focus on customers, Morgan stated that all sales teams would be having their bonus packages restructured to include a consumption component – ensuring customers are not just purchasing software but are actively using it. Following up on this point, CFO Luka Mucic clarified that it was very important to understand that this was not just related to sales, but that services, support, development, and cloud operations would all have that consumption-based bonus component. Tying this back to SAP’s customer commitment, Mucic said:

Everyone needs to be pushing to make customer success a top priority. Customers must feel the benefit.

Looking at momentum across SAP’s regions, they are seeing a significant growth in cloud revenue globally – with particular growth in EMEA where cloud revenue increased by 47% in 2019, a region that has to date been slower in cloud adoption. When asked about this, Mucic said that:

Cloud is very prevalent here. Customers want a tight handle on privacy, but Germany is now a very strong performer. The second largest cloud country [for SAP].

Morgan stated that SAP had made a strategic decision early in 2019 to focus on SaaS and not IaaS with Qualtrics as the growth engine behind this. While Qualtrics only represents a small portion of SAP’s overall cloud revenue, it is growing, with a 40% increase in deals over €100 thousand, and a 60% increase in deals over €1 million. SAP expects that Qualtrics will continue to be the growth engine for the Experience Management (XM) vision consisting of Human Experience Management (HXM), SAP SuccessFactors, and SAP Fieldglass, as an accelerant for Employee Central, and Customer Experience (CX), SAP C/4HANA, which is the largest and fastest growing category in XM. SAP’s goal is to integrate their XM products with their existing Intelligent Enterprise strategy and leverage their relationships with the hyperscalers to provide a high-performance solution for customers engaging in digital transformation initiatives.

Answering a question about the rapid growth in SAP S/4HANA customers, Klein indicated that 40% are net new to SAP. Klein sees this as an indication that SAP is winning market share. Klein also stated, in a sentiment similar to what was noted in the DSAG investment report, that when it comes to SAP S/4HANA adoption:

Technology is not always the biggest problem. It is about changing business processes that have been around a long time.

He also said that part of the issue with adoption is the huge demand for skilled resources from partners, and that SAP is working to help upskill globally. This has also helped SAP ramp and expand its own services business which has seen a steady growth in margin over the course of 2019.

Focusing on SAP S/4HANA, a very interesting point that Morgan made was that over 50% of license revenue is coming from existing SAP S/4HANA customers expanding their deployments. SAP S/4HANA is also having a significant cross-fertilization impact per Mucic, who said that after an SAP S/4HANA implementation is completed customers want to modernize other systems. This leads to increased growth in other integrated platforms and products. Finally, when asked directly about whether SAP would reassess the commitment to ECC end of maintenance in 2025, Klein’s response was that SAP has been in constant communication with customers and to “expect communication soon with more clarity.”

What does this mean for SAPinsiders?

• Leverage SAP’s commitment to transparency and heeding customer feedback. Morgan and Klein listed several key priorities for 2020, but something that was repeated throughout the call was the focus on customers. Klein, Morgan, and Mucic all highlighted this point on multiple occasions. SAP representatives say that they are listening and are committed to improving the internal understanding that everything starts and ends with the customer. They also say ensuring customer success is their number one priority. Hold them accountable in your day-to-day interactions.
• Track and utilize the integrations SAP is planning. SAP has acquired multiple assets in the cloud space, but they have not been fully integrated into the SAP suite. Morgan said that in Q4 SAP completed the integration of SuccessFactors HR and SAP S/4HANA Finance. Integration with Ariba procure-to-pay will happen in 2020. The same is true for Concur, with detailed roadmaps to follow in a few weeks. SAP is committed to ensuring that when someone buys SAP it is a real business process integration.
• Wait and see on vertical cloud solutions. While the reach of SAP S/4HANA has expanded, SAP understands that they must increase their vertical solutions in the cloud if they are to truly drive a similar expansion of cloud adoption. Klein did highlight an increased focus on industry-specific cloud solutions but provided no roadmap or details.
• Expect an increased push for SAP S/4HANA adoption on Azure. Slides from the presentation highlighted “Microsoft Embrace,” no longer just project “Embrace,” with a focus on propelling the adoption of SAP S/4HANA in the cloud. While talking points mentioned both GCP and AWS, and the fact that working with hyperscale environments makes it clear that performance is key to winning, the emphasis on the Microsoft Azure relationship that developed in 2019 is just as strong for SAP in 2020.