Last week included several big events in SAP, each of which deserves a deep dive but this article from IgniteSAP is going to look briefly at each and explore how these events interconnect, and what this means for the SAP community. The fact that these have coincided is no accident and reveals much of SAP’s long-term strategic thinking.
Some of these things have been planned for over a year and somehow have been kept out of the media despite the Coronavirus and associated Q3 announcements leading to a sudden fall in SAP share price at the end of October. The pressure and the temptation for the SAP executive board to announce these changes early to offset harsh criticism they were receiving at the time must have been immense.
Here is a quick summary of the big changes at SAP.
On Wednesday last week SAP announced Rise with SAP. A package of software and service offerings designed to ease the transition to the cloud for SAP partners and customers. Christian Klein, CEO, described the package neatly in the introduction event:
“Rise with SAP is your personal concierge service to the intelligent enterprise. We provide you the basic components of an intelligent enterprise in one bundle that includes three business processes, intelligence capabilities, cloud infrastructure of choice, our business technology platform, free access to the business network, and our market leading ERP solution S/4HANA Cloud, everything complemented with premium services and tools, all without high upfront investment”.
During the introduction event for this new SAP offering Klein also confirmed the rumours that SAP has indeed acquired Signavio, a German business processes intelligence analysis software company which will provide core tools to be integrated into the service and software package.
Christian Klein also used the event to draw attention to new collaborations between SAP and Microsoft in the provision of S/4HANA Cloud via Azure and the integration of Microsoft Teams into S/4HANA which we covered last week. This follows the recent announcement of new appointees to the executive board: Scott Russell, previously head of the APJ region for SAP and Julia White who oversaw product marketing at Microsoft Azure for five years.
The IPO of Qualtrics went ahead this week and at the last count looks to be more than successful as this account of the IPO by Forbes make s clear:
“…opening trading just after 2pm ET at $41.85, up more than 40% from its $30 list price, and finishing the day at $45.50, up 52%, for a market capitalisation of about $27 billion.”
SAP retains a majority share in Qualtrics but has made so far $1.55 billion from this IPO after purchasing the company for $8 billion in 2018.
As if this wasn’t enough to digest, last Friday was the date for the scheduled press conference on SAP’s financial report on Q4 2020 and for the year 2020. Klein and CFO Luka Mucic both made detailed statements about the company’s performance and plans for the future which we will discuss later in this article, but first we will take a closer look at each of these events.
Wednesday’s introduction to Rise with SAP consisted of an initial speech describing the context by Christian Klein detailing why it was necessary for SAP to create this new service and software package:
“If everyone wants to transform, why is it so challenging? Why do so many industry leading enterprises keep getting disrupted, or just don’t see the outcomes… of that transformation… The key challenge for many enterprises is to [the] ‘how’. How to holistically transform, especially when you are still successful in the market… a holistic business transformation starts at the top. It’s about changing the culture and mindset of an enterprise. It’s about getting everyone behind this change… it’s about it serving as an enabler, hand in hand with the business, to adopt with agility new innovative applications, and very importantly, the wide business platform serving as an integration, extension and semantical data layer…”
There followed two interviews, with Live Kindly (a company that established its global ERP network this year) and Siemens (a company established for 170 years) demonstrating the current challenges facing companies, and how current SAP products and services were used to address those challenges.
Klein went on to give some details about what Rise with SAP is and how it will enable and facilitate companies to transition to the cloud.
“ the first element of Rise with SAP is business process intelligence, allowing you to make use of best practices and data from more than 20,000 customers. Based on this unique insight, you can discover and analyse your processes and to benchmark them against leading industry standards without pulling your data into a third party solution. Afterwards, the business and processes experts get tailored recommendations, how to adapt to new digital business models, and how to automate processes. A direct connection to our workflow RPA and other AI services is sure to seamlessly embed and infuse intelligence.
Let’s move on to the next element of Rise with SAP: the technical migration to a modular and standard application landscape. This is key to gain agility in the future. And react quickly to new business demand…
In our offering we designed better services by SAP and partners to get rid of modifications and custom code and to support you in harmonising and governing your data layer on our platform. So you can run your company based on one semantical data layer and on one source of truth. We of course also understand how mission critical your business processes are. That’s why we will continue to embed further automated services to make the transition of your IT landscape to the cloud help with fast time-to-value and near zero downtime.
Now… the third element of the new offering…to build your intelligent enterprise as part of Rise with SAP. The basis of the intelligent enterprise is the cloud infrastructure. Here we provide you maximum choice at the lowest possible cost…Our disaster recovery and high availability capabilities will provide highest resiliency for your business across the globe. We will also offer the best security standards in the industry. We support domain security certificates in every country and we will offer you access only… no matter which infrastructure you choose, or who the observation partner is, SAP will be your single point of contact in this offering. So you literally have one hand to shake, which is crucial when it comes to your mission critical workloads at the heart of your enterprise.
Finally, you need intelligent applications to truly change how your business runs. So our market leading intelligent ERP system SAP S/4HANA Cloud embeds AI RPA and advanced analytics. It can be deployed both in the public and hybrid cloud to offer you maximum flexibility depending on your degree of system standardisation, process complexity, and how fast you can make the change work within your enterprise. Architects will help you to standardise in the cloud even the most modified ERP systems.
Apart from the business perspective, this offering is more than the sum of its parts. You get all of this as one offer, with one contract with one responsible party for one price. Building on this kickstart, you can tailor your intelligent enterprise to meet your respective business needs. Allowing you to clearly differentiate yourself in the future. Customers and partners alike can easily complement and extend and integrate with any other of our… industry solutions partners or third party solutions with the ability to use exactly the same data model and business services as our own SAP applications, allowing you to one your core and industry specific processes seamlessly, and end-to-end and top-to-bottom with a full 360 transparency.
The Rise with SAP project has been planned for over a year and running in pilot form with several SAP partners in order to tailor the offering to the needs of SAP users and the principal feedback they have received is that companies need to retain the modularity of SAP products in order to fit the applications to their own unique needs. Customisations are dealt with by providing as many standardised solutions for the same problems as possible. By bringing the process of transition to the cloud under the umbrella of their network of SAP partners and emphasising standardisation and best practices SAP’s” concierge service” and “architects” will be able to guide companies through the transition with a minimum of friction.
This is a complete reframing of the main problems of cloud inertia that SAP has been facing up to now and if SAP can successfully convey the message that they have addressed all reservations that companies may have regarding the transition to the cloud then they will have not only stabilised their customer base but also expanded it as many others will choose SAP as the easiest option. The accompanying move to a subscription payment system will also support steady growth for SAP as predictable income will increase massively over the next five to ten years.
The reception so far of Rise with SAP among commentators has been positive but with caveats. Most feel they have taken large steps in the right direction, but if they want to expand and increase market share they will need to create a fully fledged automated migration approach.
Alisdair Bach the SAP guru published his comments on linkedin.com:
“… the framework with Signavio at its core will enable the transformation of rigid legacy industry 3.0 automation to Industry 4.0 Artificial Intelligence led connected intelligence enabling every part of the operating model…When linked to the SAP Business Technology Platform it makes the S4 proposition slightly more palatable”.
He qualifies his remarks by pointing out that: “ECC customers need to see a fully automated machine learning led migration approach” and “real investment in embedded machine learning, RPA and AI”.
Speaking in siliconangle.com analyst Holger Mueller of Constellation Research Inc. gave his take:
“The acquisition of Signavio beefs up SAP’s capabilities in process mining, where it has partnered with Celonis so far. It’s important because the key technology for company executives to figure out what is what is really happening in their enterprises…The good news is SAP is ultimately right in that business automation needs to happen in the public cloud, but only the future will tell if SAP has managed to put an attractive enough package together.”
As we have provided links above to our discussions of the acquisition of Signavio, and the Microsoft partnership and Microsoft Teams integration we will now move on directly to look at the Q4 quarterly statement and 2020 financial performance results, and the statement made by CFO Luka Mucic at Friday’s press conference, but we shall start with an except from Klein’s assessment of 2020 found in the earnings call. Despite the relentless rhetoric of optimism it contains some cold hard facts demonstrating that SAP has been resilient through 2020.
“We delivered stronger than ever. We added more than 25,000 net new customers. Also together with our partners, we delivered more than 35,000 go-lives.
In Q4 specifically, we added almost 1,000 additional S/4HANA customers. Around 40% were net new. That takes us to a total of around 16,000 customers, up 16% over last year. We are clearly gaining market share with S/4HANA. We also saw a massive number of highly important customer wins this quarter, some of them again competitive replacements. In the ERP space alone, we have more than 200 wins against Oracle.
So let me highlight just a few wins and go-lives. Gilead has chosen S/4HANA to help increase data standards and transparency, simplify and automate processes, and mitigate operational risks. Unilever continued a strategic partnership with us by converting to S/4HANA as the future-ready ERP system. Shell selected S/4HANA to support its upstream business, and we are also collaborating on an ambition we share to become net-zero emission businesses. CureVac has chosen S/4HANA to support the development of their COVID-19 vaccine.
In procurement, General Motors selected SAP to transform the spend management processes. At the same time, we posted almost 4 billion euro of spend in our network. For human experience management, we added many net new customers this quarter, and we are the only vendor running HR across 100 countries.
Google has further expanded use of our cloud solutions, including Qualtrics. We are also exploring in partnership with Google Cloud around artificial intelligence to enhance customer value and of course, by also expanding our strategic relationship. In customer experience, we had the biggest quarter ever with regard to cloud order entry. For commerce, we doubled our cloud revenue as only SAP can offer a seamless consumer experience from the online shop, next day delivery, and flexible payment options.”
That is a pretty stellar performance for 2020, and seems quite at odds with the assessment of SAP following the Q3 financial report and SAP’s statement that they were revising their mid-term goals. This deviation between these two assessments can be explained to some extent if we remember that much of the criticism of SAP at the time was coming from stock market analysts who expect constant and rapid growth from international corporations: prioritising short-term profit over long-term stability. We have pointed out elsewhere that shareholders are not the only stakeholders in SAP and that they also have moral and contractual obligations to their staff and customers and in revising their mid-term goals SAP was addressing these, as well as ensuring the company’s longevity.
To bring us back onto firmer ground in our own assessments let us list some of the statistics from the Q4 Statement. These are also subject to some slight variation between IFRS and non-IFRS but this degree of variation presents a range which is circumscribed in comparison with subjective interpretations.
• IFRS Cloud Revenue Up 17%, Non-IFRS Cloud Revenue Up 18% At Constant Currencies in FY 2020
• Current Cloud Backlog of €7.2 Billion, Up 14% At Constant Currencies
• IFRS Cloud Gross Margin 66.5%, Up 3.1pp; Non-IFRS Cloud Gross Margin Reaches 69.6%, Up 1.3pp At Constant Currencies in FY2020
• IFRS Operating Profit Up 48%; Non-IFRS Operating Profit Up 4% At Constant Currencies in FY 2020
• IFRS EPS Up 56%; Non-IFRS EPS Up 6% in FY 2020
• Operating Cash Flow At €7.2 Billion, Approximately Doubling Year over Year; Free Cash Flow at €6.0 Billion in FY 2020, Significantly Exceeding Raised Outlook
• Customer Net Promoter Score Up Sharply; Employee Engagement Index at Record High
• 2021 Outlook Reflects Expedited Move to Cloud
• Successful IPO of Qualtrics
SAP’s Chief Financial Officer Luka Mucic used his speech at the financial press conference on Friday to emphasise key highlights of 2020 that contributed to SAP’s good performance despite Covid-19. Here are some of those highlights:
“…[We] ultimately managed to not only exceed our revised guidance for our total revenues and operating profit. But we actually came in again, within the guidance range that we had set in April at the outset of the pandemic, which given all of the volatility in the market is really a very decent result.
…We did not quite achieve the same result to get back into our April guidance range for cloud revenues. But for me, cloud growth is nevertheless a second highlight that I want to stress. Not only did we grow our entire cloud business by 18%, to now more than 8.2 billion euros. But we actually grew our software as a service portfolio by 27%. And this is really spectacular growth given the circumstances. Cloud is now more than twice the size of our software licence business. And it has helped us to propel the share of our predictable revenues to 72% of total revenues.
…I believe that the great success of Qualtrics gives us also an opportunity to reflect on the true value of the SAP broader cloud business. [Qualtrics] still represents less than 10% of our entire cloud business. In our software as a service business, which has grown very fast as I said in 2020, we have a variety of assets, both acquired as well as organically developed assets that are operating at a similar scale and similar pace as Qualtrics. Just want to cite a few here like S/4HANA Cloud, like our commerce portfolio and customer experience or our business technology platform portfolio in the cloud. This is a combined business that is running today at round about $5.5 billion. And if you would apply yesterday’s multiples out of the market capitalisation of Qualtrics to this business portfolio, it would actually already justify the entire market cap of SAP despite the fact that this as well only represents around about 20% of our entire business. So I truly believe that Qualtrics will help us to crystallise the true underlying value of our business and gives us an opportunity to justify a rewriting of the SAP share.
…From an individual markets perspective, I only want to say here, that across the regions, we had lots of positive contributors. But what I find noteworthy is that, in particular, our largest markets, the US, Germany, and in Asia, particularly Japan, with positive growth in both licences and the cloud, had a very strong showing.
Just a few words on the bottom line of the company, which, as I said, is something that I’m really proud of, because despite headwinds that we were facing on the top line, we were again in 2020, continuing a trend that we had seen already in the two years before, able to increase the gross margins across all of our individual business models… it holds for all of the individual areas in the cloud, the intelligent spend group, private cloud as well as public cloud. But it also holds for our combined software licences and support business, which managed to edge up another 30 basis points, despite already the very high profitability that we see in this space…
From an operating margin perspective, we ultimately actually ended up at constant currencies with a margin of 30.5% for the full year, which is the highest level that we have seen since 2015. And very importantly, we did not achieve this operating margin by cutting costs…
… a few words on two of the very bright spots … the net profit and earnings per share. Well, we grew even faster than on an operating profit level, with IFRS earnings per share up by 5.6% and non IFRS earnings per share up by 6%. This was aided by a very strong performance in particular, of our venture capital fund Sapphira ventures, which in 2020, posted record results, which were very positively reflecting on our financial income.
On the cash flow side, I have to say that I did not expect, given how we started the year and the uncertainty around COVID, that we would post a record cash flow in every single quarter, as well as for the full year of 2020. We ended up substantially above the guidance and expectations that we had set at the beginning of the year… what then came on top was just simply outstanding working capital management, and very, very effective cash collections, which drove free cash flow up by 164%, year-over-year.”
Mucic finished his summary of SAP’s performance with a few points about the outlook for 2020. Firstly he said that cloud growth will again accelerate in 2021 after a trough in the first quarter, to the extent that it will become the “dominating line item in our p&l” and this will drive up predictable revenue streams by roughly 75%, and though they expect to experience muted growth in 2021:
“we fully expect that as we guided for in October, from 2023 onwards, we will see SAP returning to double digit growth territory both on the top line as well as on the operating profit line.”
He also mentioned that SAP would expect strong cash flow performance in 2021.
“So SAP will continue to be solid, it will be poised for growth, it will invest properly into those growth opportunities into the transformation of our customers in core ERP to the cloud in the new industry, cloud solutions in business process intelligence and other growth drivers of the company to set us up for sustainable growth for many years and a re-acceleration of that growth profile from already very high base.”
In summary we can see that SAP has weathered the storm of 2020 and has understandably suffered a drop in share price due to a revision of their strategy, but has taken the requisite steps to ensure long-term growth. They have listened to their customer base and were in fact already in the process of addressing the problem of dealing with inertia and nervousness among their customers in the formulation of Rise with SAP, even before the onset of the coronavirus pandemic. The subsequent lockdown acted as a catalyst by pushing them to provide the means for SAP professionals to work from anywhere and the introduction of Rise with SAP, as a complete reframing of the challenge of encouraging customers to move to S/4HANA Cloud, should see substantial momentum.
Aside from the operational changes this introduces with business process intelligence, it has demonstrated SAP’s appetite for innovation within the space and will go some way toward motivating change in the industry, which as a whole has been prioritising the status quo over future investment. If SAP continues to invest much further in AI, RPA and machine learning as well as solutions that take advantage of cloud infrastructure, then they will have set the agenda for ERP and the Intelligent Enterprise for decades to come and IT professionals and companies of all kinds would do well to commit to SAP for the long-term.