21 October 2019 16:36

SAP Bill McDermott Chief Executive

SAP Q3 2019: Strong earnings, new Microsoft SAP HANA partnership revealed

SAP SE (NYSE: SAP), the German enterprise software conglomerate, replaced its chief executive officer of nine years, Bill McDermott, last week, with a pair of co-CEOs, board members Jennifer Morgan and Christian Klein. During his tenure, McDermott led SAP's pivot to cloud software and grew the company's market share in Europe. His last quarter with the company, the third quarter of 2019, was SAP's first quarter reporting non-IFRS operating profits in excess of €2 billion (€2.086 billion), up 20% year-over-year. The business segment that experienced the fastest growth in cloud revenue, Customer and Experience Management, which includes SAP C/4HANA and recently acquired Qualtrics, saw its profits plummet. Customer and Experience Management grew its cloud revenue by 95% year-over-year to €294 million; comparisons were helped by the Qualtrics acquisition.

Yet with all that growth, Customer and Experience Management operating profits fell 84% year-over-year to €2 million. SAP is a company that, when it makes an acquisition, immediately starts counting the new revenues in its year-over-year comparisons but continues to add back restructuring charges quarter after quarter. SAP's two other business units, Applications, Technology & Services and the Intelligent Spend Group, both grew profits by double digits. Applications, Technology & Services contains SAP's most mature products, including SAP S/4HANA, Human Capital Management Solutions and its Business Technology Platform. Applications, Technology & Services reported segment profits of €2.475 billion in the third quarter, up 17% year-over-year.

Intelligent Spend recorded €828 million in segment revenue, €699 million of which came from the cloud (up 24% year-over-year) at a 78% gross margin, which narrowed by 40 basis points year-over-year. Overall, SAP reiterated its full year guidance for 2019: non-IFRS cloud revenue should grow 33-39% at constant currencies; and non-IFRS operating profit should grow 9.5-12.5% at constant currencies. By 2023, SAP wants more predictable revenue to have an 80% share and achieve a non-IFRS cloud gross margin of 75%. This quarter, cloud gross margins were 69%, 500 basis points better than the prior year. The deal helped SAP double new cloud bookings in the third quarter.

Business software group SAP said on Monday it had reached a three-year deal with Microsoft to help its large enterprise customers move their business processes into the cloud. The partnership, called "Embrace", will help clients to run operations hosted at remote servers supported by SAP's flagship S/4HANA database, new Co-Chief Executive Officer Jennifer Morgan said as SAP released its final third-quarter results in line with preliminary figures released on Oct 11. "We bundled SAP's cloud platform services to support customers around the extension, integration and orchestration of SAP systems," Morgan told reporters, adding the product would be sold through Microsoft's distribution channels. Disclosure of the partnership comes after long-time CEO Bill McDermott stepped down to make way for Morgan - the first woman to become CEO of a company in Germany's blue-chip DAX index - alongside fellow Co-CEO Christian Klein. The deal - which helped SAP double new cloud bookings in the third quarter - addresses a complaint from many customers that it is too hard to shift from SAP's traditional on-premise model to remotely hosted services.

The partnership deepens SAP's already close relationship with Microsoft and its Azure cloud division, although the Walldorf-based company also works with Google and Amazon Web Services in the cloud. In the third quarter, SAP reported a 10 per cent increase in revenue and a 15 per cent rise in operating profit, after adjusting one-off items and currencies, helping it to achieve an expansion of 1.7 per cent in its operating margins. We've covered the bases on SAP's leadership transition, starting with Den's SAP - Klein and Morgan come in as co-CEOs as McDermott steps down. In flight from Walldorf (where else?), Geoff Scott, CEO of ASUG, Americas' SAP user group, hit on the need for a true partnership between SAP and the user groups. We need SAP to not only create but now operate world-class software that supports a new frontier of customer experience and expectations.

He took over as co-CEO (alongside Jim Hagemann Snabe) at a very difficult time for SAP, dealing with the contentious issue of Enterprise Support and both worked very closely to regain customer confidence. Christian has been a key exec sponsor of SUGEN's 'Ease of doing business' and 'Licensing' charters, and he has always made time to listen to product feedback and understand how SAP could work better with customers. At the same time, we congratulate Christian Klein on his new role as co-CEO of SAP SE. As for the challenges ahead for the new co-CEOs, Scott sees some big ones, starting with the S/4HANA business case: A significant percentage of customers continue to struggle to define a business case for migrating to SAP S/4HANA that captures the attention of their CEO, CFO, board and business peers. These user group comments emphasize the past work with Klein, but there is also respect cited for Morgan and her impact on SAP's workplace culture. Given the disjointed cloud portfolio, Morgan's prior, albeit brief role as leader of SAP's cloud business group will be crucial here - especially when it comes to the deeper integration needed to realize the value of Qualtrics. SAP has done its best collaborations with user groups in times of crisis (enterprise support, indirect access). SAP and Microsoft have entered into an extensive go-to-market partnership from conceptualisation to sales, to boost customer adoption of the enterprise resource planning (ERP) software SAP S/4HANA and SAP Cloud Platform on Microsoft Azure. The new cloud partnership combines a global network of system integrators to provide holistic bundles that offer customers with unified reference architectures, road maps and market-approved journeys to provide a clear path toward the cloud. As part of this simplified customer journey, Microsoft will re-sell components of SAP Cloud Platform alongside Azure. This unique offering is aimed at more easily migrating SAP ERP and SAP S/4HANA customers from on-premises to public cloud. Meanwhile, SAP will lead with Microsoft Azure to move on-premise SAP ERP and SAP S/4HANA customers to the cloud through industry-specific best practices, reference architectures and cloud-delivered services. This includes future deployment and migration of existing direct SAP HANA Enterprise Cloud customers leveraging hyperscaler infrastructure. Through a combination of market-approved journeys, reference architectures, select service partners, and Microsoft Azure cloud, customers will be able to accelerate their digital transformation. More specifically, Project Embrace on Microsoft Azure will offer customers with a simplified move from on-premise editions of SAP ERP to SAP S/4HANA for customers with integrated product and industry solutions. In response to customer feedback, a combined support model for Azure and SAP Cloud Platform will help ease migration and improve communication. Designed in collaboration with SAP, Microsoft and system integrator partners will provide road maps to the digital enterprise with recommended solutions and reference architectures for customers. These offer a harmonised approach by industry for products, services and practices across Microsoft, SAP and system integrators. "This partnership is all about reducing complexity and minimizing costs for customers as they move to SAP S/4HANA in the cloud," Jennifer Morgan, co-chief executive officer of SAP. She added that bringing together the power of SAP and Microsoft provides customers with the assurance of working with two industry leaders so they can confidently and efficiently transition into intelligent enterprises. Judson Althoff, executive vice president, Worldwide Commercial Business, Microsoft added that SAP's decision to select Microsoft Azure as its preferred partner deepens the relationship between the two companies in a differentiated way and signals a shared commitment to fostering the growth of the cloud ecosystem. "Today's news also reflects our commitment to a customer-first mindset and supporting their cloud transformation, which continues to drive how we at Microsoft approach everything from partnerships to product innovation. SAP has reported its third-quarter financial results, with strong cloud revenue reported and a respectable increase in new cloud bookings over the financial period. SAP's Q3 2019 earnings (statement) reveal revenues of €6.79 billion IFRS or €6.80 billion non-IFRS, up 13 percent year-over-year with basic earnings per share of €1.04 (€1.30 non-IFRS), an increase of 28 percent in comparison to Q3 2018. New cloud bookings were up 39 percent, reaching €572 million--34 percent at constant currencies and up 51 percent excluding Infrastructure-as-a-service (IaaS). Cloud revenue grew by 37 percent year-over-year to €1.79 billion IFRS, up 37 percent non-IFRS and 33 percent non-IFRS at constant currencies. Cloud and software revenue grew by 12 percent year-over-year to €5.63 billion IFRS and up 13 percent non-IFRS and 10 percent non-IFRS at constant currencies. The three main business segments SAP reports on, "Applications, Technology & Services," "Customer Experience" and "Intelligent Spend Group" performed well over the third quarter of 2019. Applications, Technology & Services revenue increased by 9 percent to €5.52 billion year-over-year. SAP S/4HANA now accounts for over 12,000 customers, up 25 percent year-over-year. On Monday, SAP announced a go-to-market partnership with Microsoft to accelerate customer adoption of SAP S/4HANA and SAP Cloud Platform on Microsoft Azure. Under the terms of the "Project Embrace" partnership, Microsoft will resell components of the SAP Cloud Platform alongside Azure. "This unique offering is aimed at more easily migrating SAP ERP application and SAP S/4HANA customers from on-premise to the public cloud," SAP says. SAP's Intelligent Spend Group revenue was up 23 percent to €828 million year-over-year, or up 18 percent at constant currencies. In the Customer Experience category, SAP reports revenue of €371 million, a boost of 75 percent year-over-year, or 69 percent at constant currencies.