My thoughts on SAP Q2 revenue miss, and how Bill McDermott will get them back on track.
My thoughts on SAP Q2 revenue miss, and how Bill McDermott will get them back on track.

Relax, SAP Skeptics: China Will Be Fine, and Cloud and XM Are Booming

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While quarterly revenue misses should be taken very seriously, SAP’s Q2 stumble last week was a short-term aberration. I’m betting Bill McDermott and company will get back on the high-growth track when Q3 numbers come out in October.

Clearly, the uneasy trade climate in China was a significant factor in last quarter’s miss. But McDermott made the larger case that SAP is on top of those issues, will resolve them quickly and successfully, and will ride 4 straight quarters of 40% cloud growth to hit all of its aggressive growth targets for 2020 and 2023. (SAP holds the #1 spot in my recent list of The Top 10 Fastest-Growing Cloud Companies In Q1: Hypergrowth, Sustained.)

If you’ve seen the doomsday laments about SAP’s supposed China syndrome, bear in mind that over the past year or so, that same SAP-is-finished crowd has tied its knickers in gnarly knots a few times only to be proven completely and laughably wrong at each fatalistic forecast.

Reports of SAP’s Demise

Some of the silliest are laid out in this excerpt from my April 25 analysis of SAP’s Q1 numbers called SAP’s Brilliant Transformation: And They’ve Only Just Begun:

Six months ago when SAP announced plans to buy Qualtrics for $8 billion, the ankle-biters screeched, “They’re paying way too much!”

Three months ago when SAP announced it was going to churn a tiny percentage of its workforce to ensure it could bring in top-priority skills for the future, the nickel-counters howled, “They’re gutting the company!”

Within the past several weeks, as two executive-board members left the company, the knicker-knotters wailed, “They’re falling to pieces!”

In that same spirit, I believe this most recent round of reports of SAP’s imminent demise are greatly exaggerated. To support that claim, here are some essential insights from CEO McDermott’s comments during the July 18 conference call with analysts. Of course, in the business world, results rather than rhetoric matter most. But I believe SAP has the leaders, the products and the vision to be a top player in the Cloud Wars for many years to come.

No tech company can survive on its reputation—success is earned anew every month, every quarter. And one of the things that’s impressed me about SAP has been its ability and its willingness to aggressively remake itself into what it needs to be to continue driving new value for customers. I explore that in detail in Understanding the New SAP: 10 Key Insights as Sapphire 2019 Kicks Off.

As evidence for why I think that same sort of forward-looking approach will enable SAP to overcome this China slip, please check out these key points from McDermott on the earnings call:

“Don’t Worry About It”

“In Q2, we delivered solid double-digit growth across the board. Cloud revenue was up 40%, growing faster than our key competitors. Both cloud plus software revenue, and also total revenue, grew in double digits, as our software-license business was good even with those minor headwinds in Asia due to trade uncertainties.

“That did indeed postpone some deals and it is true we didn’t get everything we wanted in Asia. I’m going to expand on that in a minute, but my point is, don’t worry about it.”

“Qualtrics is proving to be the growth catalyst we expected and more”

“For Q2, the big headline is that SAP continued to grow fast in the cloud and that growth was driven by Experience Management [XM] as the real-deal catalyst. IDC among other analysts have said XM is the new frontier and we heartily agree with them. XM is also becoming SAP’s new front-end to every segment in the enterprise application software industry, including HCM, CRM, ERP and beyond…

“The question is, who created the XM category? And the answer of course is Qualtrics, which is why we couldn’t be happier to have the SAP global distribution channel behind their XM platform. In its second quarter, Qualtrics is proving to be the growth catalyst we expected and more. Ryan Smith and his team are already making a huge positive impact and we’re only getting started.”

For a customer perspective on this, please see Under Armour Targets Mass Personalization at Scale via SAP and Qualtrics.

Experience Management has replaced digital transformation as CEOs’ #1 Priority

“Market-leading companies like Merck in Germany are shifting away from old-style HCM in favor of employee experience. In the quarters to come, we will use all aspects of XM as the differentiator for the intelligent enterprise, including employee, customer, product, and brand experience. Experience Management discussions have superseded standalone digital-transformation talk.

“I personally shared this message with CEOs around the world and the reaction is unanimous: every single one of them wants XM.”

China’s trade uncertainties will actually drive more revenue for SAP

“What you see here is, large multinational companies are carefully recalibrating their operations in global supply chains. In some cases, this causes a short-term delay on technology purchasing decisions—but in our case, you will actually see a net positive impact on the pipeline of SAP.

“For example, many of our market units in Asia have higher pipeline forecasts at this time in 2019 than they did one year ago, and the forecasts across the company are in good shape—trust me, I triple-checked every detail. This is because the companies that decide to make changes due to trade uncertainty look to SAP to support their plans to reroute channels or invest in new geographic markets. So overall, while we’ve noticed the trade effect, our customers demand more from us as they adapt and make changes. So for SAP, the bill of materials from our customers is getting bigger on these deals.”

SAP pipeline in China looks “ever robust” for Q3 and Q4

“Keep in mind there are more than 70 million enterprises operating in that country, so it’s a pretty good business opportunity. In terms of SAP’s vibrant China business, while some transactions were delayed past Q2, it’s also a fact that our pipeline in China remains ever robust and we have a very good prognosis for Q3 and Q4.”

XM “is the growth elixir that will uplift every solution in our portfolio”

“Experience Management is a paradigm shift for how CXOs run companies from the old legacy approach of inside-out to the visionary outside-in. Armed with the right mix of experience data and operational data, intelligent enterprises will always know the next best action to serve their customers and employees.

“This, ladies and gentlemen, is the future of business. And our ambition is not only to lead the XM movement—it is to help our customers win it. This is the growth elixir that will uplift every solution in our portfolio as you saw with HCM in Q2.”

Another growth opportunity for Microsoft: hyperscalers (AWS, Microsoft, Google Cloud, AliBaba)

“The hyperscalers will be a growth opportunity for SAP. The SAP cloud platform is at a mature phase now where it can grow into the hyperscaler environment that will lead the customer to many more of the cloud-based solutions that SAP offers. That’s the factor that probably no one out there is counting on—but it’s coming.”

For more on this, please see Microsoft-SAP Juggernaut: Huge Pharma Moving All SAP Workloads to Azure.

“Asian market is fine”—part of “why our digital supply chain cloud business grew in triple digits”

“First of all, the Asian market is fine. China in this particular quarter wasn’t as strong as we’re used to seeing China. China usually grows steeply in both on-premises and the cloud but there were postponed decisions in China, and yes we did see that. In this environment, a lot of companies that were manufacturing things in China are actually moving supply chains and manufacturing facilities to alternative locations like Malaysia, Vietnam and even Mexico. And when that dislocation takes place, it does impact Asia to some extent and China specifically. So that’s the scenario. 

“And then you go in and look and you ask, okay, what did the pipeline do post-quarter? Because don’t forget we ended the quarter on a Sunday, on June 30, and the G20 discussion was happening at the end of that week in Japan. So there were a lot of people hovering for the outcome of G20 in terms of some of their strategic goals.

“For us, most of those deals that were hanging out there have either closed or the bill of materials has expanded because when you change the supply chain, you open up a new manufacturing facility, you start operations in a new geography even if it’s in the similar region, you have governance, you have compliance, and you have many new things to consider. And in fact I think that’s one of the reasons why our digital supply-chain cloud business grew in triple digits because many of the customers are now counting on SAP to help them. So that’s the big picture.”

 

Disclosure: at the time of this writing, SAP was a client of Evans Strategic Communications LLC.

 

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