Helping global corporations like Emirates Group undergo massive digital transformations even as it remakes itself for the digital world, SAP is confidently predicting that its cloud revenue will overtake its license revenue this year on the strength of having “the most complete cloud in the enterprise,” according to CEO Bill McDermott.
“We believe this is not a time for measured ambitions–in a world filled with anxiety about automation, SAP will lead a new economy where intelligent machines enable augmented humanity,” McDermott said on SAP’s recent Q4 earnings call.
If that type of aspirational vision seems hard to square with images of R3 workscreens, bear in mind that McDermott’s been in the CEO chair for 9 years and has pretty much completed his end-to-end transformation of the company: its move into databases, its move to the cloud, the many acquisitions that have accelerated that journey, an aggressive embrace of powerful new technologies, and a grand new sense of the role SAP can play—and should play—in a world rapidly moving to digital lifestyles and digital business.
Like every tech megavendor competing in the Cloud Wars, SAP has its challenges:
- savage competition for SaaS deals from cloud natives Salesforce.com and Workday as well as from longtime nemesis Oracle;
- a huge product lineup that can at times be difficult to orchestrate elegantly;
- a rapidly evolving competitive landscape in the cloud where IaaS superpower Amazon along with resurgent IBM and fast-growing Google will inevitably want to expand into the SaaS and PaaS segments where SAP does well; and
- a strategic partnership with Microsoft that offers tremendous promise but also potentially distorts the clarity of SAP’s own cloud and digital-business aspirations.
So let’s dig into 10 strategic insights revealed during SAP’s recent earnings call with financial analysts and see where this extraordinary company—whose applications power huge portions of the global economy—is headed (hat tip to SeekingAlpha.com for the transcript).
Cloud Revenue Becomes King Inside SAP.
“Cloud revenue is expected to overtake license revenue for the first time,” McDermott said in his prepared remarks. Looking a bit further ahead, he added, “We expect cloud to grow at again 30% compounded annual growth rate and more than double by 2020.”
With SAP’s cloud revenue for calendar 2017 coming in $4.71 billion, that means SAP expects to come very close to $10 billion in cloud revenue for 2020. Meanwhile, SAP’s traditional on-premises business continues to grow in single digits even as the cloud business surges—and for an excellent analysis on how and why companies are balancing their cloud and on-premises strategies, I heartily recommend this insightful analysis from the always-excellent Holger Mueller of Constellation Research. (Warning—don’t be scared by Holger’s headline—it’s a must-read overview!)
This Year, SAP Expects To Top $30 Billion In Revenue.
McDermott: “On top of an outstanding 2017, we are moving forward with great confidence. We now target approximately €25 billion in total revenue in 2018 including continued fast growth of around 30% in the cloud even at larger scale.” With the euro-to-dollar exchange rate at about 1.24, that equates to $31 billion in projected revenue for calendar 2018.
Customer Choice Remains Paramount.
While the corporate move to the cloud has been booming for the past year, many large companies will continue to run significant portions of the workloads in on-premises formats for many years to come—so it’s essential that tech vendors be able to address both models. McDermott underscored that point in answering a question about whether compensation models for salespeople would be skewed in favor of cloud transactions: “We don’t in any way try to sway the customer from what’s right for them based upon [how SAP salespeople are compensated]. We want to make sure the salesforce is fairly compensated, no matter which way the customer would like to go in terms of their cloud decision or whether it’s an operating lease or it’s a capitalized – it doesn’t really matter,” McDermott said.
“What matters is, they get the product they need in the form they need it—and we haven’t let sales compensation dictate anything unnaturally nor will we. So right now I’m particularly happy that the core is steady, and all the cloud assets are growing really well.”
4. Does SAP Indeed Offer “The Most Complete Cloud In The Enterprise”?
Here’s McDermott’s rationale for that claim:
- On top of SAP’s well-known SaaS applications and its PaaS capabilities with S/4HANA, emerging “market-making opportunities” include data centricity, intelligent computing, digital commerce and business networks.
- “The SAP HANA data-management suite will continue to reshape the architecture of enterprise computing,” said McDermott, who earlier alluded to Forrester Research having named HANA as the #1 “translitical data platform.”
- SAP will “give customers the tools to truly monetize enterprise data,” promised McDermott, who said that many corporations have been frustrated in their moves to the cloud because of the inability to access and exploit all of their data.
SAP’s Core ERP Customers Are Moving to HANA: 50% By 2020?
Asked about the pace at which on-premises ERP customers are moving to the S/4 HANA in-memory platform, CFO Luka Mucic said, “I would definitely expect that by 2020, we should be done with half of the customer base and have it converted. And let’s not forget that with our current S/4 customer count we also have new customers on top—not only installed-base conversions.” Mucic said that adoption curve to S/4 will accelerate because some customers have held off until all of the S/4 functional capabilities are in place—and that’s now happened. So as this move to S/4 takes place, the underlying architectural advancement will allow those customers to tap into all of the new digital capabilities SAP has been building out.
Momentum For S/4 HANA Cloud—”The Biggest Focus”—Is Building.
While it can be a bit confusing, it’s important to remember that S/4 HANA comes in both on-premises and cloud versions—and when asked about how the S/4HANA Cloud version is being received in the market, the always-effusive McDermott become even more bullish. “On the S/4HANA cloud, John, that’s the lead story in the company. And if you think about global customer operations and all geographies and industries around the world, this is the biggest focus, and it also has the highest ceiling of any product in the portfolio. I would be very bullish on S/4HANA cloud.” And Bernd Leukert, executive board member and Head of Products and Innovation added this eye-popping statistic: in every quarter throughout 2017, bookings for S/4HANA Cloud exceeded the total bookings in aggregate for the product’s lifetime. “And this,” Leukert said, “shows a clear indication of the hockey stick and that’s why we are so optimistic that S/4 HANA Cloud is a major contributor to the bookings for 2018.”
Huge Digital-Transformation Win At Emirates Group.
While McDermott alluded to a number of big customer wins for various pieces of the SAP portfolio, he put special emphasis on a recent deal with Emirates Group that “showcases the completeness of SAP innovation” and includes:
- an “integrated multi-cloud ERP solution for finance”;
- a “modern HR approach with SuccessFactors;
- an opportunity to “transform procurement” with Ariba; and
- simplified lives and travel experiences for employees via Concur.
Riding The Four Horsemen Of The Digital Age.
Rather than tossing out fragmented approaches for AI, Machine Learning, IoT and Blockchain that customers must then reconcile, SAP is offering these remarkable new technologies in a deeply integrated fashion under the Leonardo brand in a “holistic approach” that starts with a design-thinking approach during development and extends out to deep domain expertise for industry-specific applications.
Business Networks: A Trillion-Dollar Engine?
Among the major tech vendors, SAP is unique in pursuing this type of “commerce network”—the only other one I’m aware of is offered by Infor, and it’s much smaller than SAP’s. But McDermott is fully convinced that in the emerging world of digital business, SAP’s got a unique competitive advantage here: “Business Networks is another breakout opportunity that’s only just beginning,” said McDermott. “Today, SAP owns the spend-management categories in the enterprise for direct, indirect materials, contingent labor, travel and expenses.” Okay, that’s nice but not exactly a game-breaker—but then McDermott talked about how SAP can create “transformational new business models on top of the $1 trillion in commerce that runs through these networks,” and predicted it has the potential to become “the network of networks—the business world’s marketplace.”
SAP Plans To Crash The Mid-Market Party With S/4HANA.
While SAP has always been primarily focused on global corporations, the flexibility of the S/4HANA architecture allows it to be configured for mid-sized companies—an opportunity that Leukert said the company’s eager to dive into. “There’s a great opportunity to take the product down market—it’s been way too easy in the mid-markets for some other folks,” he said. “We’re going to take this product down into the mid-market and mix it up a little bit down there and see how it goes. I think we can handle ourselves pretty well down there.”
RECOMMENDED READING FROM CLOUD WARS:
The World’s Top 5 Cloud-Computing Suppliers: #1 Microsoft, #2 Amazon, #3 Salesforce, #4 SAP, #5 IBM
Amazon Versus Oracle: The Battle for Cloud Database Leadership
As Amazon Battles with Retailers, Microsoft Leads Them into the Cloud
Why Microsoft Is #1 in the Cloud: 10 Key Insights
SAP’s Stunning Transformation: Qualtrics Already “Crown Jewel of Company”
Watch Out, Microsoft and Amazon: Google Cloud CEO Thomas Kurian Plans To Be #1
The Coming Hybrid Wave: Where Do Microsoft, IBM and Amazon Stand? (Part 1 of 2)
Oracle, SAP and Workday Driving Red-Hot Cloud ERP Growth Into 2019
Subscribe to the Cloud Wars Newsletter for twice-monthly in-depth analysis of the major cloud vendors from the perspective of business customers. It’s free, it’s exclusive, and it’s great!