Cloud blowout, RISE rising and ERP expansion - Q1 according to SAP CEO Christian Klein

Profile picture for user slauchlan By Stuart Lauchlan April 22, 2021 Audio version
Summary:
A strong Q1 that affirms SAP's strategic direction is correct, according to Klein.

Klein
Christian Klein

A “blowout” quarter for cloud and a strong start for RISE were among the highlights flagged up by SAP CEO Christian Klein as the firm announced its Q1 numbers earlier today.

Profit after tax for the first quarter ending March 31, 2021 rose 32% to €1.07 billion from €811 million a year ago. Operating profit of €0.96 billion was down 21% year-on-year, mainly due to "higher share-based compensation expenses (primarily related to Qualtrics IPO awards) and restructuring.”

Total revenues for the first-quarter declined 3% to €6.35 billion from €6.52 billion for the same period a year ago. Cloud revenue grew by 7% year-on-year to €2.14 billion, while software license revenue increased by 7% to €0.48 billion. Overall cloud and software license revenue increased by 1% year-on-year to €5.43 billion. Current cloud backlog revenue was up 39% to €1.04 billion.

Applications, Technology & Services revenue decreased by 1% to €5.31 billion year-on-year; Qualtrics revenue was €202 million, up 25% year-on-year; and Services revenue was €800 million, down 12% year-on-year .

S/4HANA cloud revenue was up 36% to €227 million with 400 new customers bringing the total to 16,400, of which 9,600 are live. Customer wins in the quarter included Google and Toshiba.

Klein said the numbers are vindication of SAP’s strategy. Overall, he said, SAP saw the fastest growth in new cloud business in five years and this will continue, he predicted:

Cloud revenue growth will accelerate from here, especially since also the strong year-over-year headwinds in transactional revenue are coming to an end in Q2. Rapid cloud growth will continue to drive the resilience and predictability of our top line performance...Also for the remainder of the year, we continue to expect the pressure on our software license revenue to increase again and we anticipate a pronounced decline for the full year in line with our cloud first strategy, as growth across our cloud business accelerates and RISE continues to gain momentum.

As for RISE, this is, he boasted, “already a game changer”, only two months after its introduction:

RISE is off to a great start. We are seeing massive success, having already closed more than 100 deals in Q1 alone…SAP’s cloud ERP revenue runway is now approaching €6 billion. If you remove the HR and procurement module, and look at the capabilities offered in S/4 HANA Cloud, S/4 HANA Cloud can be really seen as the kind of core ERP. We have already seen strong adoption here. As of Q1, S/4 HANA Cloud has achieved current cloud backlog of more than €1 billion euro. It also shows the momentum. In Q1, S/4 HANA was the cloud category with the largest new business contribution and amidst the impact of COVID, revenue and cloud backlog were up 43%. And that's just the beginning of the journey.  Keep in mind, we only launched RISE at the end of January.

Customers and those Oracle claims

Across the quarter, SAP picked up 4,800 net new customers, while together with the wider partner ecosystem, 6000 go-lives were chalked up. Klein picked out BioNTech, which is using S/4 HANA Cloud as its integrated ERP system; a “global medical technology leader”, which is using RISE to speed up its business and digital transformation, and home furnishing giant IKEA which has chosen SuccessFactors.

Such customer success stories are SAP’s business, claimed Klein, which inevitably put attention on the elephant in the room - the combative claims made by Oracle CTO Larry Ellison last month, when he dedicated a large chunk of his firm’s own earnings call to read out a list of 100 customers that he said were wins against SAP.

At the time, SAP responded with a relatively anodyne comment that it wasn’t up for getting in the middle of a public debate about customer numbers. But today Klein conceded:

We cannot let recent unfounded claims made by one of our competitors go entirely uncommented. Personally, I see it as a very positive sign that one of our main competitors spends so much time talking about SAP on their own earnings call. Let me tell you, we have been through their customer lists and confidentially we checked this claim. I absolutely encourage you to do your own research. Talk to the customers as we did.

The latest IDC ERP data also helps to put things into perspective. It shows that SAP has taken significant ERP market share since launching S/4 HANA in 2015. To those who attended the earnings call from one of our competitors, some of the customer names on [SAP’s own slide] will sound familiar. I'll leave it at that.

What ultimately matters, he went on, is that so many companies continue to sign up with SAP, citing Google and Toshiba to make his point:

Over the last year, we further strengthened our relationship with Google. They are migrating their financial systems to S/4 HANA. They also selected Qualtrics and went live on Ariba. We continue to expand our work with Google Cloud to support showing customers in depth information to become Intelligent Enterprises. Similarly, Toshiba selected SAP as vendor of choice and saw tremendous value in replacing their legacy financial systems with SAP. SAP is now front and center of Toshiba's global transformation and the all-in replacement of the broad landscape of competitive legacy software within Toshiba.

My take

A strong start and an upbeat Klein. RISE’s 100 sign-ups is a confident start, but it’s too early at this stage to ascertain its longer-term uptake, while S/4 HANA’s additional customers are welcome, although the gone live stats remain a small bite of the overall SAP apple. The number I find most interesting is the 4,800 net new customers, indicative that the company is still able to pull in ‘virgin’ business. That said, I’ll leave the competitive crossfire over the Oracle vs SAP wins claims well alone at this point. As Klein said, it’s up to everyone to do their own due diligence there.