Microsoft tie-up boosts SAP cloud revenue growth for Q3

An expanded three year deal partnership with Microsoft helped almost double cloud growth for SAP according to the latter’s quarterly numbers.

The numbers:

• Revenue of €6.8 billion, up 13% year-on-year.
• Cloud and software revenue of €5.6 billion, up 12%, with cloud accounting for €1.8 billion.
• New cloud bookings were €572 million, up 39%. SAP attributed 18 percentage points of that growth to its expanded Embrace team-up with Microsoft.

First announced back in May, Embrace is intended to simplify customer migration from on-premise SAP ERP to S/4HANA; producing a roadmap for vertical industry customers; a combined support model for Azure and SAP Cloud Platform. Microsoft will re-sell components of SAP Cloud Platform alongside Azure.

Jennifer Morgan, recently appointed SAP co-CEO, explained the rationale behind the tie-up:

Many of our enterprise customers have chosen Azure. In response, SAP and Microsoft has established a partnership to move on premise SAP ERP and S4/HANA customers to the cloud  through industry specific best practices, our joint reference architecture and SAP cloud delivered services on Azure. This partnership will both accelerate and simplify customer migration to S/4HANA on Azure., Microsoft will bundle SAP cloud platform services into a bundle. we call Embrace and they'll sell these directly through their field organization to their customers who will run SAP in the Azure cloud.  By putting the customer first,  we've combined SAP innovations with Azure to create the optimized environment for SAP S/4HANA to enable the integration, orchestration and extension of SAP systems in the Azure cloud.

The nature of the relationship is described as “preferred”, not exclusive, cloud platform provider and Morgan confirmed:

As always, choice will prevail as we recognize that many of our customers also run SAP on AWS and GCP, for example. In this case, our customers will still have the benefit of the best run SAP and their public cloud of choice.

But the Microsoft tie-up is different, she added, and it comes down to enthusiasm it seems:

The Microsoft deal is important because it goes beyond the traditional partnerships. They’ve put pretty big skin in the game and their sales teams across the world are now selling SAP solutions. That's going to help us do two things - accelerate the movement of S/4HANA to the cloud and accelerate the sales of SAP cloud platform services and cloud revenue. So the stickiness of that partnership, we believe, will continue to pay broader dividends.

We don't see this cannibalizing our revenue because we see that customers want  choice.  And so many of our customers absolutely want SAP to manage, S/4HANA in the cloud, whether it be the public cloud or whether it be HANA  Enterprise Cloud. But we see many of our customers are making broader public cloud enterprise decisions. And for us, we wanted to make sure that we didn't limit our conversation to customers, you know, only specific to one cloud offering. And so what we found is that a customer has so many voices around their table right now, whether it be movement to public cloud or S/4 or other innovations, and we just found that by coming together and giving them prescriptive options, depending on what's important to them, what their industry is etc, then we can make sure regardless, we're getting a piece of the pie and we can influence that decision. So we'll continue to see both of those revenues and revenue streams grow, but now we're going to be in far more conversations and impacting the direction.

My take

A solid Q3 and a good launching point for the new co-CEO and her partner Christian Klein to build upon. The promise made earlier in the year that SAP would put more focus on the bottom line delivered operating profit up 36% to €1.68 billion, while top line growth was 13% year-on-year to €6.79 billion. As a side note, it was good to hear competitive rivalry put to one side as Morgan and Klein both made a point to paying their respects to Mark Hurd, Oracle’s co-CEO who passed away on Friday.