It hardly seems a moment ago that SAP announced a special Capital Markets Day event. Yet here we are just shy of seven months on and only a few days from what may turn out to be a pivotal moment for the eponymous German software company.
Plenty has happened in the intervening period, much of which has been painful to observe. Now, perhaps more than ever, customers should be paying close attention to what co-CEOs Christian Klein and Jen Morgan say but equally, you should also have a CFO at your side, to help pick through the financial word salad that will be delivered by SAP's CFO Luka Mucic.
Be in no doubt, this CMD is in direct response to the actions of Elliot Management taking a stake in the company. We have spoken at length on this topic to wit you may find the following stories instructive:
- The Elliott Management track record in tech deals
- Elliott Management and SAP - the background and Elliott playbook
- SAP and Elliott - 12 open questions and 4 action plan items
Since we wrote those stories, we have been closely monitoring what's going on with customers and customer groups as well as hearing from people close to the action. While we are not privy to the specifics and are very unlikely to be pre-briefed (this stuff is far too market sensitive), we continue to have open questions as they relate to customers.
On the ground, we hear that SAP customers still face aggressive audits and while the focus has moved (slightly - although it remains a talking point) away from our old friend indirect access, there is plenty of pressure for customers to switch to S/4HANA. The chief problem we hear about stems from a lack of clarity around how S/4HANA pricing is going to work out in the long term. As one person told me: 'There's no GPS signal for that one.' So listen carefully for anything that's said on that front and be sure you understand what the words really mean. One thing to avoid like the plague - any vague promises that 'We'll sort it out.' That's an oft used but meaningless phrase, especially if it's coming from an AE.
Beware the numbers
Also, beware of numbers. At the last earnings call, SAP reported 12,500 customers had bought S/4. But even that number deserves some query because SAP also reports that 40% of customers are net new. If that's the case and with an estimated addressable upgrade market of some 35,000 customers, then SAP has landed about 21% of its existing customers. That is more in line with past data from user group surveys but again, we are awaiting the results of fresh surveys from the likes of ASUG, DSAG and SAPUK&IUG.
What you should notice is that if 20-ish percent is about right then SAP has likely landed most of the early adopters we see in adoption cycles. The fast followers and mainstream customers are yet to get on the proverbial train. If you're reading this, then that is probably you.
One data point that is worth mentioning. At the 2019 iTelligence event, Andy Steer, CTO told me that around 50% of customers are 'somewhere' on the S/4 journey. In public remarks, Christian Klein has said that 60% of S/4 customers are now either live or in implementation.
When you take it all together, SAP is naturally keen to highlight the sales momentum and provide the most favorable spin on where sold customers are at. But the way SAP counts sales is not known. For example, if a deal is done that bundles S/4 is that counted as a sale? Of the 40% not live or implemented, how much of that is shelfware? Of those in Klein's 60%, how many are live? Where is the bundle of case studies that point to success across industries? Where are the bundles of success stories that cust across market segments, i.e. large enterprise, medium etc? Those data points are important because they give customers confidence that they're making the right decisions while transparently informing the market about momentum. the two don't always go hand in hand of course but that's a different story.
SAP will undoubtedly talk about X-O in some form but always remember the central thesis is that this only really works optimally for SAP customers when you have S/4 at the core.
2025 - address this now
We are hearing persistent rumors about the 2025 issue. None of the UGs or SI's I've spoken to have been told anything officially but it is widely rumored, nay expected, that SAP will extend ECC maintenance beyond 2025. For a more detailed view on this, check John Appleby's story. Despite the obvious sales momentum risk of providing waverers with a Get Out of Contract Negotiations 2019 card, my firm view (and not one shared by many others) is that CMD is a golden opportunity for SAP to make such an announcement. Why?
Earlier this week and, so far under reported, SAP committed to an additional €1.5 billion payout to shareholders either by way of special dividend or share buy-back. SAP's logic is that:
This enhanced capital return will be in addition to SAP’s regular dividend policy of distributing at least 40% of its IFRS profit after tax. The Supervisory Board and Executive Board are confident that SAP’s strategy of investment in innovation and profitable growth, together with disciplined capital return, will maximize shareholder value for the long term.
SAP Co-CEOs Jennifer Morgan and Christian Klein said: “SAP’s operational excellence initiatives are driving improved financial performance, and we are pleased that SAP is in a position to share this benefit with shareholders. The enhanced capital return in 2020 underscores SAP’s commitment to shareholder returns and disciplined capital allocation.”
SAP CFO Luka Mucic said: “Share buybacks and special dividends, in addition to an attractive regular dividend policy, are an important element to building shareholder value and enabling our shareholders to participate in our success.”
This is great news for shareholders (including employees who hold shares in the company) and I would not be at all surprised to find that it is provided by way of a special dividend. Cash is king in the hands of shareholders, even if that means loading the company up with debt over time. Speaking of which, if, as is widely expected, investors demand much more returning to themselves, (for that watch for post-CMD reactions) then what are the implications for R&D where SAP sorely needs to put its foot on the gas, especially if that means more debt?
The Greenbaum effect
Part of the answer may lurk behind a timely wondermissive from Josh Greenbaum who attended Microsoft Ignite this year. He speculates, though I think with a good deal of solid logic, in The Ultimate Enterprise Software Alliance: How SAP and Microsoft Plan to Take over the Enterprise Software Market that:
We’re going to see a combined Microsoft+SAP (with ServiceNow playing the role of junior partner) become a formidable force in enterprise software, positioned to sweep aside the likes of Amazon’s AWS, Google’s GCP, Salesforce.com, and Oracle and, as a bonus, appeasing the activist investors that have targeted SAP, Microsoft, and ServiceNow...
...SAP and Microsoft, with junior partner ServiceNow in tow, are in the process of effecting a double end run around the enterprise software market. The exclusivity promised to Azure by SAP wasn’t just about Microsoft paying SAP $75 million over three years to make Azure the preferred platform for SAP: exclusivity doesn’t ever come that cheap or that simply.
Greenbaum explains that the SAP/Microsoft alliance helps both parties. In Microsoft's case it gets their cloud CRM into more hands while from SAP's perspective, it unshackles them from development of a product that is uncompetitive. In detail:
This arrangement would allow SAP to do two things: seriously blunt the impact of Salesforce.com in its installed base, and open up an avenue for selling to a Salesforce.com customer base that needs more enterprise-wide innovation than Salesforce.com can offer. It’s important to note that Salesforce.com is suffering from a similar problem in CRM that most ERP vendors are suffering from (et tu, Oracle, Infor, etc.): its legacy customers aren’t upgrading to the new products – the Lightning UX, Einstein and others – as fast as Salesforce.com would like. That’s ok in the short run – as long as the licenses are renewed, the revenue stream is solid. In the long run, however, something will eventually have to give. These tens of thousands of companies across the industry will eventually upgrade their core systems of record, and whoever is left standing to take the orders will be in the cat bird’s seat.
In CRM, when it comes time to innovate, moving Salesforce.com’s customers to the latest offering from Salesforce.com doesn’t have to be the only alternative, something SAP and Microsoft are counting on. Dynamics CRM is a highly advanced CRM that costs significantly less than Salesforce.com, and it comes with a huge number of tools, services, software, and even hardware that Microsoft has been adding to its enterprise offerings over the years.
Greenbaum has plenty more to say on this and I strongly encourage readers to check it out even though he caveats carefully about having a 50/50 shot at being accurate.
While I don't fully buy into his enthusuasm for such a move, there is a powerful logic behind it, as there is to other equally speculative alternative outcomes. Go figure what they might be.
Elsewhere, I recently spoke with Chris Kernaghan about SAP on Microsoft etc. The recording of that conversation is publicly available and I include direct access at the end of this story. To sum it up, I am of the view that Microsoft Azure is a patently more attractive offering than any of the other hyperscalers. It is certainly one that non-U.S. customers will be happy to consider given the many question marks there are over AWS and for SAP shops generally that are tied to Microsoft, what's not to like?
Will SAP make any reference to this topic at CMD? If so, then what level of detail will they supply?
All change at the top
One question has already been answered but it opens up a fresh line of inquiry. The recent departure of Bill McDermott as CEO and his replacement with Klein and Morgan but perhaps the equally important factoid of McDermott joining ServiceNow plays well to Greenbaum's argument, but how long will activists and investors give the co-CEOs to deliver?
The last thing SAP needs right now is yet another change in the executive leadership. But the flipside is that this is a fresh team of people unencumbered by the past. Most recently, that board was augmented with the elevation of Thomas Saueressig to the executive board as product development lead. He's another young person. As an aside, I heard someone note that the combined ages of Klein and Saueressig is less than that of Plattner. Saueressig areas of responsibility include:
S/4HANA, Digital Supply Chain, and SME and industry solutions. In addition, Saueressig is responsible for the SAP User Experience and the SAP Knowledge and Education organizations, SAP Labs Network and Global Cloud Services. Furthermore, he will take on responsibility for HANA Enterprise Cloud.
That's one heck of a portfolio but notice what it doesn't include?
Doing the unthinkable
It is hard to imagine SAP making this kind of announcement but bearing in mind that this leadership team is now dominated by a clutch of 'young Turks' who are not encumbered by the legacy of the past, there is every possibility that SAP will do what was previously unthinkable. Either sunset or sell products. Will any of that be announced at CMD? It would take mighty big cajones to do so but it would provide customers with clarity. Couple that with Greenbaum's hypothesis and it is a win-win-win. SAP gets focus (which it badly needs in a sprawling portfolio of offerings,) customers get lines of sight into where and when best to place their bets, and investors get to see SAP taking decisive action with a board ready to cut ties to the past.
Put all this together and IF SAP delivers a pristine message then a bunch, but not all, the risks we see in this situation start to melt away for customers. What's more, SAP gets considerable wiggle room for margin expansion (of which 40% goes to shareholders) but without necessarily damaging R&D efforts. Instead, I expect to see a slimmed down, tightly focused R&D effort that is much more customer-centric than it is today.
Yes, there will undobtedly be more turmoil inside the company but delivering on Jen Morgan's commitment to 'customers first' and an executive board that can now take the hard decisions without worrying about legacy decision making is surely a recipe for all around goodness.