SAP the first of the enterprise software vendors to pre-announce

We have been expecting SAP to make a pre-announcement of its Q1 FY 2020 results but are slightly surprised that it took until yesterday for this to happen. Our guess is that SAP is adjusting its forecasts on a near day-by-day basis and left it until it felt it had to make a statement before committing. We expect to see similar behavior among others who are reporting. For now, we only have the highlights and, as the statement says, things may change very quickly. 

From the release:

• IFRS Cloud Revenue Up 29% €2.01 billion €2.01 billion;
• Non-IFRS Cloud Revenue Up 27% €2.01 billion
• Software Licenses Revenue Down 31% to €0.45 billion
• Total Revenue Up 7% to €6.52 billion
• IFRS Operating Profit Up More Than 100% to €1.21 billion;
• Non-IFRS Operating Profit Up 1% to €1.48 billion

The decline in software licenses is steep but not wholly unexpected. SAP has all but stopped selling licenses and is moving rapidly to a subscription model. 

The question of just how fragile the ERP market has become will be the subject of much commentary on the earnings call. For the moment, SAP believes decisions are being 'postponed,' anticipating that conditions will remain very difficult through Q2 with a gradual recovery in Q3-4. While we accept that as a global business, SAP is well-positioned to see how COVID-19 impacts in each geography, we are not as confident as SAP. Here's why.

Global lockdown is showing positive results in 'flattening the curve' but there are numerous variables that make it hard to predict very far ahead. The very fact there is so much ongoing disagreement among experts suggests to me that nobody knows for sure. 

The assumption that we return to some form of normalcy is not a given for anyone. In a presentation yesterday, analysts at HfS Research showed this slide:

But it is the focus of spend that interests us and here HfS says the following:

The spend patterns above will support new initiatives driven by the COVID-19 pandemic across these areas as evidenced from service provider inquiries:

For its part, SAP wants to believe it can solve any problem but when you look at the technology specifics, the only area where I would feel confident is in RPA where SAP's offering is more cost-effective than the pure plays. Even then, I'd want to know if SAP can deliver on a more expansive digital assistant vision than the relatively simple chatbots that HfS and others are seeing as an exploding market. SAP will argue that it can make a significant difference in the supply chain. I beg to differ. It really doesn't have the ability to carve out the signal from the noise coming out of its own systems such that planners can get a firm grasp about what to do next.  

On the other hand, having seen 7,600 organizations take advantage of free offerings in Ariba Discovery, Remote Work Pulse, SAP Litmos and Ruum, among others, the company must be hoping that a relatively fast uptick will lead to fresh sales opportunities. 

My main concern relates to the core business. Talking about postponement is one thing but whether that leads to permanent displacement of core EPR sales in favor of more novel and innovative solutions at the edge is an open question. If anything, COVID-19 places more pressure on the S/4 transition story. 

Now more than ever, I believe SAP needs its extensive partner network. But with SAPPHIRENow canceled - at a one time hit of €36 million which will never be recovered - partners must ask themselves where the value lays in being part of PartnerEdge or SolEx beyond having a booth at SAPPHIRENow.

In conversation with Peter Maier, President Industries and Customer Advisory earlier this week, he acknowledged that SAP is not the easiest vendor with which to partner and said: "We need to fix that." Elsewhere, partners tell me that unless you're the global equivalent of an Accenture then your chances of getting the right level of attention are very low or will take as long as a year to get onto SAP's 'books.' This is a huge problem, especially for those small firms that are solving difficult problems or are operating in new areas where customers could see value buyt needs SAP to gain visibility. 

Google, on the other hand, takes a different approach, preferring to get partner solutions into the market as quickly as possible and then worrying about all the nitty-gritty details that go to make up a formal partnership. Google would prefer to discover what sticks as fast as possible rather than wait. 

The one silver lining is that SAP reported 72% of its business as predictable. That's a lot healthier than others and, as the press release says, will ensure that SAP is there to help customers overcome the many fallouts of the COVID-19 crisis.

We wish both SAP and its customers well but recognize that as a bellwether, we shall continue to watch closely as the impacts of what we're seeing unfold. Our hope is that SAP takes this opportunity to reset some aspects of its business that have needed attention for years but which have been left to drift. The partner situation is one such.