SAP Q4 FY2016 hits top of cloud range, shades consensus targets. Company ups guidance for 2020 (updated)

Den Howlett Profile picture for user gonzodaddy January 23, 2017
SAP Q4 FY2016 wasn't quite up to snuff overall but cloud revenue growth was at the top of expectations. Even so, SAP raised its 'ambition' for 2020.

SAP Q4 2016 cloud revs
SAP Q4 FY2016 results highlights

SAP executives will no doubt be full of superlatives in their SAP Q4 FY2016 earnings calls later today as the company hit its top of estimates numbers for cloud revenue and upped guidance for the 2020 'ambition' to €29 billion. The full year cloud number - €2.993 billion using IFRS measures, is now 13.5% of the total revenue number, not quite where I expected to see it following Q3's results. (Statement - PDF.)

Total revenue for the quarter was €6.724 billion, up 6%. While hitting the broad consensus estimates, it missed some analyst expectations by around €410 million according to some reports. You just can't please some people! Of importance to SAP watchers are the S/4HANA numbers. From the company's statement:

S/4HANA adoption doubled year over year to more than 5,400 customers. In the fourth quarter approximately 1,300 additional customers signed up of which approximately 30% are net new SAP customers.

Those 1,300 new customers represent an uplift of 31.7% quarter over quarter. Coincidentally, quarterly cloud subscriptions and support were up 31% year over year to €827 million. I will be speaking with Markus Schwarz to update the S/4 position later today. Last time around, I expressed relief that SAP has finally got some decent momentum going behind S/4 HANA. On its face, this quarter's results confirm that momentum although we would expect SAP to work hard on closing out end of year deals. Depending upon what is said, I will either update this story or write a stand alone analysis.

Software license revenue was flat at €2.177 billion for the quarter. That is a little worse than I expected (I don't always agree with analyst forecasts and have a generally more pessimistic view of the on-premises business) but follows a very good Q3. Software support grew a miserly 6% year over year to €2.756 billion.

Share of predictable revenue, a key metric developed by Luka Mucic, SAP's CFO was 53% for the quarter and 61% for the full year with an ambition of 70-75% by 2020. Free cashflow increased 21% year-over-year to €3.63 billion.

In the statement, SAP provided color on some of the key business drivers. On HCM, it said:

SAP is infusing intelligent services like automated matching of resumes to open positions and machine learning to root out bias in the workplace while promoting diversity and inclusion. Forrester recently named SAP SuccessFactors as a long-time worldwide leader for Learning and Performance Management. The customer count for SAP SuccessFactors Employee Central, which is the core of our Human Capital Management offerings, exceeded 1,580 at the end of the fourth quarter. Companies like Mercedes-AMG and Valentino purchased SAP’s workforce management solutions in the fourth quarter.

On customer engagement and commerce, the company said:

CEC saw strong double-digit year-over-year new cloud bookings and cloud subscriptions and support revenue growth in the fourth quarter. Brooks Brothers selected SAP’s customer engagement and commerce solutions in the fourth quarter.

I'd like to better understand what this means because sources tell me that despite the enthusiasm behind the products and hybris in particular, sales are not going as well as the company wants.

On the business networks (primarily Ariba and field glass) SAP said:

Cloud subscriptions and support revenue in the SAP Business Network segment was up 19% at constant currencies in the full year 2016.
Over the past 12 months, approximately 2.5 million connected companies trade over $885 billion of commerce on the SAP Ariba network, growing its commerce volume close to 20% year-over-year. More than 45 million end users process travel and expenses effortlessly with Concur and customers managed over 3.1 million flexible workers in approximately 135 countries with SAP Fieldglass.

Again, while these numbers sound impressive, I'd like to get more color on how changes in the business model have helped build revenue momentum.

Update - S/4HANA momentum

As announced, I held a conversation with Markus Schwarz on the topic of S/4HANA adoption and progress. Highlights from that call:

Go lives were pegged at around 550. SAP anticipates reaching the 1,000 go live mark by the time we reach SAPPHIRE. That is in the May timeframe.

Adoption is across the board with some emphasis on consumer products. Nike was called out as a customer that is using S/4HANA as the springboard to undertake what Schwarz termed 'transformation' where Nike improves its ability to serve the 'customer of one.' We have already seen evidence of that with personalized product configuration.

SAP believes it is achieving greater market share as evidenced by the 30% net new names. These are mainly in the mid-market although SAP claims there are some large customers in the mix.

SAP believes the current momentum will continue throughout 2017 and credits this to the work done in overcoming the problem if building the business case. For 2017, Schwarz said the company plans overcoming inertia in two ways:

We are focusing our expanded story that entails S/4 HANA working with the Ariba and hybris portfolio. We need to do more work there. I can demonstrate value along the idea of 'the core to the edge and from the edge to the core' and you can already see that in some retail examples.

Customers want us to address risk, time and cost. We have decided this year to double down on articulating how the customer journey to the proposed landscape works, and how it’s supported by tools and services. We need to make it more visible and ensure that customers see early wins. So that will sometimes mean getting to value in pieces rather than the whole thing in one go. On timelines, we see full scope going live in 8-12 months. The goal is definitely to get to 6-8 months which is achievable today and will become the average very soon.

Time to value changes the way that SAP implements. In the past, it has focused on the IT groups but the new focus means that SAP has to get much closer to the end user while accelerating the development of Fiori apps. Schwarz said:

Ease of consumption is absolutely more important than it ever was before which is why we are investing in people and talk time. It is why we are partnering with companies like Apple as they are the standard for ease of use. We can never do enough of that.

My (expanded) take

The markets will likely whine at the revenue miss but I don't think we should read too much into this. The ancillary information suggests that SAP is achieving better order value this year compared to last year even though overall deal flow fell. Order volume for on-premises deals fell about 5.5% but the share of deals above €5 million rose from 20% to 34% year over year. What is not so clear is the general impact of currency volatility and an assessment of conditions in a post-Brexit and under a Trump presidency.

Schwarz strategy and execution is entirely consistent with what he told me last quarter. I was impressed with how SAP is maintaining its focus on the success metrics and undertaking its own transformation for service delivery.

However, when asked my advice, it comes back to the same things: get customers live as fast as possible, get those same customers referencable and talking in the public domain, make sure the end user experience and integrations continue at a fast pace.

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