SAP Q1 FY2020 analyst call - the good and the worrying

Profile picture for user gonzodaddy By Den Howlett April 21, 2020
Summary:
SAP expanded on its plans going forward as COVID-19 unfolds. There was much to like in the analyst discussion but key areas of customer importance were fudged.

SAP board
Klein, Mucic and Fox-Martin (via Holger Mueller)

Whenever there is a significant change in leadership questions are bound to be raised as to what happened. Rumors abound and you can be sure that somewhere in and amongst, the truth lies lurking.

At SAP, the sudden departure of Jennifer Morgan, less than 24 hours before a scheduled financial analyst call to discuss Q1 FY2020 raised all sorts of questions about the direction the company will take going forward which I outlined earlier in the day. One area I didn't touch in any depth was product and in this story I will address my issues here. 

On deck were Christian Klein, CEO, Luka Mucic, CFO and, Adaire Fox-Martin, SAP Executive Board member and head of Customer Success. To repeat, the company's stated position regarding Morgan is: 

More than ever, the current environment requires companies to take swift, determined action which is best supported by a very clear leadership structure. Therefore, the decision to transfer from Co-CEO to sole CEO model was taken earlier than planned to ensure strong, unambiguous steering in times of an unprecedented crisis.

None of the analysts on the call tried to dig into what happened and in any event, you would not expect SAP to elaborate. But it is strange that the board answers to questions about COVID-19 impacts and the forward view have not fundamentally changed since April 8th when the results were pre-announced. From a practical standpoint, I can see that in a period of lockdown, attempting to run a global business from a co-CEO model must be very difficult and while SAP has a history of 'consensus management,' that's much harder to execute against in these conditions. In short, SAP needs a single leader now and Klein won that argument. 

The one question raised about re-organization at the board level drew a fumbled response from Klein who said that while we can expect changes, he could not provide any specifics and that in any event, any changes would need supervisory board approval. That means he hasn't quite got his feet under the proverbial table - if that's ever truly the case with SAP.

Perhaps more importantly, and in contrast to my view about a potential round of layoffs, Klein was at pains to point out that the company is still hiring albeit at a reduced level and that he expects the firm to 

Double down on innovation...

...arguing that SAP is the only company with the combination of products needed to get firms through the crisis. Repeated reference was made to the supply chain and HXM (Human Experience Management) as areas where SAP excels but then reference was also made to Workday (HR) and Coupa (SCM) as the competition SAP has to beat and that SAP has to focus more on getting to the LOB leaders inside its target customer base. 

There are several problems with this. SAP might consider itself the natural leader - a topic to which I will return - but the fact remains SAP SuccessFactors has lost out to Workday and Coupa is running strong. Both are native cloud vendors, with the inherent advantages cloud brings, whereas SAP can only count on SuccessFactors for that capability. Klein conceded that in the flagship S/4HANA space, which is largely dominated by on-premises systems, it is much harder to deploy virtually so firms needing a refresh now are likely better served by cloud-based products. 

Holger Mueller, in his analysis of Morgan's departure, made this point:

Product leadership is now in the hands of Thomas Saueressig, the former CIO. Saueressig reports to Klein, when Klein was CEO and Klein brought him ‘over’ to lead products. And Saueressig is doing a good job at getting the priorities of S/4HANA right. Certainly, a better one than the heads of product over at the six sisters… who all were busy to move their products to the SAP platforms. Nothing to excel and inspire a board to hand over the reins to them.

The immediate question Klein needs to answer what is going to happen with the product development areas that had not yet reported directly or dotted line to Saueressig. That’s Qualtrics and whatever SAP calls its CRM ambitions under seasoned CRM product leader Stutz. I would not be surprised if all goes to Saueressig. SAP needs good, better great CRM to be a competitive ERP player. Too much depends on customer processes. SAP was most successful because it built on a single platform. Bringing together the O and X data on the SAP BTP (aka Cloud platform) is a key differentiator. It’s also a key test for the agility of the SAP BTP to support standalone third-party deployments that Qualtrics certainly needs to keep supporting.

That's one huge task at a time when customers need help now and not in small increments of product.

There is another problem, rarely aired but worthy of attention.

SAP is not short of people coming to it with great ideas. Klein recently encouraged partners to get on board and into the SAP store, a task SAP acknowledges is far from easy but on which it is working. But too many times I have seen partners with great ideas go to SAP, only to be told that SAP would require a commitment from hundreds of engineers. That tale is still being told today and that's how innovation from the outside gets killed. So why, once bitten, would a partner or potential partner come back?

One analyst asked SAP whether it was offering distressed customers payment holidays or other incentives to help them over the current uncertainty. Reference was made to the 2008 crisis when SAP did provide some help but insisted on maintaining the line on support pricing. Here, SAP's answer was disappointing. On the plus side, Fox-Martin said that the regions have been given the power to provide options that include financing and some flexibility on payment terms but absent of further detail, it seems that SAP is holding the line on maintenance pricing. Klein's and Mucic's argument is that SAP customers need them more than ever and that a reduction in support might mean customers shutting down completely. 

Klein was also unequivocal about the future prospects where deals are on hold

I am totally convincved that those deals have not gone away. 

Taken together you can understand why SAP is confident. But as I said in the Tweetstream, such thinking is based on two huge assumptions:

  1. The slow recovery in Q3-4 happens as SAP is publicly modeling
  2. Those deals are still around.

Neither of those scenarios is a done deal. When deals go off the boil, there is always the chance that another vendor comes in with a more attractive value proposition. 

SAP is not blind to the situation since it has set aside projected cash flow reductions of €700 million coming from anticipated fallout plus what Mucic termed a 'prudent' reserve of €300 million. 

'Prudence' is accounting speak for the uncertainty that cannot be adequately quantified but needs to be assessed in some way in order to make adequate yet conservative provisions. Observers will look to see how that works out as the remainder of the year progresses. 

Another area of disappointment was commentary about the situation in China. The company reported that for almost all of the quarter, China was impacted as might be expected by the lockdowns in that country. But it offered precious little insight into the future, preferring to stick with vague references to SAP continued strategic participation in China (and South Korea's) economies. 

My take

Overall, SAP should be congratulated for presenting a coherent and calm approach with a distinct lack of hype or attempts to talk up the position. I've listened to Fox-Martin on a number of occasions but this was by far the most polished performance I've seen and bodes well for the future. 

I worry that SAP runs the risk of falling into the trap of believing in its own omnipotence to the point of failing to recognize its customer base is just as likely to shrink as any other vendor in a situation where all regions around the world are simultaneously impacted by COVID-19. It has done a lot of work to restore confidence and trust among a base that has found S/4HANA adoption arguments hard to parse. The establishment of a board area dedicated to customer success that marries sales, service, and support is certainly welcomed. Surrounding it with Land, Adopt, Consume, Expand (LACE) has a nice ring to it and appears to be a well-oiled machine, designed to keep customers on board. Mucic's dose of reality around uncertainties was as transparent as you could get. Devolving a degree of flexibility into the regions is the right thing as well. It was also good to hear that SAP is able to operate remotely largely unchanged, including big pieces of the sales cycle. All of these are plus points for which SAP should take credit. 

But the sticker price problem and maintenance cost levels in these extraordinary times remain as unfinished business. I remember only too well how the 2008 crisis coupled with a tone-deaf insistence on maintenance price hikes worked out. We have yet to see the extent to which COVID-19 impacts but everyone I speak with says it will be worse, much worse.