SAP Q4 FY2019 results - no overall surprises but cloud revenue not quite there with interesting times ahead

To no-one in particular's surprise, SAP reported Q4 2019 revenue and profits in line overall with recent projections but there are a few tweaks in what SAP is now saying that will be of interest.

Why no surprise? Enterprise deals have long lead times and cloud revenue as CFO Luka Mucic is fond of saying, is largely predictable. So absent any major decision blockers, the result was always going to be there or thereabouts. But as always, the real interest comes in understanding the details. Let's start with the top line numbers as reported:

Commenting on the cloud results co-CEO Christian Klein said the company now has 2,000 cloud customers from 20 industries and across 70 countries. Net new customers is running at 40% and he claims that overall, SAP is double the size of its next competitor. On the question of adoption, Klein noted results from the recent DSAG survey we discussed last week and the as yet to be discussed survey results that were announced by ASUG. But in terms of the reality he said: 

Often times it's not the technology (that holds customers back) but sometimes it takes time for our customers to make a business transformation.

In that context, SAP has ramped its services business with a corresponding increase in margins, a trend the company believes will continue into 2020. CFO Luka Mucic said that cloud growth in bookings excluding infrastructure, growth was 31% (25% overall) a 50% larger growth than on-premises licensing.

On this outing, SAP chose to split out Qualtrics numbers rather than fold them into the over-arching X-O messaging of the past. That was a smart move and follows the re-organization the company undertook late last year in which the CX portfolio was re-organized into distinct units (see illustration) and a corresponding de-emphasis of the X-O messaging we've heard in the past. In that sense. what we're seeing is co-CEO Jennifer Morgan putting her stamp on how SAP will approach customers looking to expand on their SAP investments while continuing to give Qualtrics the opportunity to grow independently. On that note, Morgan said of the separation and growth that

From a business perspective, we're just allowing them to keep on running. Their growth was beyond what we expected. We've increased the share of deals in over 100K and 60% in deals over a million. 

To a question about the precise numbers on Qualtrics, SAP said that revenue was €508 million for the year compared to €289 million, pre-acquisition, but in remarks, the company was careful to emphasize that the impact from efforts to 'acquire' customers from the SAP portfolio is only just getting underway. 

To the question about whether SAP plans to stick to the previous ambition of a €300 billion valuation, Klein answered this way: 

I learned in my career (that the most important thing) is to focus in customer success. All employees will have customer adoption success (metrics as part of their compensation), and with that profitability follows and then shareholder value. 

There are always questions about the relative growth metrics between cloud and on-premises going forward Mucic answered this way:

On-premises licenses is not growing any more....it will be in a very high likelihood that (traditional) licenses will no longer be higher than cloud. 

My take

This was the first outing for joint-CEOs Klein and Morgan on numbers that are under their control. Choosing three, readily digestible areas of focus (see below) is smart. 

A firm focus on the business first message reflects what the joint CEOs have been saying since they took on their positions late last year. Notably, none of the executive team chose to follow in past CEO McDermott's footsteps of banging the X-O marketing drum. Instead, they focused on practicalities with a densely packed, largely fact based presentation.

Some analysts will be jittery that projected cloud growth is not quite what the company has signaled in the past. I am less concerned. If anything the tacit acknowledgment that many of its customers are not yet ready to commit to a cloud transition for core ERP reflects well on the company's focus on listening to what customers are saying. Having said that, one of its largest customers did make a change, contributing heavily to the Q4 cloud segment outcome. We think it could be  Apple but that's not confirmed. 

It was particularly notable that in most of his remarks, Klein came back to the issue of customer sentiment. While these presentations are largely aimed at shareholders and institutional investors, Klein's answer to the €300bn valuation question was telling and won't go un-noticed by customers who, in the last quarter, gave the company something of a mauling in user group conversations. 

As always, there are more questions than answers. For example, the integration topic was talked about at a high level but the devil will be in the detail. It was interesting to note that Klein referenced having spoken with 'large, medium and small' customers. In that sense, I hope this is a sign that SAP recognizes that its customer portfolio is much larger than the S/4 targets that most people focus on. Let's hope that Klein will make it a priority to check in with B1 and BYD customers. 

During the press event, Klein also talked briefly though positively about industries and the need to double down on this topic. At last! Someone is taking action in an area that has, for too long. been neglected. 

To the S/4HANA adoption versus go-live question, I was disappointed that there was not more clarity around the numbers. Successfully closing 13,800 S/4HANA customers, up from 12,500 in Q3 is a great metric to put out there but there are numerous questions about how adoption translates into in anger usage and the obvious follow on about cross and up-selling of other SAP solutions. SAP is alive to the topic but details are what matter. Integration is a top of mind topic and here Klein said: 

My most favorite topic...We will start to integrate S/4 with SuccessFactors - all the necessary processes were integrated in Q4. Ariba with procure to pay comes in Q3. Qualtrics will come embedded in Q1, Callidus and Concur will come in Q3. From an architecture perspective I am happy that we have the right approach. ...During 2020, our customers will see our cloud acquisitions integrated with the core. This is where customers see value in buying more solutions from SAP. We will expand our investments in our verticals.

The company is confident it has the portfolio with which to achieve its growth ambitions but without those S/4HANA customers in production, it is hard to see how the remainder of the story hangs together.