SAP 's Q4 FY2020 earnings call

At the end of what's been a SAP-tastic week for me, I sat in on SAP's Q4 FY2020 earnings call for the media. Prior to that, I spent quality time poring over the numbers which have not changed from those pre-announced and on which I reported earlier this month. The details to which I will refer can be found in this document (PDF.)

Analysts will be interested to know about any changes in the outlook for the current year and here, SAP is making no changes although we anticipate updates each quarter.

On the cash flow statement, SAP recorded €68 million in its provision for bad and doubtful debts, up from €14 million in the 2019 financial year. This gives you a sense of the impact of companies going out of business who had contracts with SAP although the company does not break out the type of customer (on-premise, maintenance, or cloud.) During the year, SAP reported that it improved collections and that was partly evidenced by a €2.3 billion year over year reduction in receivables. Stock-based compensation fell dramatically from €1,835 to €1,082 but that was almost wholly offset by an increase in taxes paid. Taking all the adjustments together, SAP improved cash flow from operations from €3,496 to €7,143. All to the good. But it is the regions that intrigue me. 

Here is the breakdown as supplied by SAP:

I appreciate that vendors prefer to talk about non-IFRS numbers and in SAP's case constant currency but I always work with IFRS numbers as these are the ones that go into the final audited report and are reflected directly in cash flow statements. 

As you can see, SAP's home market in Germany was flat on a year over year basis while the rest of EMEA fell by seven percent. In the Americas, the US was off nearly six percent or €141 million. while the rest of the Americas were off by €108 million or 17%. Japan was marginally up but the rest of the APJ region was down nine percent of €84 million. In the detailed notes, SAP said that license revenue fell 15% year over year to €1.7 billion, although that was offset by increases in subscription revenue.

But again, looking at the detail, it appears that while cloud revenue overall is holding its own, in the Americas, SAP's license revenue is starting to fall off a cliff with an 11% fall year over year compared to a seven percent fall in EMEA, most likely held up by the German-speaking countries. If our analysis is correct then SAP has a lot of work to do in its largest market which saw the departure of US-based co-CEO Jen Morgan in April, 2020.

The Americas - a problem?

I asked about any plans to rejuvenate the Americas to which Luka Mucic, CFO of SAP replied:

I think you need to understand that the cloud revenue performance in particular might be the source of your question, whether there was a need to rejuvenate that market is actually a result of the past. And of course, North America is a very large scale base. And as I said, during my remarks, was also at the beginning of the pandemic, particularly hard hit by some of the US originated assets around Concur. That had a particularly tough stance, given the space that they're operating in. However, there is actually nothing really to be rejuvenated about this market anymore, because in the second half year, North America had actually among the best performances of our regions, when the new order entry is concerned, actually, the US was able to show positive growth in software licences, and also had a very strong cloud or entry performance. Canada was one of our strongest market performance in cloud revenues. And so with that order entry that we have achieved already, and now the wave of rise with sa P and the new initiatives that were driving, we're very confident in our business in North America, and the US has actually proven to be very resilient for us all the way through the second half.

The rest of America is relatively small compared to North America. And as you know, Latin America has really had a high share of struggles in 2020. Brazil is among the countries that has the highest share of COVID infections. Despite that, actually, we fared relatively well against our internal expectations, which were already adjusted for this difficult economic climate. The same certainly applies for Mexico. And those two markets are obviously the lion's share of what is happening in Latin America. So we are actually quite satisfied with the performance against internal objectives, but you cannot disregard the environment. And that was a very difficult one for well known reasons.

This is where I run up against the use of non-IFRS measures by vendors. For example, the currency headwinds to which SAP refers in the table and in its notes are well known as they hit our business as much as those with large exposure to the US Dollar. But in my mind, that's part of doing business and where CFOs need to hedge as best they can. 

SAP talks about the negative impact of the pandemic on its Concur line but from my soundings over the last six months, the word 'rudderless' is often used as it relates to the US market. While SAP will naturally wish to first protect its home market, not paying close attention to the US has, in the past, led it to cede the CRM market to Salesforce while Workday continues to win SAP customers. During a recent call, Aneel Bhusri, co-CEO of Workday said that in its engagements which are mostly HCM and finance, its prime competitor is Oracle. In a call this week with senior Oracle executives, I sensed genuine respect for Workday but no mention of SAP. Let's see therefore how order entry works through into the upcoming quarters. 

RISE momentum

I asked Christian Klein, CEO of SAP about momentum for RISE. In back channels, some colleagues wondered whether the reported 130 trials all became full customers and how SAP views the impact of RISE for 2021. Klein reiterated much of what we have already heard when he said:

All of the 130 customers, they are consuming this offering end to end. Again, they have choice on the cloud infrastructure, they have the world's leading SAP solution with S/4HANA. Cloud, they use the platform heavily for integration, where we made great strides. And they can also move to a standard landscape. Because we all know in ERP, these are mission critical processes, complex poses. So extensibility is key. And now the ecosystem can join the party.

That didn't exactly answer my question but again, we will have to see how this story unfolds, especially given the recency of the Signavio deal. We can draw comfort that SAP's RISE story is coming together in a way that SAP watchers can understand. For example, Klein emphasized that RISE is a pathway to help accelerate S/4HANA migrations, something implied at RISE but now made explicit. He also referred to the people and cultural impacts, explaining that the purpose of the Business Process Intelligence offering is to provide the hard evidence companies need that demonstrates the value of operating the most efficient market-leading practices. 

Klein was asked about recent executive changes and whether the recent reorganization is now a done deal. This gave Klein the opportunity to confirm that the recent appointments of Sabine Bendieck as COO and Julia White as CMO are designed to push SAP's own internal transformation and bolster the company's product marketing, two key pieces of the SAP story. 

Long term, not short term

On the call, SAP's CEO Christian Klein noted that the company added 25,000 net new customers, 35,000 go-lives, and a total of 16,000 S/4HANA customers, of which more than 8,000 are live. This is all good but it heavily suggests that the impact of moving to a subscription model today is substantial in the short term. That's why SAP needs RISE. As Klein said:

When you do what is right for your customers, the financial success will follow.

And as if to hammer home the message, Mucic said:

Any given year is only a point of time. What we are working on is to set SAP up in a way that in many years to come, we actually have the potential to grow in double digits and that's what we will actually achieve with the business model transformation. And therefore, it's really for the long term that we are building the company up not for a given year and for any artificial comparisons.

As an aside, SAP reported that its NPS score improved by 10 points. That finally put the company in positive territory after years of having a negative score. I'm not a fan of NPS scores but I can understand why SAP is relieved. 

My take

It's been quite the month for SAP and an action-packed week. As I said on Twitter, if nothing else, SAP's timing of events could not have been better:

At the beginning of the month, we had the earnings pre-announcement. It wasn't bad but it wasn't great. This week we have had, in quick succession RISE, the highly successful Qualtrics IPO and now the detailed earnings call which exposed how SAP fared across the regions. 

Put another way, January has been a setup month for what comes next. There is still a long way to go and while I am optimistic about SAP's opportunity, the messaging around RISE poses many questions, most of which could easily have been anticipated but which remain unanswered. 

Endnote: This story may be updated for additional information coming out of the financial analyst call.