I've consistently said over the years that regardless of how you view SAP, never underestimate their ability to exercise and manage account control. That has been particularly evident in the last couple of years as the company's cloud revenue starts to kick in and replace the legacy on-premise line of business. So it should come as no surprise that SAP reported blow out cloud revenue for Q2 FY2018 although overall growth was anemic.
By the numbers as publicised by SAP:
Impressed? Yes and 'kind of.'
The important number to look at here is 'predictable revenue.' CFO Luka Mucic has talked to me about this for several years and with good reason.
SAP has known for some time that replacing legacy on-premise revenue, with its upfront revenue number would be a challenge when compared with the ratable numbers that come from cloud revenue. It has therefore been SAP's goal to transition to cloud revenue in such a manner that the bottom line doesn't materially suffer. Having got to a point where predictable - as in long-term cloud and maintenance revenue - composes two-thirds of total puts SAP in a comfortable position to deliver on its market promises.
The company also has significant runway in front of it. SAP reported that the S/4 HANA customer count now totals 9,000 following 600 adds in Q2. For SAP watchers, this is another important metric. I lose count of the number of claimed SAP customers but the one number that truly matters is the 45,000 active ERP systems of which 30,000 are active ERP customers. SAP's current S/4 number therefore represents 30% of that total. That's a good result.
While SAP is confident in the future, having raised guidance for the first time in a while, the next 10-20% will be much harder to execute againt. But then it is not that simple.
At recent events, I've observed a pattern emerging which suggests SAP is following a classical adoption curve where the first 5-15/20% are relatively early adopters with the next 60% being the mainstream customer group. Based on what SAP is reporting, that early adopter group are now captured and will act as the flywheel driving the next tranche.
The question remains, how quickly will that next group pick up the S/4 pace?
SAP is confident enough to say 'more quickly than we thought' although I sense that comes with hidden mixed messages. I know for example that certain global customers are spending much more on SAP's consulting-led Leonardo style projects than S/4. These are leading and bleeding edge customers who recognize the risks of being pushed aside by fast-moving new entrants, especially in retail and banking but other sectors as well. That, by the way, is despite the recent headline pull back by Lidl which canned an ongoing SAP implementation.
For its part, SAP has already put its feet on the marketing gas pedal with the Sapphire C/4, CRM related marketing push as a way of waking up potential customers to SAP's broader, customer's customer-focused digital transformation agenda. Whether this is the correct approach remains to be seen since SAP is targeting multiple market message led opportunities.
I also know that SAP has finally got around to recognizing the need to actively reinvigorate industry solutions although the precise extent to which they've brought talent on board is not clear. This is an essential plank to growth since the vanilla S/4 implementation message does not stand up across industries unless you have industry templates.
So - overall the piece parts are in place or, at the very least, on the SAP agenda. What does this mean? I spoke with Luka Mucic, SAP CFO and put some of those (and other) questions to him.
A Q&A with Luka Mucic
Qu: It was reported that B1 indirect access charges were doubled recently - what was the rationale behind this?
Mucic: This is not correctly reported. We saw that BusinessOne pricing was behind where the market is and so we adjusted for that. Customer CFOs recognized that to be the case and are largely OK.
Qu: Is revenue from indirect access material to results?
Mucic: As you know we went to market in April with full transparency on indirect access which has taken a lot of heat in discussions with our customers and we see in the first quarter a healthy uptick on that but we don't report that as a separate line item. I would say that it is not particularly material at this time. What is more important is the qualitative impact among customers concerning questions around our pricing model.
Qu: We see strong sales volume from S/4 but can you provide an indication of overall penetration among the base?
Mucic:: So we are now approaching 2,000 live S/4 customers and we have close to 3,000 implementations and I think those references will be quite powerful. We are now seeing the average implementations timeframe in the 9-12 month timeframe. We rigorously ensure that implementations are more agile and we think that makes the case for faster adoption.
Qu: Is the mix changing to reflect IIoT and Leonardo as well as S/4?
Mucic: I think we are differentiated in the sense that we provide an intelligent platform that is embedded in our mainstream products so they don't need to be run as a sidecar. It makes consumption easier, so we're not in the business of selling a particular technology but to make our industry customers successful in delivering their strategies. Having said that, conversational apps are in high demand. On industries we are seeing a strong uptick in retail and financial services along with IIoT in metals, mining and process industries and obviously in agricultural both in Europe and Latin America which is largely due to the fact we have R&D labs in both of those regions. We can do a better job selling this but we're not selling it as a solution
Qu: Leonardo still sounds like a 'bag of tools' rather than a product but what about nailing the industries?
Mucic: It's important to understand this is products and services to ensure we deliver immediate value across heterogeneous environments. We have a strategy to build out industry-specific solutions from those customer co-innovation projects. One good example: a co-innovation with an international retailer has made it into an industry specific kit. That's a value proposition that will be very hard for others to replicate.
Qu: Is Brexit (and its fluid/uncertain nature) having an impact on the market?
Mucic: The UK which is probably the most impacted was strong in the last quarter with 12% growth but overall I think that our customers have factored in what will likely happen.
Qu: We have advocated strongly for board level sales discussions that actively embrace CFOs/CIOs/CEOs and other stakeholders. I think this is something with which Bill agrees. How would you say that is progressing given SAP has traditionally been a technical sale once the CEO has bought in.
Mucic: As you and I know, the CFO is embedded in all parts of the business and so at Sapphire we had many more CFOs and their peers than you might have usually expected. We see the role of the CFO as central to transformation because they truly see all parts of the business and are the ones who can communicate the impact of strategies across the various parts of the business and among their board level peers. I am having dozens and dozens of those types of conversation with other CFOs and internally at SAP we have for example our controlling and treasury people speaking more with others.
It would surprise me if Mucic and I see things materially differently since we both have a financial background that's been helped by time spent inside the business areas outside the finance department.
What I am now seeing is the emergence of a much more coherent view of where industries need to go but, as Mucic says, the key to success lays in the consulting-led nature of current discussions.
What he doesn't say but which is reflected in the analysis of folk like Phil Fersht, is that companies are still feeling their way in terms of discovering the next important strategic steps to take in their journeys to become 21st century, services-led businesses. That is particularly acute among the kinds of B2B industries where SAP has its greatest strength. Perversely, those industries are interconnected so can afford to take some time to adapt.
The long-term question has to be whether SAP can deliver industry needs quickly enough to maintain its hold on the 25 or so industries it has served the last 40 years. The fact that SAP is actively looking for co-innovation that leads to product is a good sign, as is the de-emphasis of Leonardo, IIoT etc as technologies that stand alone. We are in a business led sell cycle and aligning technology to the business is step one.
SAP's only problem - as it always has been - is that of articulating in a market attractive manner. That is an ongoing project.