Global enterprise software provider SAP disclosed third-quarter financial performance and essentially promised investors that Q4 would be a lot better in terms of Cloud-based revenues.
Financial performance headlines for Q3 included:
- Total revenues growing 4 percent to 5.59 billion euros. The growth rate in constant currencies was 8 percent.
- Cloud and software revenues increasing 5 percent to 4.67 billion euros.
- Cloud-based revenues up 27 percent in the quarter, 30 percent year-to-date.
- Software license revenues up 3 percent, 5 percent year-to-date.
- Operating profit up 19 percent to 1.3 billion euros.
In the briefing to investors and in the associated press release, SAP executives pointed out that S/4HANA adoption has grown to more than 6900 customers, up nearly 70 percent year-over-year. However, that number must be taken in context given the rather slow adoption rates experienced a year-ago. Q3 adoption of this suite was noted by executives as 600 customers. There was a mention of significant customer uptake in digital supply chain technologies but no specifics were shared as to application areas.
A strengthening euro threatens to dampen expectations of operating profits through the end of the year. SAP CEO Bill McDermott indicated: “Seventy per cent of the revenue we transact around the world is in the denomination of US dollars.”
Shares of SAP fell 3 percent on the initial news of Q3 performance.
As Supply Chain Matters has pointed out to readers in many prior commentaries, the overall transition by major enterprise software and applications providers is a work-in-progress, and requires a balancing of expectations as revenues shift from a one-time license model to a recurring Cloud-based subscription contract model. Investors are keen to watch and observe how these transitions translate to sustained profitability as well as indicators relative to intent among new and existing customers toward adopting Cloud-based deployments. Business enterprise software providers need to educate new and existing customers to the important benefits of the Cloud-based model. In the case of SAP, which has many large global-based manufacturing and services customers, transition comes with overriding concerns for data and information security among mission-critical business applications.
Recent survey data that became available in June had indications that many existing SAP customers had no strong business case and unclear ROI motivation to make the transition from existing hybrid ERP environments. Instead, the emphasis is in select investments in systems of innovation surrounding legacy ERP. Some of the recent S/4HANA adoption could reflect systems of innovation vs. total enterprise transition to the Cloud.
In the financial performance briefing to investors, McDermott predicted to analysts and investors:” You can expect a dynamite Q4” In responding to analyst queries: “Don’t worry about bookings, relax, it’s going to be terrific.” He further hinted to some big-name customer enterprise computing deals.
Thus, management has placed a significant emphasis both internally and externally on expected performance in the final quarter of the year. The CEO further indicated that SAP’s influence on the C-Suite and line-of-business executives remains strong, who remain patient with SAP’s overall transition to private or public Cloud deployment options.
However, by our view, and others in the industry, C-Suite executives must increasingly consider the threats of wider scope cyber-attacks such as that which occurred at Equifax, which threatens the business and the brand. The strategic question comes down to whether internal ownership of IT security and infrastructure is sustainable with added needs for constant security monitoring and threat updates.
From a regional perspective, the EMEA region reported strong performance with Cloud and software revenues increasing 8 percent in the quarter. However, Cloud and software revenues in the Americas region was reported as 2 percent (IFRS), reflecting a 7 percent growth rate in constant currencies. For the APJ region. Cloud and software revenues were up 2 percent (IFRS), or 9 percent in constant currencies. As readers can note, these regionally performance numbers were the evidence of how results are being buffeted by strong currency headwinds.
In the management briefing to investors, executives shared that the entire Executive Board has met as a body to review expected Q4 bookings, revenue and profitability performance. Likewise, internal All-Hands meetings have occurred with global employees to emphasize the need for meeting expected Q4 business performance.
There have also been recent senior executive changes occurring at SAP. Executives announced that Christian Klein has now assumed the role of COO and new Executive Board member. There has also been a senior leadership change for the SAP Success Factors business unit.
During the analyst Q&A session, equity analyst honed-in on the Cloud performance numbers and management’s views of expected performance. SAP executives indicated that Cloud related gross margins decreased by a lower than expected 3.3 percentage points in the quarter. The explanation related to added infrastructure related expenses in the deployment of S/4HANA Public Cloud.
SAP was previously fitting out two separate Cloud-based platforms with associated infrastructure and resource support costs, but has initiated the process of merging into a singular Cloud infrastructure to reduce overall costs and accelerate margins. CFO Luka Mucic indicated to analysts that SAP should experience the maximum benefits of the merged Cloud platform in the 2018-2020-time periods, which coincides with SAP’s 2020 Vision.
SAP remains under the looking glass of equity markets in its abilities to transition larger numbers of customers towards Cloud-based computing contracts while delivering consistent profitability performance. Q4 operational and financial performance will assuredly been the next signpost.
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