SAP SE  has now reported both Q4 and 2019 financial and business segment performance to the investor community. In this Supply Chain Matters blog we focus on what current and future financial and operational performance metrics portend for SAP’s ERP and supply chain management focused customers and support partners in the coming months.

SAP SE

SAP Key 2019 Financial Performance Highlights

We begin this commentary with highlights of 2019 finance and business segment performance to provide reader context.

Key financial highlights of 2019 included:

  • Total Revenue increase of 12 percent (in constant currencies) to € 27.5 billion.
  • Cloud and Software Revenues up 12 percent to just over €23 billion.
  • Total Cloud revenue increase of 39 percent (in constant currency) to € 6.9 billion.
  • Operating profit decline of 21 percent (in constant currency) to € 4.5 billion.
  • Full year Cloud bookings increase of 21 percent (in constant currency) to € 2.3 billion.

SAP management indicated that the enterprise technology provider hit all of its 2019 revenue and profitability targets which include expectations of an operating loss.

As expected, decline in fourth quarter operating profit was attributed to higher acquisition-related costs due to the prior acquisition of Qualtrics along with charges related to SAP’s global restructuring program announced in early 2019. Full year operating margin reportedly decreased 6.8 percentage points to 16.3 percent.

In the now all-important and closely monitored metric of more predictive revenue (subscription based), the company reported a 2-percentage point year-over-year increase to 67 percent.

2020 Business Outlook and Ambition 2023 Financial Objectives

Stating the perception of strong financial momentum, SAP pegged its 2020 financial outlook metrics to partially include:

Total revenue growth in the range of 8 percent to between €29.2 to €29.7 billion.

A near doubling of Operating Profit to between €8.9 to €9.3 billion.

The share of predictable revenue (Total of Cloud and software support)  to reach 70 percent, an additional 3 percent increase.

Ambition 2023

The technology provider further remains committed to its year 2023 goal pegged to a year 2018 baseline of:

Tripling non-IFRS Cloud revenues

Growth to more than €35 billion in non-IFRS Total Revenues (€7.4 billion addition over the next three years)

Approach a predictable revenue metric of 80 percent (13 additional percentage points) and a gross margin percentage of 75 percent.

 

 

Business Segment Performance Metric Highlights

Regarding Q4-2019 operational performance, SAP reported highlights of three key business segments: Applications and Technology and Services (AT&S), Intelligent Spend Group and Qualtrics (Experience Management).

Applications and Technology and Services

Within the AT&S segment, the most monitored area is SAP S/4HANA adoption.

For the first time since the SAP ASUG/Sapphire customer conference held in the spring, customer adoption numbers were reported as 1200 in the final quarter, increasing total adoption to a reported 13,800 customers.  Approximately 40 percent of the final quarter adoption rate was indicated as net new SAP customers.

However, there is an attached note related to segment performance which indicates that in the past Q4 quarter, SAP elected to update the definition of S/4 HANA to: “more closely resemble categories commonly included in ERP.”

Now included are elements of Digital Supply Chain Management, Finance and Risk Management.  That change required the company to provide an accompanying table that readjusts customer adoption numbers dating back to Q1-2017 in fairly significant swings. Readers will have to interpret for themselves what the adjustment implies to the reported growth number.

SAP C/4HANA and Business Technology Platform

These two relatively new business segment sectors have no summarized customer adoption numbers reported which is noteworthy.

Intelligent Spend Group

Q4 revenues in the ISG segment which includes Cloud platforms SAP Ariba, SAP Concur and SAP Fieldglass were reported as €156 million in Q4.

Qualtrics

After acquiring Qualtrics in 2018 for a reported $8 billion, segment revenue for Qualtrics in Q4 was reported as € 156 million with a reported operating loss of €10 million.

 

Year 2020 Implications for ERP and SCM Customers

In an October 2019 blog commentary reflected on the then co-CEO senior leadership change that occurred, we viewed the appointment of Jennifer Morgan and Christian Klein as a positive move for SAP customers, even though we are not enamored by this technology providers co-CEO management models. We viewed the move an opportunity for perhaps a fresh perspective, including a more cohesive engineering development and more grounded customer perspective for the enterprise applications technology provider.

The prior tenure of prior CEO Jim McDermott featured a track record of multiple expensive acquisitions aimed to boost Cloud and subscription revenue growth. The legacy has further included a series of constantly changing and confusing product development strategies and timetables. The overriding notion is that customers must sort thru changing application development and integration timetables in order to assess time-to-value. It has become more and more obvious that supply chain functional and IT teams are struggling to be able to present a convincing set of business and financial arguments to senior management to undergo the transition to both digital process transformation and Cloud in the forms of SAP S4-HANA, SAP Integrated Supply Chain or SAP Leonardo.

Commenting on the latest financial performance, the publication focused on the SAP ASUG user group indicated that moving the needle for S/4HANA adoption remains the central focus. ASUG CEO Geoff Scott is quoted as acknowledging that adoption is one of the most discussed metrics among the SAP universe. There are also cited acknowledgments from co-CEO Christian Klein indicating that the change management required in business transformation remains a roadblock for existing customers who are contemplating Cloud ERP upgrade. There is further tacit acknowledgement that existing customers remain concerned as to the economics and overall timelines of S/4 adoption.

While ASUG members are encouraged that the two new SAP leaders are now demonstrating more interest in voice of the customer needs, they further need to focus on “harmonizing the solution portfolio.”  

 

Our Supply Chain Matters Commentary Takeaway

The reason why Supply Chain Matters has specifically highlighted the above financial and business segment goals and metrics is our belief that SAP’s management team will likely be consumed by the predictable revenue, margin and operating profitability metrics.  With a highly recognized activist investor sitting in the background, failure to show any progress will likely not be tolerated. The notions of listening to customer can only extend so far, because the counterbalance is likely listening to influential investors and reaping the benefits of a Cloud business model.

Our belief is that the notions of further advanced technology or easier deployment innovation will likely be tempered by prioritization to which business segments best leverage 2020 and Ambition 2023 required milestones. That could likely be a prioritization toward Qualtrics, C/4HANA and to some extent Intelligent Spend Group in the context of Qualtrics enabled experience paths.

Customer transformational and change management roadblocks will fall by default to the SAP partner or systems integration community to sort out to achieve more acceptable time-to-value digital transformation adoption paths. That would include the specialized supply chain management focused partners who continue to benefit from SAP’s goal conflicts. It will also be to the benefit of SAP’s competitors who can provide a smoother and more cost effective path toward business and supply chain transformation.

 

Bob Ferrari

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