UPDATED 10:46 EDT / OCTOBER 21 2019

CLOUD

New Microsoft deal boosts SAP earnings, but new executive team faces challenges

SAP SE stole its own thunder by pre-releasing its earnings results 11 days ago, so this morning’s conference call with executives was more of a get-to-know-you for new co-Chief Executive Officers Jennifer Morgan and Christian Klein than a news event.

Still, the announcement of a 39% increase in cloud bookings and 37% growth in cloud revenue, combined with significantly stronger gross margins, was enough to send SAP stock up more than 2% in early trading.

“In April we promised a stronger focus on profits and we are clearly delivering,” said Chief Financial Officer Luka Mucic. “We achieved this result with strong top-line momentum.”

Today’s results came just a few hours after SAP and Microsoft Corp. declared a partnership under which Microsoft will bundle SAP’s cloud platform services into a packaged offering that’s intended to accelerate customer moves to the Microsoft Azure cloud. SAP said the deal helped it double new cloud bookings in the quarter.

Although SAP has a closer relationship with Microsoft than with other major cloud providers, executives said the company won’t play favorites when it comes to platforms. “We recognize that many customers run on [Amazon Web Services Inc.] and Google Cloud Platform,” said Morgan (pictured). “They will still have the benefit of the cloud of their choice.” She noted that the S/4HANA database will go live on Alibaba Group Holding Ltd.’s cloud platform in the fourth quarter.

The Microsoft deal is in line with an increased focus on partnerships that aim to simplify customer migrations, the company said. “We are doubling down on partnerships with hyperscalers,” Mucic said. Morgan said SAP now has 27 “conversion factories” supporting customer migrations around the world.

Cloud is the new database

Remaining cloud-agnostic will be important for the company’s future, said Constellation Research Inc. analyst Holger Mueller. “Four years ago SAP said it will treat the vendors like it treated database vendors in the past: as a customer choice deployment option,” he said. “We are seeing that strategy play out.”

Software license revenue was down 4% on a constant currency basis to €932 million ($1.04 billion), a somewhat slower decline than the 6% drop reported in the previous quarter. New cloud and software order entry grew 15% and total revenue grew 10% to €6.8 billion ($7.6 billion), both on a constant currency basis.

The quarter saw significant growth in cloud gross margins, which improved 5.4 percentage points to 69%. Operating profits also grew 15% in constant currencies and operating margins were up 1.5%. Both are in line with outgoing CEO Bill McDermott’s pledge to investors earlier this year to put profit margins ahead of growth for the next several years.

Adoption of the S/4HANA in-memory database, which anchors SAP’s strategy for integrating its many acquisitions, continued to grow steadily, adding 500 new customers to reach a total installed base of 12,000. Nearly 40% of those installations were net new, the company said.

Continued S/4HANA growth is important given the integration challenges SAP faces, an issue that will dominate the agendas of the new co-CEOs, said Dave Vellante, chief analyst at SiliconANGLE sister market research firm Wikibon, in a recent video analysis (below). “SAP’s big technical challenge is to get all this stuff working together,” he said.

One notable recent acquisition that dominated today’s briefing was the $8 billion purchase of Qualtrics Inc. last year. Qualtrics’ survey software, which companies used to gain feedback about their products, is being angled toward integration with both SAP’s human capital management and customer experience products as a door-opener to top executive prospects.

“Qualtrics has redefined how we’re having conversations,” Morgan said. “It tells customers not just why attrition is happening but where attrition will happen in the future. This makes it a C-suite discussion.”

SAP didn’t break out results by product line, but said its SuccessFactors Employee Central HCM, which encompasses Qualtrics, added more than 150 customers in the quarter to total more than 3,500 customers globally. Qualtrics CEO Ryan Smith said SAP’s up-sell strategy is working. “Anytime we go in with SAP our deal size increases 30%-plus,” he said.

Qualtric’s “vision of combining transactional data with qualitative data is a good one,” said Constellation’s Mueller, “but SAP must show what the architecture will be and what the roadmap is.”

The Customer and Experience Management segment, which also includes Qualtrics, grew cloud revenue 92% and overall revenue 69% in the quarter, although off a small base. The segment showed a small profit in the quarter, compared to a loss the previous quarter.

The company also reported strong growth of 18% in constant currencies to €828 million ($924 million) in its Intelligent Spend Group, which includes SAP Ariba e-commerce, SAP Concur expense management and SAP Fieldglass workforce management.

Dave Vellante, chief analyst at SiliconANGLE Media sister market research firm Wikibon, recently offered this analysis of a post-McDermott SAP:

Photo: SAP

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