SAP on the Tipping Point

I am bringing what I believe are some important topics to discuss in the SAP ecosystem, mixing views and news. In a few days, SAP will present its Q3 2022 earnings. The expectation is around 7.74 Billion Euros, up 12% YoY, the same YoY increase we saw in Q2. The stock price is also essential for the company; SAP currently trades at 87 euros per share, it has been many months since they left the 100 euros per share, and SAP, on a low market value, makes the company vulnerable. In a few days, we will see if the "money comes backs in" or not, based on the company macro result. SAP earned 34% of all revenues (52% of cloud revenues) from US customers, in Dollars, in its first two fiscal quarters. A few days ago, SAP CEO Christian Klein said the stronger dollar is a tailwind for SAP because it reports in euros. To me, it's a poor reason; however, a strong dollar might be a small gain vs. many other significant disadvantages for SAP and its customers. In the end, the most critical stock indicator is the Earnings per Share, which SAP has been missing in recent quarters. It does not help that the SAP CFO will leave the company next year (that's a long resignation). CFO Mucic is well respected in the community, and SAP announced his replacement coming from Airbus, Dominik Asam. We will see if Asam introduces some changes to how SAP presents its numbers (cloud backlog terms and similar).

There are just a few days a year SAP gives an update on its vision; one of these days is during DSAG, the German Speaking user group meeting which happened this week in Germany. During the meeting, there is always a poll the User Group does to its members (SAP customers), where one of the critical announcements this year has been that they want a "Hybrid future." In other words, not everything must be cloud in the SAP ecosystem, and many of them (we are talking about the vast majority) demand to have perpetual licenses.

Read it as "customers will continue going to S4HANA, but the on-premise option must remain". Thomas Saueressig, the highest rank SAP executive at the meeting, said the plan was "not as SAP expected," but "we'll work on it". For those who do not speak SAPANESE, an SAP running on AWS or Azure is an on-premise version; what SAP considers a cloud ERP is the "S4HANA cloud" and "S/4HANA on RISE".

Regarding RISE, the Christian Klein legacy, if one of its main reasons was to increase the S/4HANA adoption, the current result is that numbers are growing steadily but not fast enough for SAP's own ECC deadlines. RISE has not significantly accelerated the S4HANA overall adoption, including the cloud and on-prem versions.

Also, to customer surprise, SAP adjusted its contracts and announced cloud service prices are expected to increase by 3.3 percent per year. Although that is not far from what other cloud vendors have done, this comes at a terrible time for the SAP big manufacturing customer community. Additional customers indeed generate additional costs; in the end, public cloud software has a significantly higher complexity, thus, higher prices, but on the other side, SAP does not have a public cloud; SAP has an outsourcing offering built on top of other public clouds, and while the price increases have been standard in the software vendors, it has not happened in the public cloud vendors.

These public cloud vendors, including AWS, Azure, and Google, are in the middle of their annual congresses. Microsoft event is called Ignite, and SAP was mentioned during Satya Nadella's keynote. Cloud vendors are big companies, dozens of times bigger than SAP but except Microsoft, they lack the business penetration that SAP has, but due to many reasons, customers have been adopting these cloud services in the last years, with a 40% growth we don't see in SAP or Oracle, so today there is a need to integrate the public cloud with SAP software better. This is tremendous customer demand in every forum, and this is an action that requires a significant willingness from SAP to happen yet to come.

These public cloud vendors have released Industry Clouds recently, which used to be one of SAP's main playgrounds. In that area, SAP's lack of a roadmap has enabled competitors to advance into the SAP territory – controlling all processes, from finance to human resources to production and logistics. Now, in the cloud, customers no longer have to buy the whole package; customers can book parts from SAP rivals. Like Salesforce did by stealing the CRM market from Oracle and SAP, the specialist companies are gaining ground, often cheaper, flexible in use, user-friendly, and with predictable cost.

The unique selling point of SAP -an integrated software package for all areas in the company - apparently is no longer as important for many customers as it used to be. If SAP needs to challenge precisely this, that is the vision we need to hear and see during SAP earning presentations, keynotes, user groups meetings... etc. Something we hardly see these days. "wow effect" disappeared in these events, and even in some years of McDermott's reign, there were even Capital Market days off-season to report the plan, the vision.

Forgetting price increases, suppose we expect customers to make hard decisions, like digital transformations, cloud software, and similars, in our current economic situation. In that case, there must be financial incentives to help them. They will not migrate because of a product deadline; if that happens, they will look for options for the same reasons customers didn't migrate to the cloud because data centers closed. They migrate to the cloud because of the many incentives they find to do it.

More than ever, the decision for or against the cloud is based, first and foremost, on purely economic considerations. The deteriorating global economy is forcing companies to focus their decision-making efforts on cost-benefit analyzes of potential migration projects. Many ERP projects don't have a good hand then - especially regarding applications that have received many company-specific adjustments and are strongly networked within the IT landscape.

Although cloud migrations continue in full swing, ISG reported that 2/3rds of customers demand expert hands to mitigate cloud management and control risks. Expertise who can monitor and manage capacity-based cloud usage, especially since innovation management is also becoming the focus of interest.

Against the background of increasing uncertainties in the global economy, it can be assumed that economic considerations will continue to slow down the potential S/4HANA migrations for many customers. In contrast, for many others, we will continue seeing an increase the cloud adoption looking for innovation and flexibility, both migrating their existing SAP landscapes or building the new SAP landscape from scratch while looking for these incentives.