SAP is going to more aggressively move customers to the cloud, focus on co-innovation and move to one data model across its platforms as the COVID-19 pandemic proves to be more difficult for the company.
The enterprise software giant’s third quarter results featured a number of unpleasant surprises. The biggest hit was that SAP cut its outlook. Licensing revenue was weak and customers are moving to the cloud at a faster rate and evaluating SAP’s wares as well as offerings from rivals.
That backdrop led to a strategy overhaul and a reset by CEO Christian Klein. Klein noted that SAP’s customer base was struggling with COVID-19 and how it was hurting demand. The supply chain, which is largely run by SAP software, has been retooling on the fly amid multiple disruptions. It doesn’t help that Concur, which is a travel and expense application, is seeing less volume since business travel has largely stopped.
CFO Luka Mucic said SAP was cutting its cloud revenue growth targets for 2020 as well as total revenue and operating profits. In addition, SAP will spend more to transition its customer base and apps to the cloud and that will result in less growth that will pick up again in 2023.
Mucic said that SAP’s cloud revenue previously large largely incremental to existing licensing arrangements. Today, cloud is cannibalizing licensing. As a result, SAP will be moving customers from an upfront software licensing model to subscriptions. The move is similar to what Microsoft and Adobe have done. “There is undoubtedly going to be some cannibalization effect customers moving from established license and support agreements over to subscription,” said Mucic.
Two money slides that have rattled SAP shares.
Klein’s plan for SAP seems solid, but it may seem a bit overdue. Here’s a look at the moving parts.
For sure, SAP can co-innovate with supply chain and ERP customers, but what remains to be seen is whether the company can edge more into line of business applications where the competition is fierce.
SAP had allowed customers to choose on-premises vs. cloud and licensing vs. subscriptions. Now the plan is to move customers to the cloud on a faster timeline.
The catch here is that SAP will want its customers on its data model with its suite of apps. The challenge is customers will certainly want one data model, but one that spans multiple applications and vendors.
The plan for SAP looks doable, but there will be tough times ahead for licensing revenue. Klein said that software license revenue will fall further in the quarters to come. COVID-19 is hitting SAP’s customer base hard.
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