The News
On July 21, 2022, SAP reported its numbers for the second quarter 2022 and the first half of the business year 2022. In contrast to the last times, I’d like to cover this in written form, as this one is quite interesting and probably takes a bit longer than 5 to 10 minutes.
SAP changed the report structure to reflect the common cloud service terminology. It is reporting IaaS, PaaS and SaaS now.
The overall cloud revenues increased by 34 percent, with some tailwind by the current weakness of the Euro. The cloud backlog surpassed € 10 bn for the first time, growing at the same pace. S/4HANA Cloud revenue is up by 84 percent, with the backlog even growing at 100 percent.
This revenue growth is consistent across the reporting regions.
For the first time, SAP broke out PaaS revenues, which came in at € 389 million, up 49 percent yea over year.
Not surprisingly, the profitability went down, which is attributable to loss of business due to the war in Ukraine and unfavorable conditions for SAP Ventures.
The bigger Picture
The enterprise cloud market is extremely contested. It is a saturated market that is dominated by few vendors that are able to support important parts of or even the complete business value chain. The challenge facing all these vendors is the necessity to scale down into the mid and lower mid-market. This, however, is a region that is covered by smaller vendors with similar aspirations, e.g., Creatio, Freshworks, Hubspot, Odoo, Pega, ServiceNow, SugarCRM, Zendesk or Zoho, to name but a few.
The big vendors in this Clash of Titans follow different strategies and have different strengths. Oracle, SAP, and within limits Microsoft are full suite vendors, while Salesforce focuses on customer facing processes. Microsoft and Oracle have a considerable infrastructure business, something that Salesforce does not have and SAP to a limited extent (€ 257 million in Q2 2022). Oracle’s core domain is its database business, while SAP is strong in the ERP and supply chain areas. Microsoft has best access to consumers and data, thanks to LinkedIn and Bing.
All of them have strong ecosystems, with Microsoft and Salesforce likely having the leading ones. Having said that, all ecosystems leave room for improvement in a sense that they are geared towards value generation at the hub.
Decisive in this game will be the ability to offer strong, well-integrated solutions that offer easy adaptability and extensibility with a fast time to value for the customers.
My Analysis and Point of View
The first reaction to the numbers reported by SAP should be that congratulations are in order although the falling Euro certainly helped. Still, the overall growth rate in all likelihood surpassed the growth rate of the main competitors. Their numbers will be interesting to see. The accelerating traction of S/4HANA Cloud shows that SAP certainly hit a nerve here, supported by the implementation program RISE, which, interestingly enough, seems not yet have to be copied by any competitor. I will not discuss the strengths and weaknesses of RISE here. This has been done by other analysts; I recommend reading Josh Greenbaum’s recent assessment.
It is also amazing to see, how a huge vendor like SAP can achieve a triple: A complete transition of its portfolio from on premise to the cloud, maintaining growth while staying highly profitable. This achievement is largely undervalued by the (finance) analyst community. There are other vendors that buy growth on cost of profitability. But then, I am an industry analyst and not a finance analyst and look a bit more geeky at things.
What makes the SAP numbers interesting, is that the usual vendor obfuscation changed somewhat. Cloud revenue is now split into the industry standards IaaS, PaaS and SaaS, which is laudable. This makes it also more obvious that SAP wants to be seen more as the platform vendor that the company is – and has been for quite some time. What it also enables, is a better guesstimate at SAP’s CX numbers, considering that the main revenue drivers of the SaaS portfolio are S/4HANA Cloud, Business Network, HCM, the industry clouds and the CX portfolio. Given this portfolio and the fact that its size – minus S/4HANA Cloud is at around € 1.9 billion, it is reasonable to assume that SAP’s CX business size is well below € 1 billion, probably at around € 600 – 800 million (per quarter). This would still not be a number to sneeze at, but clearly shows that there is some potential, also given the number of net new names in the S/4HANA business.
What is obvious by the lack of mention is that the CX portfolio is not one of the revenue drivers – means that its growth rate is below the 35 percent growth of the SaaS business, nor does it seem to be at the core of SAP’s strategy, which is unfortunate, as SAP is certainly competitive in the league for the tier one vendors.
Still, what needs to be said, is that its growth rate seems to be at least comparable to the numbers that were reported by Salesforce and Oracle for their last quarters (or Zendesk or Freshworks, for that matter). Again, the upcoming numbers of especially Salesforce and Microsoft will be worthwhile a deeper look.
SAP certainly tells a strong story along not only corporate, but also whole industry value chains and underpins it with its Business Network and initiatives like Catena-X. Industry cloud narratives gain traction as well, albeit as a company that does industry processes for several decades now, this narrative came interestingly late.
The CX organization within SAP tells a good story as well. Refer to Jon Reed’s recent interview with SAP CX Chief Revenue Officer Jen Bailin for more details. Still, being a CRM/CX guy, I wished that this story would be told more prominently on the board level, i.e., outside the CX organization. That way, SAP would become far more visible in the CX market and could strengthen its position. It certainly has what it takes on the product side, especially considering the Commerce Cloud, Emarsys, and the Customer Data Cloud Solutions portfolio.
The future can be very bright for SAP.
And the company is in a position that enables it to shape its own fate.