After a weak third quarter, SAP's earnings rebounded with a solid performance in Q4, capping off a difficult year of flat growth.
Q4 cloud revenue was up 8% to €2 billion, while the traditional revenue engine of software license and maintenance was down 8% to €4.5 billion. For 2020 overall, total revenue dropped by 1% to €27 billion, with software licenses and maintenance down 6% to €15 billion and cloud revenue up 17% to €8 billion.
SAP reported its earnings last Friday, two days after it unveiled Rise with SAP, a "business transformation as a service" subscription set of cloud infrastructure and managed services. SAP has positioned Rise with SAP as the vehicle to transition its large base of on-premises customers from traditional to intelligent enterprises, built around S/4HANA Cloud and cutting-edge data and analytics tools. In addition to the Q4 earnings results, SAP's spinoff of customer experience vendor Qualtrics last week earned $1.5 billion in an initial public offering.
Christian Klein
SAP's customer base is growing steadily and the company's products have proved their value during the COVID-19 pandemic, SAP CEO Christian Klein said in an earnings call to investors and analysts last week.
The company added 25,000 new customers for all products and 16,000 new S/4HANA customers in 2020, with over 35,000 customers going live on SAP products, Klein reported.
Fighting the COVID-19 pandemic
From a product and technology standpoint, Klein touted SAP's ability to support the global fight against the COVID-19 pandemic.
SAP worked with Deutsche Telekom on contact tracing in Germany, Klein said, and 17 of the top 20 global vaccine producers run SAP systems. Vaccine producer Moderna also runs SAP supply chain management to support its vaccine distribution.
Luka Mucic
"Others talk about how they have helped to deliver the vaccine, we are running the supply chains, we are running the production," he said. "We are closer than ever to these enterprises to help them scale production, to put them into the cloud and connect them to the [SAP] Business Network so that they can get the ingredients of the vaccine from Asia-Pacific to the factories in the U.S., despite country lockdown. These are real business scenarios ... and this gives us the confidence to be very positive about 2021."
SAP earnings also got a big boost from spinning off Qualtrics, the customer and employee experience software firm that SAP acquired in 2018 for $8 billion. An initial public offering of Qualtrics raised $1.5 billion and SAP will retain majority ownership of the company.
"We are delighted with the outcome of the Qualtrics IPO, which represents a more than doubling in value since the acquisition two years ago," SAP CFO Luka Mucic said in the earnings call. "The IPO maximizes Qualtrics' opportunity to expand their business, while SAP continues to reap the benefits of majority ownership."
Strong Q4 caps year, but long-term growth questioned
The SAP earnings results were not spectacular, according to analysts. However, this was somewhat expected given the overall economic circumstances of 2020.
Trevor White
"They didn't blow it out of the water, but they definitely finished strong for the year, and it seems like a good sign for the future," said Trevor White, analyst at Nucleus Research. "They seem very confident about the ability to take their installed base to the cloud with the Rise with SAP program."
Rise with SAP shows that SAP has a plan and is ready for a cloud-centric future, White said. This is particularly important now as the COVID-19 pandemic has changed the conversation for SAP's on-premises customers.
"In general, SAP has been one of the last of the on-premises holdouts, but on-premises became antiquated almost overnight with COVID," he said. "A lot of people were concerned about SAP's plan for the future, but now it seems that they've got a competent, well-thought-out, well-designed plan that they've started to execute, so there's a growing confidence in SAP as a whole."
Not everyone sees the 2020 Q4 results and Rise with SAP program as clear signs of SAP's assured future. SAP's growth was essentially flat in 2020 and it has a way to go before it can be considered a true cloud company, said Andrew Bartels, vice president and analyst at Forrester Research.
It's not the growth story that they'd like to tell, which is cloud.
Andrew BartelsAnalyst, Forrester Research
The drop in revenue for software licenses and maintenance was not surprising as companies begin to shift to the cloud, Bartels said, but it's a concern that a usually stable revenue source fell significantly.
He called the reported 8% growth in cloud revenue a bit of an illusion, stemming from a low base in 2019 revenue. In reality, quarterly growth was essentially flat, as SAP's cloud revenue comes primarily from applications vulnerable to the economic downturn such as SAP Concur for travel and expenses, SAP Ariba for procurement, and SAP Fieldglass for contingent workforce management. SAP will need the economy to rebound to count on growth from those areas, Bartels said.
Overall, SAP's growth prospects may be weaker than expected as it still relies heavily on its on-premises software for revenue, he said.
"In the long run, it will take SAP a while to become a true cloud company," Bartels said. "More than half of its revenues are coming from license and maintenance, which is still a solid business and there's still a strong preference for on-premises software in many parts of the world and in many industries. But it's not a growth engine. It's a great business for SAP because there's a solid stream of revenue and profits, but it's not the growth story that they'd like to tell, which is cloud."
Christian Klein
Luka Mucic
Trevor White
