The Six Five team discusses SAP Q3 2023 earnings.
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Daniel Newman: We are heading into earning season. SAP was one of the first. You had TSMC this week actually outperformed, but SAP, another company that you and I tracked very closely announced its earnings and it was a bit of a mixed bag. It didn’t actually meet the street’s expectation, but the company reaffirmed its longer term guidance and got a really positive bump from it. This quarter it saw its cloud business grow 16%, the street wanted 18%. It saw its backlog of cloud grow.
It saw its margin grow, it saw its revenue grow, it saw its operating profits grow and its EPS grew substantially. So winner or loser. Well of course what you do doesn’t always matter when the street wants more, but my take is this. This is a company that’s quarter after quarter doing things right. It’s got a very difficult situation with lots of on-prem customers with massive custom code bases that are in a position now where they need to move from old iterations of SAP to S4 in the cloud. So they can take advantage of the most advanced AI and other cloud enabled features. It’s a tight rope. If they push too hard, they’re going to be the bad guy. And because of the complexities of lifting and shifting from old to new with SAP, they’re going to create vulnerabilities.
At the same time the company saw some massive customers this quarter make commitments and move over to SAP, which it’s always fun to watch the tit for tat that goes on between Oracle and SAP every quarter when they each announced the wins that they took from each other’s companies. But I think SAP is taking a very balanced customer led approach. They’re basically trying to listen to the customer base and make transition with the customer. But at the same time, with things like Joule and what they’re doing with advanced AI features being in the cloud, they’re subtly pushing the envelope of saying, if you want to get the best of SAP, you’re going to have to be thinking about migration to the newest technology. It’s a solid quarter. I mean, this is the playbook that Christian Klein, CEO, is trying to execute.
I had some time this quarter to speak with him about it and what I’m seeing in the numbers tends to match with what he indicated in the interactions that we’ve been having. Strategically speaking, I think it’s a tough but achievable road ahead for the company. The company needs to be executing, needs to be making its customers feel that there’s enough value in the migration and in the up leveling of their SAP stack. At the same time, they don’t want to give customers reason to feel they’re being bullied or pushed after making massive investments for multiple decades to build SAP instances that run their businesses. And by the way, taking down your ERP system or changing your ERP system is a massive commitment. Anyone that’s ever done one knows SAP has to really walk this tight rope. But I think according to the numbers, according to the reaffirm guidance, it looks like that’s the direction it’s headed.
Patrick Moorhead: Yeah, SAP is a company that you run your business off of, right? I mean, you’re building things, you have a transportation company, you have an airline, you have a power company. I mean, this is technology that you don’t want to mess with and it’s double-edged sword, right? It’s strategic and it’s sticky, but you don’t want to touch it. Okay? I believe that SAP has been too gracious with some of its customers and quite frankly it’s holding them back.
I think what we learned in areas like Windows and what we learned with Oracle Fusion was that at some point you have to cut and run and you have to move even though the Register might write nasty articles about you. Because what happens is you end up splitting your R&D and I urge any SAP customers out here to at a minimum get on the Common Core.
You can get on the Common Core three different ways. It’s not like SAP is saying there’s only one way to get there. There’s three ways to get there. But if you’re rolling and running on something that you were using in 1996, and can’t even remember the name, you need to move or you need to get onto something else or you need to write it yourself because it’s holding back SAP.
And I think this momentary thing with the quarter for a company like SAP to me is meaningless. I mean, I’m not an equities analyst and quite frankly, I don’t even care what the stock does. But what I do care about is that it is investing R&D and it is taking care of its future forward customers that aren’t holding it back.
So I’d like to see a little bit more push the company even has programs like RISE and GROW to help customers get there. So I think we’re, I don’t know, a couple years away from a cut and run by the way. And there’s no other vendor who will just let you sit and squat on-prem who is worth their salt because there’s no money in it. So all in all, I’m really happy with what the company has done with the cloud and to get all the good AI goodies you have to get on the Common Core and get in the cloud. And we’ve gotten multiple ways of getting there.
Daniel Newman: Yeah, you hit it buddy. Even a little bit more assertive than I am. It’s a really tough balance. You don’t want to incent anyone to leave, but you need to incent them-
Patrick Moorhead: Where are they going to go? Where are they going to go? Who squats? I mean what like an IFS?
Daniel Newman: What I mean is it’s pretty well understood that if you, our three instance is S4, that lift is the same as moving to Oracle.
Patrick Moorhead: Yeah.
Daniel Newman: So what I’m saying is when they have to lift off the prem and their custom code, they’re going to have to basically start from scratch, which opens the door. And that’s all I’m saying is that that threat can hold us back. You know how many times we think we don’t want to lose that customer. And you make a decision based on that, even though you’re holding back from saying or doing the right thing. We always are balancing that. It’s a tough one, but I think the company’s handling it well.