Are U Sure It's All Going A Bit V-shaped, SAP? ERP Giant Goes Own Way, Seems Optimistic About Third Quarter Bounce

Analysis On a call with financial analysts yesterday, the leadership team of Germany's enterprise software giant SAP was measured and rational - and quite possibly at odds with the rest of the world's response to the unprecedented challenges presented by the COVID-19 pandemic.

There is a chance that, as the Germany's determined policy of test, track and trace begins to bear fruit, the company has failed to understand the misinformation and poor leadership that has characterised the response in the United Kingdom, America and elsewhere.

Tomorrow's economy: U-bend or V-turn?

It turns out Vs may be important. Hopes of a V-shaped economic recovery from the inevitable recession are fading. A survey of 3,534 chief executives from 109 countries conducted by business leadership network YPO found 60 per cent of chief executives are preparing for a U-shaped recovery – a long period between recession and an upturn.

“We have not seen a crisis like this for over a 100 years, and some household names will not survive,” said Glenn Keys, executive chairman of Aspen Medical, a Singapore-based health services firm and YPO member.

But SAP’s view of its financial prospects is based on companies returning to delayed software spending from the third quarter of this year. As a reminder, that is just nine weeks away.

SAP cut its full-year guidance earlier this month, warning that business had slowed during March. The company's revised full-year sales forecast down about 5 per cent to €27.8bn and €28.5bn, from previous estimates of €29.2bn to €29.7bn.

On a call with analysts, CEO Christian Klein said he thought sales were being delayed by customers unsure of making investments in the current economic climate, but seemed certain sales would come back.

"We have no reason to believe we have lost a lot of business but assume most of it as rather just being pushed out. I have no doubt that revenue ultimately come back to SAP," he said.

SAP itself is making some cut backs to discretionary spending, making savings on travel and will reduce the rate at which it hires, but does not plan to lay off staff or freeze recruitment. Would it help customers with cashflow in the coming months? There were some pointers to flexibility, but little assurance.

Klein said: "We want to be empathetic with our customers. We will look for proper solutions that help them to continue to consume the SAP software... However, we clearly expect that both our maintenance as well as our subscription revenue streams will be very resilient in this respect."

But CFO Luka Mucic said the company had made some adjustments to its assumption on working capital in anticipation that "some payments by customers may put push out and we might see delays in payments, due to working capital management measures of some customers."

Then there was the question of a change in leadership. After being appointed co-CEO in October last year, Jennifer Morgan has departed from the position. SAP said that Morgan had "mutually agreed" with its board on the decision. She will leave the company on April 30. Klein will stay on as sole CEO with immediate effect.

The decision was a simple response to the rapidly changing situation created by the virus outbreak. A company statement said it needed to take "swift, determined action which is best supported by a very clear leadership structure."

Reality bites

Does this mean the leadership structure was somehow unclear in the recent past? Whichever way, Christian Hestermann, senior direct at analyst firm Gartner, has said that two changes in the CEO chair from six months ago, when former CEO Bill McDermott resigned, is not a good look.

"Telling the exact different story from what was told half a year ago - look at the wording back then, and compared to the wording today - and you just get a picture of a pretty high level of confusion. What customers need is a steady course and a leadership team that announces things and then delivers them rather than having their internal discussions and tensions that ultimately culminate in certain departures like this," he said.

Nor is Hestermann convinced that sales SAP believes are in the pipeline of its line of business applications such as HR and procurement - up against companies like Workday and Coupa - will necessarily come back with economic growth. Customers might pause for thought.

"In those areas, this is actually made even more attractive for customers because those line-of-business products are not extremely well integrated. For a company looking for maybe a lower cost option, the difficulty to integrate is similar if you buy the SAP solution versus if you buy something else. So, they might look for an easier solution – and it is realistic they will find one. And those are the high growth areas right here, the potential high growth market for SAP."

But it's SAP's expectation on economic growth that may ensure the execs' comments on the analysts call do not age well.

"We don't know how deep will the recession be and how much companies in different industries will have to spend. It's optimistic but in an earnings call you need to be optimistic. It is not impossible. But is it very likely? I doubt it."

In the meantime, SAP continues to struggle to convince customer of its core ERP products to upgrade to its flagship in-memory technology, S/4HANA. According to SAP numbers, less than 15 per cent of its customers have started a project to migrate to the new platform. Hestermann said most customers still struggle with the business case for an upgrade, which they see as not representing radically different functionality, but which has eye-watering costs. Even mid-sized companies are facing the prospect of a $10-20m project.

"That clearly does not change with the likely recession in most industries. There is already a bit of hesitancy, and I don't see how COVID-19 will turn that into a more positive picture," he told The Register.

However, core ERP customers are unlikely to migrate away from SAP entirely, he said.

There's a wonderful German expression eierlegende wollmilchsau. As SAP tries to integrate line of business applications – while still making them attractive stand-alone products – and convince companies to upgrade their main ERP without upsetting them too much, that it may be like the woolly egg-laying pig the term describes.

In any case, SAP may have become prone to believing that, in the face of COVID-19, collapsing markets, and negative oil prices, the rest of the world is acting as rationally it should. Perhaps there is a word for that. ®

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