Despite the upbeat and high-fiving tone of SAP’s Q3 2018 earnings call, analysts were not enthusiastic about SAP’s latest results. Although SAP reported 41% growth in cloud sales in Q3, analysts were more focused on profitability, which missed their expectations, and thus negatively impacted SAP’s share price.
Given SAP’s performance and the market dynamics, there are three key takeaways from SAP’s Q3 results.
1. SAP is laser-focused on chasing cloud market share.
In the earnings call, SAP executives continued to focus on defining SAP’s capability as superior to other cloud competitors such as Workday and Salesforce. SAP’s strategy is centered around bringing existing and new customers to the cloud on the S/4HANA platform and not just ERP but the entire suite of business-centric solutions such as Concur, Fieldglass, Ariba, SuccessFactors and the newly minted C/4HANA, SAP’s CRM product.
Given this dynamic, both new and existing customers can expect a full court press in Q4 by their SAP account team to close any cloud deals in the sales cycle. SAP sales and account representatives will strive to meet or exceed the commitments made by Bill McDermott in the earnings call which raised guidance for Q4 and the full year of 2018. With this in mind, customers who have cloud deals on the table (which are being aggressively pursued by SAP) should keep in mind the second key takeaway from SAP’s earning’s call.
2. Potential customers have an opportunity to obtain very favorable terms for a Q4 cloud deal.
With SAP raising guidance for revenue in Q4, the company will need to ensure they close the deals in the sales pipeline to hit the target. While this is good news for those who are in the market for SAP cloud products, it’s important for potential customers to know what a good deal looks like before they sign on the dotted line.
SAP cloud pricing is complex and discounting varies by product so it’s important that customers are informed as to where SAP has been aggressive on commercial terms. Leveraging a third-party advisor is a sound strategy to maximize your leverage to get a best-in-class deal in Q4. However, getting a good deal now is not the end of the story and leads to the third key takeaway from SAP’s Q3 earnings call.
3. SAP isn’t going to leave money on the table.
SAP’s strategy to chase market share at the potential expense of profitability is deliberate. While customers have the opportunity now to close a very aggressive and commercially favorable deal, it’s crucial to take steps to protect against SAP clawing back margin on future cloud transactions.
Adding additional volume to existing products, adding new products to your cloud portfolio, or renewing your cloud agreement are all opportunities for SAP to increase their margin on your deal. When you are informed of these potential exposures, you can negotiate terms which future-proof (to the extent possible) your cloud relationship with SAP and bring cost predictability. You can also leverage that knowledge to create flexibility over time as needs change for functional capability across their SAP portfolio of products.
There’s no doubt that Q4 will test SAP’s ability to deliver against the commitments made to the investor community both on revenue and profit related to their cloud business. More importantly, Q4 is an opportunity for SAP customers, who are appropriately advised and informed, to take advantage of this situation and negotiate a favorable and aggressive cloud deal.
Stay tuned for our upcoming blog where we will address SAP’s challenges in converting customers from ECC to S/4HANA and where we believe there are levers to take advantage of this dynamic as organizations plan their future roadmap.
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