SAP Prescribes a Good Night’s Sleep: Q3 2017 Earnings Analysis

Based on SAP’s Q3 2017 earnings announcement on October 19^th, its CEO Bill McDermott purports to be resting easy.  But if you’re looking to do a deal with SAP in Q4, how are you sleeping?

Let’s dig into a few of the key numbers to understand the basis for Bill’s statement, “(If)… you are the CEO of SAP, you will be sleeping very good tonight.”

The Confidence Factor

SAP’s key Q3 results appear quite positive and are reflective of SAP’s bullish position:

• Cloud subscriptions and support revenue rose 27% in the quarter.
• Classic software license and support business revenue rose by 4%.
• S/4HANA customers rose 70% year-over-year, of which 40% were net new customers.
• SAP nudged up guidance for full-year core operating profit to between 6.85B € and 7.0B € and said 2017 total revenue would range from 23.4B € to 23.8B €, marking year-to-year growth around 6- 8%, excluding currency effects.

The Not-So-Good News

All of these numbers seem to justify a very strong outlook for Q4 and beyond.  However, there were a few metrics which are of some concern to SAP:

• Cloud and software gross margin decreased by 1.3 percentage points year-over-year.
• Specifically, cloud gross margin decreased by 3.3 percentage points, which was lower than expected.
• Third-quarter revenue grew 8% to 5.59B € ($6.6B) from a year earlier, falling short of the mean forecast of 5.71B €.
• Core profit excluding special items rose by 4% to 1.64B € at constant currency rates, below the 1.69B expected.

The Regional Variances

In addition, there are some interesting differences in regional performance which should factor into a potential customer’s thinking in Q4:

• In Europe, cloud and software revenue increased by 9%, and cloud revenue increased by 46%.
• In Asia-Pac, cloud and software revenue increased by 9%, and cloud revenue increased by 37%.
• In the Americas, cloud and software revenue increased by 7%, and cloud revenue increased by 19%.

SAP is very confident they will deliver the Q4 pipeline, to the point where Bill McDermott exclaimed, “…[I]t’s going to be a really strong Q4 bookings number. I’ll count on it…It’s in the bank.”

So, What Does This Mean if You’re Considering a Q4 Deal with SAP?

• SAP will be aggressively pursuing closure of their Q4 pipeline, so expect significant pressure if you are in a sales cycle.
• Given the miss on margin, be aware that SAP will hold firm on limiting aggressive discounts, particularly in the cloud space.
• If you’re in the Americas, the gap between the regions may only exacerbate the pressure to close a deal and maintain margin.

With all that said, if you want to sleep as restfully as Bill McDermott and successfully close a transaction with SAP in Q4, you should have a strategy to proactively manage your deal:

• Understand your leverage and options and how to maximize them to your benefit

  • Whether you are a new customer or an existing customer, or a cloud vs. software user, these nuances can be used to improve your bargaining position if you can develop your strategy around them.
  • The option of not doing a deal is powerful, and skillfully creating uncertainty puts SAP on the back foot.
  • Setting the cadence and developing your story for when and if you do a deal keeps you in control.

• Obtain market intelligence to analyze SAP’s proposal so you can make an informed decision

  • SAP often assures you you’re getting the best deal, but how can you confirm this is true?
  • If you do one or two SAP deals a year, your market intelligence is limited, so you should leverage a trusted advisor who not only has the benchmark data but can help you negotiate a comprehensive set of commercial terms.

• Ensure your SAP account team is at the right level, advocating for you as a customer

  • Make sure you know the SAP executive who owns the P&L for your deal.
  • Set the bar often and early as to what your leadership expectations are in the deal.
  • Effectively manage SAP and your executives’ interactions will keep your message and objectives front-and-center and keep you from being managed by SAP through the sales cycle.

SAP is performing well, and if you empower yourself with the appropriate strategy, there’s no reason why you can’t benefit from their success by using key leverage points to secure a solid transaction in Q4.

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