Over the past several years, SAP CEO Christian Klein has been on a mission to accelerate SAP into the cloud. The enterprise resource planning giant beat earnings expectations on Tuesday despite a rough quarter for a lot of software companies, perhaps a sign that it is starting to turn a corner.
The company posted third-quarter revenue of €7.8 billion ($7.7 billion), while cloud revenue rose 25% year-over-year to €3.29 billion.
“Two years ago actually, we started the transformation of SAP where we said, ‘Hey, we want to move our portfolio completely to the cloud, because this is where we can serve our customers best,” Klein told Protocol in an interview Tuesday after the release of its earnings.
This quarter’s earnings show positive signs, but it hasn't been all smooth sailing over the past three months. The war in Europe and broader macroeconomic uncertainty led SAP to lower guidance last quarter, and the company has struggled to move its legacy ERP customers into the cloud.
But Klein said he anticipated this. “We said, ‘Hey, the next two years our profit ambition will come down because we are changing from up-front to a subscription-based license model.’”
In the past SAP has struggled to move its customers to the cloud. That’s why the company introduced its RISE with SAP initiative early last year, which is intended to take customers “by the hand” and guide them through their cloud migrations, said Klein. It seems to be working: “Our flagship product S/4HANA has seen 108% growth,” he said.
Although SAP is intensely focused on migrating customers to the cloud, it still has to support its on-premises customers. For instance, some public sector customers might want their software on-premises in their own data centers, said Klein. “We are a big believer that while more and more customers move to the cloud, there will also be hybrid landscapes,” he said.
SAP also faces challenges in Europe, where the company is headquartered. Europe is a difficult market to sell enterprise software to because of the existence of member states, high standards for data privacy and sovereign clouds, and the recent geopolitical risks, Klein said.
Despite these challenges, Klein is still confident about SAP’s future. The company maintained its fiscal year guidance of €11.6 to €11.9 billion and remains bullish on the need for ERP software in a world of “disrupted supply chains.”
Moving forward, SAP plans to build more data centers in additional countries, hire talent across Southeast Asia and the African continent, and increase focus on its core products. That includes S/4HANA, supply chain, and HR in some areas, but not contract management for example, said Klein.
Overall, Klein seems unfazed by SAP’s challenges over the past several years. “We said to the financial market, 'Please trust us, we are going to master this transformation. And after year two, you’re going to see higher recurring revenue, and also higher operating profit,'” he said.
Today Klein feels SAP has reached a “tipping point” in cloud growth and operating profit. Next year, he said, SAP will deliver on both.
