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SAP earnings strong for Q1, Oracle claims dismissed

SAP results in Q1 2021 were strong, led by a growth in cloud revenue and the growth of the customer base for SAP S/4HANA. However, there are weaknesses in the Intelligent Spend unit.

SAP reported a strong first quarter 2021 fueled by rising cloud revenues and addressed claims that its customers are moving to competitor clouds. SAP Q1 earnings were €6.35 billion ($7.66 billion U.S.), a rise of 2% over the same period last year, with cloud revenue at €2.15 billion ($2.59 billion U.S.), up 1% from the previous year.

Calling it "one of the strongest quarters in SAP history," SAP CEO Christian Klein highlighted the growth of SAP's cloud business on the company's earnings call on Thursday.

Christian Klein, CEO, SAPChristian Klein

"Q1 was a blowout quarter in the cloud. We saw the fastest growth in new cloud business for five years, which boosted our current cloud backlog up 19%," he said.

Cloud revenues for SAP's cloud business outside of its Intelligent Spend business unit (which includes SAP Ariba, SAP Fieldglass and SAP Concur) were very strong, Klein said, including a "stellar" 43% growth in S/4HANA Cloud.

Although it did not share how many were S/4HANA Cloud, SAP added 400 new S/4HANA customers, bringing the total number of S/4HANA customers to 16,400.

Oracle claims dismissed

Without mentioning any names, Klein pooh-poohed recent claims made by Oracle founder and CTO Larry Ellison that more than 100 SAP customers had replaced SAP applications with Oracle applications.

"We cannot let recent unfounded claims made by one of our competitors go entirely uncommented," Klein said. "Personally, I see it as a very positive sign that one of our main competitors spends so much time talking about SAP on their own earnings calls. We have been through their customer list and we confidently reject his claims. I absolutely encourage you to do your own research and talk to the customers as we did."

Klein pointed to a number of big customer wins in Q1 2021, including Google, which switched its financial systems to SAP from Oracle. Other key customer wins for a variety of SAP systems include Toshiba, BioNTech, BMW, AstraZeneca, Ikea and Peloton.

The quarter also included the launch of the Rise with SAP program, which offers customers a simplified path to adopt cloud systems based on the core S/4HANA ERP system and the SAP Business Technology Platform, an application development and integration environment.

Rise with SAP has closed more than 100 deals in Q1 2021, Klein said, including Carrefour Brazil, Sono Motors, Kia Chile, Grupo Feromax and Hillrom.

SAP earnings flatter than they look

The SAP earnings numbers look impressive at first glance, but the results were fairly mixed, said Andrew Bartels, vice president at Forrester Research.

While revenue grew by 2% over the same period a year ago, the base of measurement was comparatively low, Bartels said.

There's obviously this huge potential that as their customers move they may consider other vendors, but we're not seeing signs of that.
Trevor WhiteResearch manager, Nucleus Research

"Overall, the increase was not that strong," he said. "They did talk about a 12% increase in the cloud revenue, which is not bad, but remember for comparison, vendors like Salesforce and other SaaS vendors have or will report growth in their cloud revenue that's more in the 20%-25% range."

SAP's biggest weaknesses are found in the cloud applications of the SAP Intelligent Spend business unit, including SAP Ariba, SAP Fieldglass and SAP Concur, which were all hit hard by the COVID-19 pandemic business disruption, according to Bartels.

"Those revenues were not that strong, even though there are some reasons that are not necessarily worrisome for that," he said. "For example, a lot of Concur's revenues come from travel and expense reporting, and there's not a lot of travel going on so it's not surprising that's weak."

The upside for SAP going forward is that revenues from the Intelligent Spend unit will grow as the economy improves, Bartels said.

"Ariba and Fieldglass both have revenue models that are very much tied to transaction flow; Ariba's revenues are tied to transaction flow across the Ariba Network, Fieldglass' revenues are tied to a percentage of your spend on contingent workers," he said. "Both of these have been weak, but will improve as the economy and business activity picks up."

Cloud transition gets serious

The results were somewhat mixed, agreed Trevor White, research manager at Nucleus Research, but they were not that surprising given the COVID-19 pandemic business climate and SAP's transition toward cloud computing.

Trevor White, analyst at Nucleus ResearchTrevor White

"Overall, we saw the movement that SAP was hoping for in that the customers are getting serious about the cloud," White said. "We're seeing some strong feedback from customers about the potential there, and they've positioned themselves well to be able to move everybody into the cloud slowly but surely without the huge risk of losing out to the Oracles of the world and others."

The pandemic has forced SAP and its large customer base that continue to run on-premises systems to see that the cloud is the future, he said. To its credit, SAP was able to pivot and roll out Rise with SAP as a way to move these customers to the cloud on their own terms.

"Because SAP customers tend to be big and risk-averse, it is a big deal to move them over [to the cloud] and it is a big risk for both," White said. "There's obviously this huge potential that as their customers move they may consider other vendors, but we're not seeing signs of that and a lot of that is being driven by Rise and the path that SAP laid out for their customers."

Jim O'Donnell covers ERP and other enterprise applications for SearchSAP and SearchERP.

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