SAP’s CEO Says Sales Weakness Is Evidence of Cloud Transition

SAP SE Chief Executive Officer Christian Klein sought to put a positive spin on his company’s slowing revenue growth, saying more clients are transitioning to cloud-computing products, after the German software giant lost a third of its value on a forecast that alarmed investors.

“Covid-19 is an inflection point for our customers,” Klein said Monday in a Bloomberg Television interview. “They had a big ask: they want to accelerate the move to the cloud. This is what we are now doing. We are following the needs of our customers.”

SAP, like peers Oracle Corp. and Microsoft Corp., has spent years attempting to move away from legacy, or on-premise, software that resides in clients’ computer servers, to cloud-based software, which is delivered over the internet. SAP, which at 48 is older than the man who has led it for the last year, has seen uneven results in this modernization effort. Klein, 40, has focused on developing and selling cloud-based products to show gains by 2025 after his predecessors bought major cloud-based subsidiaries. But twice during the coronavirus, the Walldorf, Germany-based company has warned that the pandemic would stymie client deals.

Last week, SAP cut its revenue forecast for the full year and said it expects a fresh wave of lockdowns to hurt demand through the first half of 2021. The stock has lost almost a third of its value since the announcement.

Klein said Monday the pandemic has “absolutely” accelerated a shift away from legacy software.

“We had a guidance out there that had foreseen higher growth in” on-premise software, he said. “And now I don’t want to trade the success of our customers by forcing them to buy more on-premise software while they want to move to the cloud.”

The problem for SAP is that more than 50% of its revenue still comes from traditional software, compared with 30% from cloud-computing tools. Legacy software deals can also be more lucrative because clients have to pay in full upfront rather than subscribing to the cloud-based product over time. In addition to reducing its forecast, SAP reported that overall revenue in the period that ended Sept. 30 declined 4% to 6.54 billion euros, missing analysts’ average estimate.

Klein sought to downplay the results, saying investors have told him privately that the company is setting itself up to be successful in the mid- and long-term. He also refuted criticism that the company’s cloud results were just as disappointing as traditional software performance.

“When you look at our Q3 numbers, many said, ‘Why is cloud revenue only 14%?’” Klein said. “Actually our cloud revenue was up 26% and with that, surpassed the level of our competitors if you exclude our travel and expense solution Concur. So I’m confident we’re going to accelerate our growth in the cloud in the years to come.”

Marc Benioff, CEO of SAP rival Inc., said on Bloomberg Television last week that SAP’s weak results were not a harbinger of bad news for the rest of the software industry, and reflected the company’s challenges related to a CEO and cloud transition. Monday, Klein declined to discuss the competitive environment, saying he had a “friendly conversation” with Benioff in Davos and wishes “Marc all the best.”

©2020 Bloomberg L.P.

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