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13 Oct 2020
SAP set to join the exclusive USD10bn Cloud Club
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SAP set to join the exclusive USD10bn Cloud Club
SAP set to announce USD10bn Cloud ARR
We (and consensus) expect SAP to announce EUR2.1bn of cloud revenues in Q3, putting the company on a USD10bn annualised Cloud Revenue run rate. SAP would join Microsoft, Amazon, Salesforce, IBM and Google as companies with USD10bn of Cloud ARR, with Salesforce being the only other SaaS oriented provider larger than SAP. And yet, SAP''s core market (ERP) is only now set to move to the cloud, driven by COVID related digital acceleration. An SAP customer is going live with S4 Hana Cloud every hour as the product cycle accelerates, and the coming cloud ERP wave will see SAP much better prepared and positioned than when CRM and HCM started moving to the cloud. Not only will SAP likely be a Cloud ERP winner (with key partnerships with Amazon, Alibaba, Google and Microsoft), but with most SAP cloud apps now migrated to a common data platform (Hana) and with deeper functional integration nearly complete (90% by year end), SAP will be well positioned to cross sell its impressive portfolio of cloud solutions (ERP, HCM, eCommerce / Customer Experience, Travel and Expense, Procurement, Supply-chain, Analytics, PaaS and IaaS) into its underpenetrated customer base of 35k ERP customers and 440k overall customers.
Q3 results less significant than CMD, which may point to accelerating cloud rev growth
SAP will announce Q3 results (its smallest quarter) on Oct. 26. We are 2% below revenue consensus with c/c license declines of 17% and Cloud growth of 18%, with op margins of 31.4% vs 30.9%. There is a chance SAP uses the Q3 results to update its 2023 outlook ahead of its CMD (expected before year end). We expect SAP to lower its 2023 adj margin outlook (we model 33%, below the 34% guidance) but we believe the company may maintain Cloud revenue guidance for at least EUR15bn and its EUR8bn FCF guidance, which we believe would be well received. Lowering the margin target now would allow the CMD to focus on the levers management...