Enterprise software developer SAP SE (NYSE: SAP, XETRA: SAP-DE) said on Monday that it had entered into a three-year agreement with Microsoft to assist its long-list of enterprise clients to move their business activities into the cloud. The agreement resolves the complexity in shifting from SAP’s traditional physical location of the enterprise to remotely anchored facilities. Following the news, the stock closed almost flat at $131.80.
According to Jennifer Morgan, Co-Chief Executive Officer, the partnership, dubbed “Embrace,” will enable customers to carry out operations anchored through remote servers backed by SAP’s flagship S/4HANA database. Morgan further stated that the product would be offered via the distribution channels of Microsoft. “We bundled SAP’s cloud platform services to support customers around the extension, integration, and orchestration of SAP systems.”
Interestingly, the partnership has been revealed after long-time CEO Bill McDermott resigned to give way for Jennifer Morgan along with associate CEO Christian Klein. Notably, Ms. Morgan is the first woman to become CEO of a company, which is a constituent of Germany’s DAX index (made up of blue-chip enterprises).
Walldorf-Germany-based SAP, in its third-quarter results, has reported that it had signed up 500 S/4 Hana clients and asserted that it now has over 12,000 clients for its cloud-based ERP (enterprise resource planning) platform, an increase of 25% on a y-o-y basis. In the third quarter, nearly 40% of the additional S/4 Hana clients were new clients to SAP.
The partnership, which assisted SAP in double new cloud orders in 3Q 2019, resolves the complexity in the transition from SAP’s conventional on-premise solution to remotely anchored facilities. The collaboration strengthens SAP’s existing strong bond with Microsoft and its Azure cloud unit, even though the company also has a working relationship with Amazon Web Services and Google.
The latest deal with Microsoft is expected to quicken the adoption, as per SAP. The company said, “This partnership will both accelerate and simplify customer migration to S/4 Hana on Microsoft Azure.”
As part of the deal, Microsoft intends to resell constituents of SAP Cloud Platform parallel to Azure. SAP stated that the product is intended to simplify the transition of SAP ERP and SAP S/4 Hana clients from physical location of the enterprise to the public cloud.
Jennifer Morgan, co-chief executive officer of SAP, opined that the partnership would make it easy and cost-effective for customers to shift to the cloud. Jennifer Morgan said, “This partnership is all about reducing complexity and minimizing costs for customers as they move to SAP S/4 Hana in the cloud. Bringing together the power of SAP and Microsoft provides customers with the assurance of working with two industry leaders, so they can confidently and efficiently transition into intelligent enterprises.”
Judson Althoff, executive vice-president, worldwide commercial business, at Microsoft, stated that the partnership deepens the already existing relationship between the two companies. “SAP’s decision to select Microsoft Azure as its preferred partner deepens the relationship between our two companies in a differentiated way and signals a shared commitment to fostering the growth of the cloud ecosystem.”
Soft-pedaling native cloud tool has become one of the major factors in the improvement in SAP’s cloud gross margins. In the third quarter, gross margins increased 5.4% to 69%, versus the 2023 target of 75%.
The company reported its preliminary third-quarter results on October 11th. Yesterday, the company released the final results, which were in line with preliminary results.
In 3Q 2019, SAP posted revenues of €6.8 billion, up 13% on a y-o-y basis. Segment-wise, cloud and software revenues rose 12% y-o-y to €5.6 billion. Cloud business reported revenue €1.8 billion revenue in the recent quarter.
New cloud bookings grew 39% to €572 million and rose by 51% devoid of infrastructure-as-a-service (IaaS). Analysts have pointed out that the latest collaboration with Microsoft had generated an 18% to 39% increase in new cloud orders.
In the latest quarter, SAP posted a 10% rise in revenue and a 15% increase in operating profit, after one-time adjustments, assisting it in attaining a growth of 1.7% in its operating margins. The company reaffirmed its outlook for the year and through to 2023.
Technically, the stock has bounced off the 50-day moving average, which acts as solid support. The MACD indicator’s reading has turned positive. As a result, we can anticipate the stock to remain bullish in the short-term.
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