 From the SiliconANGLE Media office in Boston, Massachusetts, it's theCUBE. Now, here's your host, Dave Vellante. Hi everybody, welcome to this CUBE Insights, powered by ETR. In this episode of the Breaking Analysis, we're going to take a look at SAP. Thursday, October 10th, SAP surprised the street. They announced early, they pre-announced their earnings. And at the same time, they timed that with the announcement that CEO, long-time CEO Bill McDermott was stepping down. His contract was up for renewal in January of 2020. And he decided that he's going to turn it over to a co-CEO structure that I'll talk about a little bit. So that was big news. Spending on SAP has been holding pretty steady over the last several quarters. I'll share some ETR data with you. It's been quite a run by Bill McDermott. He started out as CEO, I think it was February of 2010 as co-CEO with Jim Hageman, Schnabe. And then two years later was named the sole CEO. And I'll share some data on that in terms of the performance of SAP during his tenure. But the bottom line is we expect, based on the spending data, some continued momentum from SAP. I'll show you some data that shows a little bit of mix in the numbers. ETR basically just dropped a report on Friday that I'll share with you as well. But the bottom line is we see some major challenges ahead for SAP, specifically from a technology integration point that I'll talk to. And it really is not showing up yet in the spending numbers, but it's something that we're keeping an eye on and something that we want to share with you, our community. So Alex, if you wouldn't mind bringing up the first slide here, I'll make some key points really around SAP's Q3 earnings and the CEO news. So as I say, they pre-announced earnings on October 10th after the close. 10% revenue growth, which is a nice healthy double-digit revenue growth. Cloud was up considerably. Bill McDermott made the big emphasis when he was doing the rounds on how their cloud revenue is growing faster than competitors, 33%, but definitely from a smaller base. But their license revenue, their traditional on-prem businesses continues to be under pressure and decline. It's got to, SAP has a strong services business, services and maintenance business, and they're up to 12,000 customers with HANA. I'll make some comments on HANA in a little bit later. This may have some implications for Europe. We've been saying that Europe is overbanked, that banking is soft based on the ETR spending data. So this may be a little bit of a bright spot for Europe. Of course, SAP with its ERP business of strong in manufacturing, anybody who has a supply chain. So this may be a good sign for Europe. That's something that we're watching. And then say McDermott steps down, we're going back to the dual CEO structure. Jennifer Morgan, who headed the cloud business is a longtime SAP employee, and she essentially is going to be taking that role of the customer facing CEO. Christian Klein is really, has history as product development and HANA. He did a stint in finance at success factors and is really an operations guru. So back to that dual CEO role that you saw with Snabe and McDermott, where McDermott was really the front facing sales, you know, facing individual and Snabe was the product person. So that's kind of an interesting structure. We see that, we saw that in Oracle before Mark Hurd stepped down with Safra Katz as co-CEO. So it's not a unique structure, although it's certainly not common in the industry. The next thought I want to share with you is one that you may have seen before. Every time that ETR does a survey, and this is data, fresh data from the October survey, every time they do a survey, they take spending intentions and they ask folks, are you spending more? Are you spending less? Are you spending the same? Adding to the platform, are you subtracting from the platform? So they essentially ignore the, for this net score that I'm showing you now, they ignore the people that aren't spending, that are staying the same, flat, and they take the more minus the less, subtract them out, you get a net score and the net score here is 27%. This is not uncommon for, from the data that I've seen out of ETR for a large company established legacy provider like SAP. Net score 27% is not great, but it's a holding steady score. It's not in the negatives. It's not in the red zone. And so you can see here the 32% of the survey respondents were saying they're going to spend more, 54% basically flat, but only a smaller number, 6% saying they're going to spend less. So it's reasonable for SAP, but if you look at the trend line, Alex, you bring up the next slide, look at the spending trend line from the survey for SAP since the July 16 survey. This is, they do this every quarter. And so the blue is the net score that green minus the red that I've talked about in the past. And you can see that sort of steady decline, but it's, this is not a disaster. What it is, it's a sign of spending momentum, you know, relative to, you know, previous years or previous quarters. And you can see the yellow line is also declining. That's market share. What that means is market share in terms of spend relative to other initiatives. So the categories that SAP participates in, enterprise software, et cetera, spending on SAP relative to other sectors has been in decline. If you look at, Alex, if you bring up the next slide, look at the SaaS business, you'll see that it's a much, you know, happier story. SAP's made a number of acquisitions that I'll talk about in a moment of cloud slash SaaS players. So you can see their SaaS position has been holding firm. ETR sites concur, success factors, Ariba, Calidus, they kind of remain remaining stable versus a year ago. And you can see the market shares, you know, kind of kind of ticking up. So pretty solid from the new growth, that growth, that high growth area. And that's something that the street really pays very close attention to. The next data point that I want to show you on the next slide is actually quite fascinating. So SAP beat its forecasts. So it did a beat and raise expectations for the, you know, for the rest of the year. But so what this shows is ETR's regression analysis. What the quants at ETR do is they crunch the numbers and they compare them to the consensus on Wall Street. And they actually forecast, you know, higher or lower where they think that earnings are going to come in based on their spending data. So you can see here that green into that little, you know, RPM meter, they're in the green, that's where you want to be, 359 basis points ahead of the median forecast. So they're saying, so the ETR second half spending 10.4% versus consensus of 6.8%. Very positive sign. I think it's no coincidence that SAP, of course, beat for the quarter. So, you know, based on that data collected in that October survey, it looks like there's some momentum for SAP. Now, the next slide I want to show you is the stock chart. This is kind of the scorecard, if you will, for Bill McDermott's tenure. And you can see, so I went back to 2010, as I say, started in 2010 as a co-CEO with Jim Snabe, and then look at the performance here. I mean, it's been pretty solid. And so you see today it's up around 10%. As I say, they announced the earnings beat, they announced the revenue beat, and they basically affirmed expectations, maybe raised them a little bit going forward. The reason why the stock is up is the beat, but also McDermott has put in place sort of an efficiency improvement and a restructuring. They've made a promise to improve operating margins by 1% a year over the next five years. They've made a promise to get cloud gross margins to 75% by 2023. They've done a restructuring, I think it affects around 4,400 people, and they're hiring data scientists and AI experts, and machine learning people, and you know, RPA folks, they acquired an RPA company a while ago, I kind of just threw that in because it's such a hot space. Software coders all around the world, China, US, Europe, all over the place. And so that restructuring, the street loves when you restructure, you cut the dead wood, so to speak, with all due respect to the folks that might be affected by this, but the street loves that. So you're seeing the combination of the beat and the uptick or the efficiencies taking place in the quarter, and they time that with the McDermott announcement because they wanted to, I'm sure, time it with some positive news, so you can see the stock's up today. So that's kind of a scorecard on Bill McDermott, I have to say, pretty impressive performance over the last 10 years, or almost nearly 10 years. But here's the thing, we see some major challenges coming forth with SAP, and I want to talk about that a little bit. Before I do, Alex, if you would play the video from Bill McDermott answering a question that John Furrier asked several years ago, and then we'll come back and talk about it. I had a meeting with the CEO yesterday, and this is a very common conversation. He grew his business by acquisition, and now he's got a federation of a whole bunch of companies, and he feels like a holding company. What he wants to do is consolidate these businesses onto a common platform. He won't do it overnight because you can't shut down businesses, but the vision over the next few years is consolidate everything onto one common SAP platform, and take all the databases out and standardize everything on HANA. Now here's what's ironic. The core success of SAP historically has been what? It's been that they have a single unified system. The general ledger and all the financial data and all the supply chain data, all of that is in the same place, accessible, single version of the truth, if you will. What's ironic is SAP's made 31 acquisitions in the last nearly 10 years under the tenure of Bill McDermott. So in a way, SAP is becoming a tech holding company. And I'm picking up on some of the things that Bill McDermott said in his little clip there. In our view, SAP's big technical challenge is to get all this stuff working together. As you well know, it's non-trivial when you make a lot of acquisitions, billions and billions of dollars of acquisitions, which by the way, they promise to stop that torrid pace of multi-billion dollar acquisitions. Very difficult to pull those together. Let's look at some of those acquisitions that they've made, Ariba, Concur. Success factors, success factors is interesting because success factors was kind of talent management. You had kind of core HR from SAP and it's been a challenge to put those things together. Think about the legacy R3 and R4 and all the on-prem manufacturing stuff that SAP still runs, that customers still run. Acquisition of Sybase, Calidus. So SAP's answer to all this integration is to put everything in memory in HANA. So the motivation for HANA, however, in many ways was to compete more effectively with Oracle and not have to rely so much on the Oracle database to get people off Oracle. But here's the thing that SAP didn't do that Oracle did do and I think my opinion, Oracle got right. Oracle did fusion, they bit the bullet and did Oracle fusion. It took the better part of a decade. Actually it took more than a decade but every time Oracle buys a company and every SaaS application that it jams into the red stack runs a fusion middleware and runs the Oracle database. So it's not the case with HANA. So it's kind of an integration nightmare. It's very, very complex what SAP has got handed to the new regime. I think this is a daunting task and I think this might be in part why the timing of Bill McDermott stepping down. I mean, he sees that this is gonna be a heavy lift. It's gonna need more of a product-focused leadership team, that's why I think it's smart that SAP has maybe gone back to that two-headed monster of two CEOs, one that's customer-facing and one that's more product-oriented and R&D-oriented because they have a major integration challenge ahead of them. So as I say, SAP has promised to stop making these multi-billion dollar acquisitions. It's got to get to work on integration, which is going to be a major portion of the task in the next five years. So spending data from ETR shows some positive momentum relative to consensus. Now, remember that the street works on a quarterly shot clock. So if the street says you're gonna do this for earnings and they do this, well, that means higher EPS. So the stock's gonna go up. If you do this and you come in below, that means the stock's gonna go down. So these are very tactical kinds of things. We're talking here about more longer terms. This could be a five to seven year integration challenge. If not more, remember it took Oracle 10 years plus in terms of integrating fusion. So that's something that you need to keep an eye on, especially if you're a customer and you're getting pitched all these different services and cloud services. Just got to think about the architecture for integration. Okay, this is Dave Vellante with Cube Insights powered by ETR. Thanks for watching. We'll see you next time.