>> 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 preannounced their earnings, and at the same time they timed that with the announcement that CEO, longtime CEO Bill McDermot 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 Hagemann Snabe, 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 a 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 you, and it really is not showing up yet in the spending numbers, but it's something that we're keeping an eye on, and it's 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 they 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 a, SAP is 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 over-banked, 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 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 Kline is really, has history as product development and HANA, he did a stint in finance at SuccessFactors, 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-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 Catz as co-CEO, so it's not a unique structure, although it's not, 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, "are you 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 amount, 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 that 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 trendline, Alex, bring up the next slide, look at the spending trendline from the survey for SAP since the July 16 survey, 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 this is not a disaster, what it is, is it's a sign of spending momentum relative to 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 happier story. SAP's made a number of acquisitions that I'll talk about in a moment, of cloud/SaaS players, so you can see their SaaS position has been holding firm, ETR cites Concur, SuccessFactors, Ariba, Callidus, they kind of remaining stable versus a year ago, and you can see the market share's kind of ticking up, so pretty solid from the new 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 didn't beat and raise expectations 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 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, you see that little 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 records B for the quarter, so 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, he 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 their 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 4400 people, and they're hiring data scientists and AI experts and machine learning people, and RPA folks, they acquired an RPA company a while ago, and kind of just threw that in 'cause 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 timed that with the McDermott announcement because they wanted to, I'm sure, time it with some positive news, so you can see the stocks 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 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, kind of 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 all know, it's nontrivial when you make a lot of acquisitions, billions and billions of dollars of acquisitions, which by the way, they promised to stop that torrid pace of multibillion dollar acquisitions, very difficult to pull those together. Let's look at some of those acquisitions that they've made, Ariba, Concur, SuccessFactors, SuccessFactors is interesting because SuccessFactors was kind of talent management, you had kind of core HR from SAP and it's kind of 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, Callidus, 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 and 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, it actually took more than a decade, but every time Oracle buys a company, and every SAS application that it jams into the Red Stack, runs 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 going to be a heavy lift, it's going to 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 multibillion dollar acquisitions, they 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, the Street works in a quarter, so they're on a quarterly shot clock, so if the Street says, "You're going to do this for earnings," and they do this, well, that means higher EPS, so the stock's going to go up. If you do this and you come in below, that means the stock's going to 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. (techno music)

>> Narrator: It's theCube, covering Sapphire Now 2017, brought to you by SAP Cloud Platform and Hana Enterprise Cloud. >> Hi, welcome to theCube, I'm Lisa Martin, with my cohost George Gilbert, we are covering SAP Sapphire Now 2017. George, we've just watched the keynote, the very dynamic keynote with quite a few characters, I want to get your take on some of the things we heard in the keynote today, Bill McDermot kicked it off very lively, one of the first things that was interesting to me, and I'd love to get your opinion, that the journey to the club requires empathy and transparency. It's not often something that we hear from an CEO. What were your thoughts on his vision as to what SAP is doing around empathy and transparency. >> I guess I would take it in the soft skills that it might have been intended which was, empathy in that there's going to be changed management, not just because you're moving the operational capabilities from on-prem to the cloud, but because you're exposing new capabilities that will impact how people do their jobs. And transparency I think is part of the program of migration where you're going to break some things as you move them, and this is going to call out in the process of migration what few things you need to change. I think that's what he meant by transparency, because it's not a complete seamless lift and shift. >> Definitely. I think another thing that kind of jumped to mind is that, not only are these firsts changing, they talked about the digital core and the essential elements of that, but also the fact that they are listening to their customers, customers saying we want transparency, we want to see how things are going like you said, it's not a lift and shift, we need to get more understanding, but I think the undertone of we're listening to our customers was quite strong, when they talked about the new SAP Cloud Trust Center, that seemed to really bring it home in terms of what he was talking about, where not just customers of SAP, but that they're using Hana, can see what's happening within their cloud infrastructures, but also people who aren't using it yet, so really broadening transparency to foster new customers, and acquiring new customers going forward. >> Yes, I guess with the transparency, the footprint for enterprise applications is just growing and growing, and he talked about at one point, we're not just talking to the CIO, the CEO has to be involved, the head of sales, head of procurement, head of supply chain, and I think it is related to the idea of the digital core, and then the what they call the sort of win applications around them, which is the core where the traditional systems of record and the win, they're like the AI in machine learning and Internet of Things and Blockchain, these are strategic new capabilities that enable applications, not just about efficiency, but about opening up new business models, new product and service lines, things like that. >> And they talked about, you mentioned, they talked about openness as the game changer with the nucleus of a digital enterprise being that digital core. You talked about machine learning, AI, blockchain, give us a little bit of an insight as to this expansion of Leonardo, they talked a lot about Leonardo, what were some of the things that really stuck out in your mind as the new capabilities, and who's their audience here. >> Okay, great questions, because their audience is not the typical, their typical buyer was the CFO, because it cost so much, so he had to be involved. IT, the CIO, because he had to sort of standardize the infrastructure on which it ran. And then between the two of them, they were essentially putting in a platform for business process efficiency, and that's what they called the core, and then Leonardo is now the win that surrounds that And that has, they see that having transformational capabilities, and that impacts then not just the departments that were looking for efficiency, but looking for transformation, so that's why they have to get involved, the head of sales, the head of procurement, supply chain, things like that. It's a different sell, just to offer an example, the best description I ever heard for trying to sell enterprise software is like trying to get a bill through both houses of congress, and congress just got a lot bigger. >> So from a target audience perspective, we know that they work with small medium sized businesses, Enterprise, we had Google on stage, they're partnering with Apple, with Facebook, etc, looking at Leonardo, from a target audience perspective, are they talking to mostly the large enterprise north of 1500 employees? >> Those customers come first, because they always have the more sophisticated, greater number of more sophisticated skillsets in place, and as these systems mature from the early adopters, they work the kinks out they're able to generalize things better, and then it's more easily absorbed into the main stream. McDermot said something interesting, which was you're either an early adopter or an also ran. I think he's trying to motivate people to get started, but the adoption curve doesn't really change just because we're doing more advanced technologies. >> One of the things that interested me, is if you look at a small to medium business, and they mentioned a number of businesses, Mod Pizza for example, during the intro, and there's a great video about them on their website, but if you look at an SMB or SMBE about, as a competitor, they're much smaller, typically, much more agile, much more nimble, that was one of the things I was sort of expecting to hear in some sense in the keynote about the small enterprises really becoming the disruptors because they can react and move faster than a larger legacy incumbent. What were your thoughts there? >> In Tech we look at the smaller to mid sized companies as being more nimble, but that's changed in the last few years, where the big incumbents, the rich just get richer, partly because, partly because they have these data assets that they can keep turning into newer and newer products. That may change in the next few years, but right now, the more data you have the more your advantage. And the capital intensity is for the most part so low that they can use all their profits just to buy the little guys who look promising. That's in tech, outside tech, I think the answer to your question will be, how easy can SAP make it to absorb and install and implement and run their system. In the past it was so flexible that you really needed extremely sophisticated implementation advice to get it up and running. If they've taken that out and simplified it, and made it like just, you know, configure these buttons, then that would make a difference. I'm not sure we have seen the answer to that yet. >> Okay, playing on the incumbency theme if you will. Google, Diane Green was on stage, and, at Google Cloud Nexus just a couple of months ago here in San Francisco, they announced a partnership with SAP to deliver Hanna on Google Cloud platform, and today they talked about kind of the expansion of that, they had a customer, a consulting agency that was their proof in the pudding. And one of the things Bill McDermot did say was we are now partnering with Apple with Facebook with Google, so they're talking about some of these incumbents, looking at Google as an incumbent, but also as a competitor of Microsoft Azure, of AWS who SAP also works with, what was your take on the conversation that Diane Green had in announcing this expansion and hey here's a consultancy that's leveraging SAP Han into Google Cloud. >> Well Diane Green had to talk about both, because just running SAP on the Google Cloud platform, without sentient systems integrated to help, a customer who might want to buy it in, implement it, and then integrate it with their existing systems, they probably can't do that on their own, because SAP is still complex enterprise software, even if some of the operational capabilities are offloaded to a cloud vendor, so she needed both SAP and an implementation partner to say hey we're serious, but I guess I would add that when you're evaluating SAP there's more than just the core app, the core app is sort of the center of the universe for a customer who is looking to take their systems of record into the cloud, but there's an ecosystem on each cloud that surrounds that that makes it easy to build applications that leverage, that ecosystem's richest on Amazon, it's not far behind on Azure, and Google is still booting that up. >> So what advantage does this SAP partnership with Google give to Google, but also what advantage of any does it give to SAP? >> Okay, great question, so on the advantage to Google, it puts them as a peer, or more closer as a peer to Azure and Amazon, and then to SAP they can say we're cloud agnostic, I believe their infrastructure technology is both made up of Cloud Foundry which is cross cloud technology coming from Pivotal, and then Open Stack as a sort of infrastructure technology that's coming from a whole bunch of the legacy IT vendors who didn't want to be beholden to Amazon. >> What are the other things today, if we look at future trends, and that's kind of what I was expecting to hear, and we heard about a lot of them, big data block chain, we heard about IOT, industrial IOT, IOE, Deep Learning, they talked a lot about how Leonardo was going to facilitate machine learning, artificial intelligence, really help deliver automation, but one of the things that I was wondering if we were going to hear about was mobile. So a few months ago, I look at my notes here, they announced, I believe it was at Mobile World Congress, this partnership with Apple, so SAP opened their cloud platform to iOS developers with the goal of really establishing a bigger presence in mobile apps to power iPhones, etc, with Hana. Curious about did you expect to hear things about mobile today, or was that not part of the plan. >> If I had expected to hear more it would have been from a partner like IBM. Because with Apple they were essentially creating a toolkit for people to be able to build user interfaces on an iOS phone, and I think they've done Android as well, but in other words, the developer is left to their imaginations to fill in the functional capabilities of whatever app, they just have a frame work that makes building an Apple UI accessible. What IBM did with Apple was actually more significant, which was, hey we have all these industry solution groups, and we all these bright ideas functionality in the cloud, but we dont' have an accessible way to deliver it. SO what IBM teamed up to do with Apple, wasn't just give me, tell Apple give me an iOS UI development kit, it was let's collaborate on building some real apps that pilots need, that delivery folks or field servers folks need. So, I guess, I wasn't blown away by what they did with Apple. >> Okay, maybe that's a to be continued. One of the other themes that we heard today from Brad Luker, was software needs to become a strategy and that openness in that respect is an absolute game changer, allowing machine learning integration, social data integration for customer profiling, and really helping these user of SAP understand customer behaviors. He also said that every company today regardless of size needs to drive innovation by connecting all these business processes when software becomes strategy. What was your take on that from a thematic perspective, as well as a real world implication perspective for SAP customers from the small enterprises to the large. >> You know, I would have through that that would be the whole focus, you know the famous Mark Andersen SA from several years ago, Software's Eating the World. It's now really kind of data is eating software, it's data programs the machine learning algorithms that increasingly make up software. But he was a little bit, he talked at a high level about it, the only example I recall was Hybris, which is their commerce front end, where they're going to link marketing sales service, support, customer experience, and they're going to open this up through micro services, so that other developers can easily leverage these capabilities. That to me was end to end processes integrated on a SAP platform, but I would have liked to have seen a lot more examples of that. >> So you talked about Hybris, and on the Leonardo front, the expansion of that, they really talked about this expansion of Leonardo giving companies the ability to reinvent, that word has been used a lot by a lot of companies including Dell, years ago reinvent, reimagine, that could be used to mean a lot of things, but they talked about that as a facilitator of intelligently connecting lots of things, people, processes, systems, etc, what's your take on Leonardo as an accelerator of innovation as they positioned it to be. >> You know, that was sort of to re-emphasize they called the digital core, which is their legacy, not in a bad way, that's their asset that they can leverage to move in any direction. The traditional apps. And Leonardo was the win capability, how to leapfrog your competition. And they used this wonderful example of a win farm, where they could then look at a particular instance of a winmill and find where the stresses were and a capability I haven't seen yet, they were actually able to put a virtual sensor on that errant winmill and see where the stresses were coming from. But that capability isn't completely unique, there's GE and Predicts, and there's Parametric Technology with their Thingworks, and IBM has their Genius of Things, they're not alone in going after this notion of the digital twin and integrating it within the entire business process life cycle, their value add should be to make it easy to create that life cycle for the digital twin as designed as built as deployed as serviced as operated, to make that possible without tons of programing and to link it in with core business processes like field service, but again, it seemed a little bit more like a scenario than a finished app. >> Okay maybe you're saying for them to be differentiated it needs to be more of a me too, it needs to be much more simpler, maybe this is just the precipice they're on, and just didn't context it that way. >> It felt like a hey this is where we're moving to, as opposed to this is where we already are, and they have a lot of assets to bring to bear to get to that point, it just, they weren't really concrete in saying okay here's the functionality we have today, here's what we're going to add over the next 12 to 18 months, so it felt more like a this is where we're going. >> That's a good point that you bring that up from a road map perspective, and perhaps that will appear in some of the break ads which I would anticipate because they talked about that in the transparency and the empathy part of the keynote when Bill McDermot was first on stage about we're listening to our customers, we need to show you these roadmaps, so they did mention in text having impressed as well that it's for three particular products that they have these three year road maps, and obviously they'll be adding more over time. But if you look at SAP, 45 year old company, their roots in on-prem ERP, looking at their evolution and even kind of getting to the topic we were just on, the virtual reality and understanding sensors, is this a natural progression of an ERP company to transition to completely the cloud, help keep their customers there, establish this nucleus of the digital core, and then expand upon things to bring in machine learning, advanced analytics, predictive modeling. Is that a natural expansion? >> You know it's funny the way you asked that, because I think the answer is yes. But it happened in this wave where first it's completely custom, and you have the excentures, PWCs and the specialized sort of system integrators, the small ones that have boutique capabilities in big data and machine learning. They start building those sorts of apps first for big companies, or for internet center companies who really need to be at the bleeding edge, then comes the IBMs of the world where they have these semi-repeatable capabilities, custom development in the industry solutions groups and in their global business services, and so they're there composing a bunch of semi-finished piece parts, and then when it gets to SAP, it should be pretty much almost packaged and SAP goes in and configures it for the customers, in other words they flip a bunch of switches that make choices, so you go from completely custom to configured and almost fully packaged, and that's a natural progression over time, and every time we encounter newer technology that starts on the back, goes again to the fully custom solution, so I guess I do expect SAP to follow this pattern, their sweet spot, their business model is the repeatable stuff. >> When they talked about running core businesses in the cloud to get the benefits of scale, elasticity, availability, I think this was actually Byrne that was saying that they need to be using intelligent apps to automate as much as possible the hyper connectivity as they were talking about is really going to enable that, and he did predict that 80 percent of business processes will be running through SAP or 80 percent of them running will be fully autonomous in the near future. That's a bold number. >> Yeah, you know and that's the number behind the anxiety that everyone has about so what happens to my job, especially when we have conversational bots, we don't need host on our shows, I mean it's a bit of an exaggeration. There are a lot of people who worry that jobs will get completely automated, and then there are other people who say look, it's not every task I do that can be automated, it's some tasks, and there will be a machine that augments me, and changes the nature of my work, but doesn't replace me. One example is Gary Kasparov, who was beaten by IBMs Deep Blue chess playing program, I forget how long ago, maybe 12 or something like that. The best chess players in the world now, are not the computers, they're the ones who pair with a grandmaster with a computer playing against another grand master with a computer, because there's an intuition as to where to look that is not completely replacing human judgment. It's more like a compliment of judgment and then raw calculating horsepower. >> Interesting accompaniment. Well George, thanks for sharing your insights on the keynote, from SAP Sapphire Now. For George Gilbert, I'm Lisa Martin, stick around, we've got more coverage from SAP Sapphire now 2017. (upbeat electronic music)