SAP and the UAE’s digital evolution
It is no coincidence that Bill McDermott, CEO of German software colossus SAP, was invited by the government of Dubai to be a keynote speaker at the World Government Summit. McDermott will share the podium with world leaders, the president of the World Bank, the managing director of the IMF, the quantum physicist/futurist Dr Michio Kaku and the Oxford philosopher Dr Nick Bostrom. Digital transformation is happening in real-time in the UAE, as well as in advanced societies all over the world. Artificial intelligence, robotics, machine learning, big data, quantum computing and the Internet of Things will literally rewrite the future of humankind in code and revolutionise the roles of government, business and human communications.
I was at a recent meeting with the CEO of a prominent Arab bank who told me that smartphone technologies will force him to slash a third of his branch network. The government of Dubai has embraced the Smart Government initiative. SAP’s cloud and enterprise resource software applications power the port terminals of DP World, the digital backbones of the Emirates Group and the electronic banking arteries of the UAE’s largest financial institutions. SAP is Dubai’s innovation partner for expo 2020 and its UAE annual cloud revenue growth is in the triple digits.
SAP will invest $200 million in the UAE and operates its vast Mena business from Dubai Internet City. There are an estimated 2.5 millennials in the UAE and SAP has chosen to open its new development institute and co-innovation lab in the most networked, most cosmopolitan city in the Arab world. If ever there was a tangible corporate commitment to the digital transformation of the UAE, this is it. So I have no hesitation in wishing Mr McDermott marhaba as he arrives in Dubai. Your business software will help to make the world run better and improve the lives of our children in the UAE. Danke schön!
SAP shares trade at €83 in Frankfurt as I write. This signifies an irresistible risk reward calculus for me. This means SAP now trades at 18.4 times 2018 earnings and 12.6 times enterprise value/Ebitda, at least a 15 per cent discount to the global software sector. Yet valuation is not the only catalyst for Europe’s preeminent enterprise application software firm. Why?
One, the wizards of Waldorf will integrate their multiple acquisitions (Ariba, Business Objects, Success Factors, etc) on a common IT infrastructure. This means corporate growth margins will rise in 2018, a ballast for SAP shares.
Two, S/4 Hana is a game-changer new ERM product that will stimulate private cloud demand worldwide and has seen positive early traction. After all, SAP targets 40 per cent gross margins from its global private cloud business by 2020.
Three, innovation defines SAP’s corporate DNA and Wall Street undervalues the sheer momentum of the new product offerings in the firm’s business networks, human capital management and customer engagement/commerce divisions. The cloud and on-premise applications are the new growth engines of SAP even as operating margins expansion accelerates.
Four, there is a clear trend to blowout 56 per cent growth in cloud and subscription revenues in SAP’s Europe, Middle East and Africa business, led by Germany and Russia. Cloud subscription and support revenues were also up double digits in Brazil and China. SAP’s emerging market growth is clearly at an inflection point.
Five, SAP has scaled up its cloud offerings via a series of opportunistic acquisitions since 2011. For instance, in the fourth quarter of 2017 alone, Ariba Networks connected 3.1 million companies trading $1 trillion and Concur Technologies end users were 50 million. Almost a billion euros in cloud subscriptions and support revenues with a 28 per cent growth rate and 61 per cent gross margins tells me that SAP’s share price does not capture potential EPS growth/margin acceleration. Moreover, since I doubt if SAP does a big “transformational” merger deal, the tsunami of cash flow it generates in 2018 will be used to deleverage the balance sheet, boost its dividend and increase its shares buybacks.
Six, S/4 Hana’s momentum is on a roll. Some of the 1000 new corporate clients for S/4 Hana in the last three months of 2017 were the Emirates Group, Standard Chartered Bank, Unilever and Puma. This alone is a catalyst for a valuation rerating.
Seven, SAP just acquired Callidus Software for $2.4 billion to boost its formidable cloud based CRM franchise. This ipso facto, boosts the value of the SAP Cloud Platform.
The German investment bank M.M. Warburg estimates SAP’s fair value to be €108 a share. Mein response? Achtung baby!