What we learned: IBM, SAP and MuM report CQ1

As I noted yesterday we’re starting to get into earnings season for software companies and, as expected, the news is mixed. If you want details, go here for details on IBM’s quarter, here for SAP, and here for MuM’s results — following are just my main takeaways on what is actually a lot of newsworthiness. And yes, these are very different companies –IBM had revenue of almost $80 billion last year, while Mensch und Maschine (MuM) reported revenue of about $250 million– but they do give us early insights into what might be coming in our PLM-focused universe.

Here, my highights:

• Q1 was not awesome but not horrible either:
  • IBM‘s revenue was down 3% year/year as reported, though that was more or less as expected and is due to divestitures. Looking at continuing operations, revenue was up modestly.
  • SAP preannounced a couple of weeks ago, so this only covers the new news. Total revenue was up 7%, led by cloud revenue, which was up 29% as reported. However, software license and support revenue was down 3%.
  • MuM reported Q1 revenue of €79 million, up 25% as reported, with revenue from proprietary software up 11%, and the VAR business, up 30%. That’s more or less in line with last year.
• A massive shift happened during the January/February/March quarter, at different times in different geographies:
  • IBM CFO James Kavanaugh told investors that “through February, we were tracking roughly in line with our expectations. As we got into March, the health situation and resulting social distancing became more widespread. As you would expect, we saw a noticeable change in client priorities [and] effectively a pause as clients dealt with their most pressing needs. This was most pronounced in our software business, where the vast majority of transactions typically closed in the last two weeks of the quarter. For those clients that did engage at the end of the quarter, there was a noticeable change in priorities where focus very quickly shifted to the stability of their operations and preservation of cash. They moved ahead with spending that addressed immediate and essential needs, including running mission-critical processes and securing a remote workforce.” and CEO Arvind Krishna said, “[non-software] parts of our business maintained modest momentum.”
  • As it had earlier indicated, SAP CEO Christian Klein, said that “SAP started the first two months of the quarter with strong momentum and healthy growth … [But] as the impact of the COVID-19 crisis rapidly intensified towards the end of the quarter, a significant amount of new business was postponed. This is reflected, in particular, in the significant year over year decrease in software licenses revenue.” To give you a sense of how much was postponed: According to the company, its cloud backlog has increased by 25% to €6.65 billion.
  • MuM said it saw “high demand for the Autodesk maintenance to subscription offer and for BIM solutions, in spite of certain Corona retarding effects.” It did say, however, that “The Corona crisis had approx. EUR 1-2 mln negative effect on sales / gross margin and approx. EUR 0.8-1.5 on EBIT, mainly in the CAM and Training Courses business. The overall impact is bearable, however, just preventing an even higher record result.”
• Cloud products saw acceleration in Q1, not surprising as everyone who could, shifted to working from home:
  • IBM reports “strong cloud performance … with cloud revenue up 23%. By bringing together our technology and expertise to help our clients accelerate their journeys to cloud, our cloud revenue has grown to $22 billion over the last 12 months”.
  • SAP talked about how it gives customers the choice of how to deploy S/4HANA, including “cloud, on-premise and hybrid so they can choose the scenario or combination that is right for them, all on the same data model with a consistent user experience”. Even so, that giant deferred revenue bump (see above) means customers are still interested, just not sure of the timing of their buys.
• Services revenue performance was mixed, since it depended a lot on what services were being offered.
  • IBM, for example, saw a 5% increase in consulting revenue “led by offerings that help clients with their digital reinventions such as cloud advisory and application modernization, and offerings that leverage AI to inject intelligence into business processes”. Why? To”re-engineer [client] business processes and IT environments for speed, flexibility, and efficiency to better serve their end-users”.
  • But even that shifted at IBM, as the quarter progressed: “as the impact of COVID-19 intensified in March, clients began to deprioritize some of [the enterprise IT] projects. In this environment, we are aligning our go-to-market and delivery resources to the near-term opportunity, addressing challenges like engaging customers virtually, modernizing and migrating applications to the cloud, empowering a remote workforce, and cybersecurity and IT resiliency.
  • MuM, in our little PLMish world, echoed the finding by saying that it saw a slowdown in its training business. Presumably, some of that has shifted online where possible.
• About Q2 so far:
  • IBM‘s Mr. Krishna said that “larger transactions tend to get bunched up at the end of the quarter [meaning that April so far isn’t a good indicator of market appetite]. We haven’t seen, at least so far, any big change in the subscription side, coming into April. That is no doubt because we do tend to run our client’s mission-critical workload, not the workload that’ll be the first to turn off. If anything, it’ll be amongst the last to get impacted. And so, the subscription side, we feel quite good about it. Now, on the transaction side, so far things are holding up, but it’s too early to tell.”
  • Yes, MuM did start offering cloud-based training in April and says it is seeing the start of a recovery in its Chinese CAM business.
• What about the rest of the year?
  • IBM’s Mr. Krishna said that the company has decided to not issue guidance for the year or the quarter: “[In these] unprecedented times this quarter is not the time to declare that we have clarity … But please know there’s a difference between the ability to accurately predict a near-term revenue or earnings per share number, and confidence in our business over the longer-term“.
  • On a positive note, IBM’s Mr. Kavanaugh did say “As we look forward, we have a solid base of business and a growing backlog, though in the near term, we expect customers to continue to delay and replan some projects.” That’s a positive because delay isn’t cancel — cancel would be dire.
  • SAP does still offer guidance for Q2 and for 2020, based on the “challenging demand environment deteriorates through the second quarter before gradually improving in the third and fourth quarter as economies reopen and population lockdowns end”. With those caveats, it sees cloud revenue up 18% to 24% at constant currencies, to below the low end of earlier guidance. Cloud plus software revenue is expected to be up 1% to 4% — and total revenue to be in a range of €27.8 billion to €28.5 billion at constant currencies, up 1% to 3% at constant currencies. That said, SAP slashed €1 billion from its expected operating cash flow for the year, now estimated to be €5 billion, because of COVID-19.
• And as far as doing business in the time of COVID-19:
  • IBM said that it has “shifted from a predominantly face-to-face engagement model to a virtual one, now with almost 100 percent of our [Global Business Services] delivery resources not only working remotely but productively working to support our clients.
  • SAP said much the same, moving to a “virtual sales and remote implementation strategy to enable the large majority of its employees to work productively from home”. The company has also slowing hiring and reducing discretionary spending, in addition to “natural savings e.g. from lower travel and virtual rather than physical events”. (Although, as I noted earlier in April, it saw a big hit from the canceled user conferences.]

So, what does all of this tell us:

1. Buyers are conserving cash since they don’t know what’s coming at them for the rest of the year. This favor subscription deals but means we may see fewer large enterprise/perpetual deals.
2. It also means that, at least from the Big IT point of view, enterprise engagements may be on hold. And that makes sense –why automate a system that may not be the right thing when end-customers start buying again? It ties into conserving cash, but also into looking at new ways of interacting with customers and partners. I see it as part of the gain holding pattern we all find ourselves in right now.
3. Larger deals = longer sales cycles. Always true but apparently, especially today.
4. Engineering and business operations software is absolutely not, in the main, optional. Each of the companies used words like “mission critical” (though, keep in mind that shareholder communications are a form of marketing so of course, they’ll say that!). To at least some extent, buyers will keep paying for these licenses, though they may stall new purchases.
5. Cloud, which I think is shorthand for flexibility, is key. You want to work remotely? We’ll make it possible by having the same functionality available on-prem, in-cloud or virtualized. You want to collaborate with people who are able to go to the office? We can do that, too. My point is that companies that are succeeding remove the friction of place and time — and let customers get on with it, wherever they are.

We’ll get more specifically PLM in the next few weeks but I expect we’ll hear very similar news.