One Thing Apple, Walmart, and Exxon Share: They All Use This Company | At Barron's

Key Concepts

• Enterprise Resource Planning (ERP): Software that organizations use to manage day-to-day business activities such as accounting, procurement, project management, risk management and compliance, and supply chain operations.
• Customer Relationship Management (CRM): A strategy and technology for managing all your company's relationships and interactions with customers and potential customers.
• Supply Chain Management: The management of the flow of goods and services, involving the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption.
• Artificial Intelligence (AI): The simulation of human intelligence processes by machines, especially computer systems. This includes learning, reasoning, and self-correction.
• Generative AI: A type of AI that can create new content, such as text, images, audio, and video, based on the data it has been trained on.
• Large Language Models (LLMs): A type of AI model that can understand and generate human language.
• Cloud Computing: The delivery of computing services—including servers, storage, databases, networking, software, analytics, and intelligence—over the Internet (“the cloud”) to offer faster innovation, flexible resources, and economies of scale.
• Data Harmonization: The process of bringing together data from different sources into a consistent format.
• Autonomous Payroll: A payroll system that can process payroll with minimal human intervention.
• PE Multiple (Price-to-Earnings Ratio): A valuation ratio that compares a company's current share price to its per-share earnings.

SAP: A Global Leader in Enterprise Software and the Future of AI

Christian Klein, CEO of SAP, discusses the company's role as a global leader in enterprise resource planning (ERP) software and its strategic direction, particularly in the context of artificial intelligence (AI). SAP, a company with a 50-year history, provides software solutions that manage critical business functions across finance, HR, supply chains, and customer-facing operations for over 150 countries.

SAP's Core Business and Global Reach

• ERP Software: SAP's foundational offering helps companies run their core operations. This includes managing financial books, human resources, and the intricate flow of materials in global supply chains.
• Full Suite of Enterprise Software: Beyond ERP, SAP also provides solutions for Customer Relationship Management (CRM), covering front-office sales and service. This integrated approach aims to provide an end-to-end view of business operations.
• Global Footprint: While headquartered in Europe, SAP has a significant global presence. The United States is its largest market, followed by Europe, with Asia being the fastest-growing region. This global reach allows SAP to help businesses scale internationally.
• Diverse Customer Base: SAP serves a wide range of clients, from global tech giants like Apple, Microsoft, Alphabet, and Amazon, to major retailers like Walmart, energy companies like Exxon and Chevron, and even emerging unicorns like Databricks. They cater to businesses of all sizes, from small and medium enterprises to the largest corporations across 25 industries.
• Competitive Landscape: SAP competes with companies like Workday (in HR), Oracle, and Salesforce (in CRM). However, SAP's key differentiator is its ability to offer an integrated, end-to-end solution that connects customer experience with supply chain orchestration.

Navigating the Global Economic Environment

• Mixed Economic Signals: Klein describes the current global economic environment as a "mixed bag," with different regions performing exceptionally well in different quarters.
• Resilience in Challenging Times: Paradoxically, SAP often sees increased IT spending during economic downturns. This is because their software and AI solutions can help businesses improve productivity, manage inflation, and overcome disruptions, such as those seen during the COVID-19 pandemic with supply chain issues.
• Impact of Currency Fluctuations: A weaker dollar affects SAP's reported topline revenue, as the US is its largest market. However, the company uses hedging strategies and reports in constant currency to provide a clear view of underlying business performance.
• Tariffs and Supply Chain Management: SAP's software helps customers navigate complex trade policies like tariffs by assisting with supply chain reshuffling and adherence to new regulations. The company itself is not directly impacted by tariffs as it operates in the digital services sector.

Regulatory Scrutiny and Business Practices

• EU Investigation: SAP is currently under investigation by the European Union regarding its practices for maintenance and support services for on-premise software. Klein asserts that these are industry best practices, considered fair, and that customers are not exclusively tied to SAP for support. He emphasizes a constructive dialogue with the EU to find a resolution.

The Transformative Power of AI at SAP

• Generative AI as a New Frontier: Klein expresses significant excitement about the next generation of AI, particularly generative AI, which opens up new opportunities for customers. SAP has been integrating AI into its software for years, but generative AI offers enhanced capabilities.
• Leveraging Business Data: SAP's strength lies in its vast repository of mission-critical business data, which is essential for delivering high-quality AI. No other tech company possesses as much business data as SAP.
• AI for Workforce Planning and Reskilling: Embedded AI in SAP software can help companies identify future skill needs, suggest training programs for reskilling employees, and create strategic workforce plans. This involves combining employee, payment, skill, and unstructured data.
• AI-Powered Supply Chain Optimization: SAP is using AI to enhance supply chain planning by providing demand predictions based on thousands of parameters, including weather data and pipeline information. This leads to intelligent procurement and manufacturing recommendations, resulting in significant savings by ensuring the right products are available at the right time.
• From Transactional to Intelligent Systems: SAP's evolution from transactional systems to highly intelligent systems powered by AI is driving massive efficiencies for its customers.
• Tangible AI Applications: Klein stresses the importance of making AI tangible for customers, moving beyond hype to deliver practical solutions. Examples include autonomous payroll processing with higher quality and efficiency compared to traditional shared service centers.

Strategic Vision for the Next Five Years

• Cloud Migration and AI Transition: SAP is experiencing a strong cloud migration among its 400,000 loyal customers. The company anticipates that the revenue boost from cloud migration will be followed by a transition to AI services.
• Reinventing Business Processes: SAP's approach goes beyond simply moving systems to the cloud. They aim to help customers reinvent their business processes using new technologies, automation, and best practices.
• AI's Impact on Employment: Klein expects double-digit top-line growth with underproportional headcount growth due to AI-driven efficiencies. AI will act as a significant efficiency booster in areas like software coding, delivery, and marketing, allowing SAP to cover increased demand with a relatively flat workforce.

The European vs. US Tech Landscape

• US Dominance: Klein acknowledges the US's lead in software companies, attributing it to a robust ecosystem of universities, researchers, venture capital, and a large, scalable market.
• European Challenges: Europe faces challenges due to a regulatory-first approach, fragmented markets with varying laws across member states, and a less developed venture capital landscape.
• Path Forward for Europe: Klein advocates for a shift towards an "innovate first, then regulate" mentality. He believes Europe has strong talent and universities, and with more private investment and a more unified market, it can unlock significant potential.

Financial Performance and Investor Confidence

• PE Multiple and Stock Options: SAP's PE multiple may appear high due to the expensing of stock options, which is considered a more transparent accounting practice. However, Klein believes the multiple also reflects high investor confidence in SAP's strategy, AI focus, execution capabilities, and strong workforce.
• Confidence in Future Growth: Klein expresses strong confidence in SAP's ability to accelerate growth and achieve efficiencies, leveraging its customer base, rich business data, and AI capabilities.

Christian Klein's Journey to CEO

• Long-Term SAP Employee: Klein has been with SAP for his entire career, starting as an intern at 18 and progressing through various roles in customer support, finance, and cloud business (at SuccessFactors).
• Connecting Technology and Customer Needs: His extensive experience has provided him with a deep understanding of SAP's culture, technology, and customer needs. He emphasizes the importance of developing AI solutions in the context of customer requirements.
• Global Perspective: His experience across different regions has contributed to his global perspective, which is crucial for leading a truly global company. He became CEO six years ago.