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William Ball

Fund Manager, Sanlam UK

German enterprise software company SAP has been a holding in the Sanlam Global High Quality Fund since the beginning of 2020, generating a compound annual total shareholder return of just shy of 16%. In our view, SAP remains a high-quality business. The transition to the cloud presents a significant opportunity for the company to drive long-term sustainable growth and improve its cash flow generation.

SAP is one of the leading global software vendors for the management of business processes. It is a market share leader in various enterprise software end markets, including supply chain management, procurement, travel and expense management, and enterprise resource planning (ERP). It has a significant installed base – 99 of the 100 largest companies in the world are SAP customers.


Why is ERP so important? The simplest way to define it is by considering all the core business processes needed to run a company. The sales team needs ERP to manage customer orders. The logistics side of the business relies on ERP software to deliver the right products and services to customers on time. The finance department needs ERP to pay suppliers correctly and promptly. Management needs instant visibility into the company’s performance to make timely decisions.

The importance of ERP software to businesses is illustrated by its ever-increasing adoption rate. According to G2, the world’s biggest software marketplace, ‘the global ERP software market is projected to reach US$78 billion by 2026, growing at a compound annual growth rate of 10% from 2019 to 2026’.

ERP is different to other software end markets in that it’s not about selling a single product into one market. The traditional ERP software suite would typically be installed on a customer’s own computer servers with the responsibility for hardware and software installation and maintenance residing with the customer’s IT department. This licence model is called on-premises software.

In many cases a business has multiple ERP systems because of operations in different countries or regions, acquisitions and operating lines of business. Needless to say, such a collection of different software solutions creates challenges (such as a lack of integration across an entire organisation, not having the latest technologies and irregular updates) and costs associated with hardware and staff to maintain the applications.

This has resulted in a partially fragmented industry. Why do we say ‘partially’? Because half of the market share is attributed to small vendors who typically have a specific on-premises offering and not a platform end-to-end solution. The rest of the market is more oligopolistic with SAP having a leading market share of 19%, followed by Oracle at 10% and Workday at 8%.


The world is currently in the throes of digital transformation, with most companies looking to modernise their IT systems and applications. An important aspect of this is transitioning to the cloud to take advantage of the numerous benefits this offers, including access to new technologies such as artificial intelligence and no longer having to maintain your own IT hardware.

In our view, the transition to cloud ERP is a once-in-a-decade opportunity for SAP to cement customer retention, add new customers and drive share gains, since a portion of ERP vendors are unable to successfully bring competitive solutions to market. This competitive position is strengthened by the ability of SAP’s customers to run mission-critical processes on its end-to-end integrated cloud platform.

The ERP market is still in the early days of cloud migration, with just less than one-third cloud penetration. Technological research and consulting firm Gartner has estimated that this could increase to 43% by 2025. Businesses are turning to the cloud to standardise their core business processes to automate and integrate new technologies, and to improve analytics to support decision-making. It also helps customers meet sustainability goals and drive more sustainable operations through data insights and analytical tools.


In April 2020, Christian Klein assumed the role of sole CEO at SAP. He saw an opportunity to evolve the business model to focus on the structural shift to cloud, putting the company on a solid footing to drive long-term sustainable growth. Management has made a series of capital allocation decisions, which have expanded the potential growth opportunities and should improve free cash flow margin and returns on invested capital.

One such shift has been to change the business model to an industry-focused approach, enabling SAP to provide more vertical-specific solutions customised for specific industries. The company has made additional investments to strengthen its product offerings and support this change. An industry-centric model should reduce the pain points and addresses customers’ demand for shifting applications into the cloud in modules. This strategy is enabling SAP to increase its share of customers’ technology budget.


In our view, SAP has a very good chance of driving its installed base (software licences) to the cloud, and cross- and upselling additional modules. We see this as potentially being an inflexion point for SAP akin to other software businesses. If SAP can drive even a portion of its installed base to the cloud, it can capture two to three times revenue uplift. Layered onto this is the ability to capture market share from smaller, on-premises vendors and cross-selling opportunities in adjacencies.

The combination of these factors should drive sustainably higher growth and cash flows over the long run. Moving to a subscription model significantly increases customer lifetime value, more so than other types of enterprise applications. The appeal of recurring revenue is that it compounds – it adds layers over time. With a management team inspiring confidence at the helm of SAP, we are positive on the long-term prospects of this quality company.

Comment from David Lerche, Chief Investment Officer of Sanlam Private Wealth:

Over the course of my career, I’ve learnt two things about companies moving to an SAP ERP system:

  • It generally takes longer, costs more and is more disruptive to operations than everyone expects.
  • However, once an SAP ERP system is bedded down within a business, it delivers real improvements.

I have yet to see a business move away from SAP once it is embedded within its operations, which supports William’s thesis above regarding sticky revenue for the company.

We constantly challenge the norm. Our investment process is a thorough and diligent one.

Michael York has spent 18 years in Investment Management.

Michael York

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