SAP’s Q2 FY2015 results (PDF) take a good bit of dissecting. First up is the company’s habit of using non-IFRS measures. Then there is the significant positive impact of currency fluctuations. It all makes for a somewhat convoluted picture that takes some discerning. What cannot be denied though is that the cost of transitioning to becoming a cloud player is taking a heavy toll on profits with substantial financing and restructuring costs in the mix.
On its face, a 129% increase in cloud subscription fees to €552 million looks impressive but we should not forget this includes significant contributions from Concur, hybris and Fieldglass as well as Employee Central. While we don’t have the precise split at this time, it is safe to say that virtually all SAP revenue comes from acquired product or product that is augmenting acquired product.
This is turning out to be a good strategy for SAP because based upon IFRS measures, it was able to expand cloud subscription and support margin from around 56% to 61% year over year. Although it is not clear what the overall currency impact was in the quarter for this line of business, when currency is taken into account on the top line, subscription fees come in at +92%.
The overall currency tailwind was hugely significant this quarter, accounting for €938 million or just a tad under 10% of gross overall revenue. The biggest impact was seen in the Americas where SAP’s cloud revenue jumped 96% while its total business grew 13%. In Germany and EMEA, total business grew 5% and 10% respectively but 5% in aggregate based upon currency adjusted non-IFRS measures.
On volume (statement), SAP reported a large jump in HANA and S/4 HANA sales:
This quarter, the number of HANA customers surpassed 7,200 compared with 3,600 a year ago. S/4HANA’s robust early traction – more than 900 SAP S/4HANA customers by the end of the second quarter compared to over 370 at the end of the first quarter – is a major catalyst in SAP HANA’s broader market adoption across all industries and regions.
On SuccessFactors/Employee Central, SAP said:
SuccessFactors Employee Central, is localized for 71 countries and the number of customers has increased to more than 730 from around 390 a year ago. This represents an 87% growth in customers.
It is worth noting that SAP consulting services costs surged 25% while revenue rose 14%. This fits with SAP’s strategy of ensuring that early customers are looked after by its own consultants rather than farming out to SIs. However, while the sales numbers look impressive, I await speaking with the company before making any further comment. There are aspects of the sales model that I’d like to better understand and those are not present in these figures.
Right now, SAP is only reiterating current guidance and while the strength of the US dollar favors SAP in US deals, we can expect the company to be driving hard in that market to grab as much share as possible. The currency tailwind is clearly helping SAP in cloud and on-premises deals because it can offer higher discounts, leveraging the currency tailwind while also knowing that its maintenance revenues will pick up any sacrifice it makes in new deals.
On the expense side though, things are tougher. Restructuring costs jumped from €39 million to whopping €367 million in the quarter and year over year. Again, there is no specific explanation in the current statements. I hope to get an update later in the day.
It is good to see R&D jump 29% year over year but again, it is unclear how much of that relates to acquired product and how much to continuing development. We know that SAP continues to invest heavily in HANA and, obviously, S/4 but equally, we know that the innovation center in the US has been largely gutted the last year.
The good news is that SAP added €600 million to its cash reserves in the quarter to show cash and cash equivalents of €3.9 billion. SAP is on the record saying that it has no other major acquisitions in mind so it has a healthy cushion to weather the continuing transition.
At time of writing, SAP’s stock was down €0.10 or 0.15% suggesting the result was in line with analyst expectations with no real alarms. That is bound to be a relief at a time when the macro-economic indicators are best described as ‘volatile.’
Side note: in 2013 at about this time, I speculated that annual HANA revenue would be around €2 billion and cloud at €2.5 billion. It seems I was likely right about cloud but through no act of genius since circumstances have changed in the intervening period. It is impossible to say how much revenue relates to HANA since it is no longer split out. Given what we see in volume – is it likely that HANA sales are holding up the on-premises numbers? Go figure.
Disclosure: SAP is a premier partner at time of writing and a recent past client of the author.