SAP turns in solid Q1, even as Russian withdrawal hits bottom line

SAP turned in strong numbers for its Q1 2022, but the firm’s decision to pull out of Russia and Belarus is going to take its toll on the bottom line, potentially as much as €350 million of net income.

The company said in a quarterly trading statement:

In the first quarter, SAP’s business was impacted by the war in Ukraine. At the beginning of March, SAP stopped all new sales in Russia and Belarus. In addition, SAP started to shut down its cloud operations and intends to stop the support and maintenance of its on-premise products in Russia.

Current cloud backlog was lowered by approximately €60 million due to the termination of existing cloud engagements, and operating profit by approximately €70 million due to reduced on premise revenues, accelerated depreciation of data center assets and capitalized sales commissions.

For the fiscal year, we expect a total negative revenue impact of approximately €300 million from lack of new business and discontinuation of existing business, in particular software and support and services.

During the post results announcement analyst call, CEO Christian Klein confirmed:

Like other companies globally, we have been working closely with governments and implementing all sanctions imposed by the international community.  We are also going above and beyond those requirements. We were one of the first technology companies to stop sales and shut down cloud operations in Russia. In addition, earlier this week, we announced a structured exit of our direct questions in the country.  These decisions have a financial impact both on the top and bottom line.

Results

That’s all to come. For Q1, overall revenue rose 11% year-on-year to €7.077 billion, with cloud revenue rising 31% to €2.82 billion, while profits rose 12% to €4.974 billion.

Other stats of note from the earnings:

• Total number of customers using S/4HANA is now 19,300, with 13,900 live.
• Sixty percent of S4/HANA wins in the quarter were net new.

New customers for RISE with SAP in the quarter included Accenture, Canon Production Printing, Citizen Watch Company, Daimler Truck AG, Grupo Estrella Blanca, Exide Industries Limited, NEC Corporation, Ooredoo Group, Qinqin Food, Rising Auto, TELUS, Tramontina, and Wipro Limited.

In addition, Microsoft has become the first public cloud provider to adopt RISE with SAP and SAP S/4HANA to transform its own SAP ERP deployment. Klein said:

This will enable Microsoft to deploy new technologies faster and establish best practices that benefit our joint customers in the market.

Directions

Overall, the numbers are a proof point of the validity of the strategic direction announced in 2020, argued Klein:

Since then, we have seen the COVID pandemic accelerate cloud based business transformation around the world. The new geopolitical realities we face amid Russia's ongoing war in Ukraine. are also likely to fundamentally reshaped the world we live in.

Even before the conflict began, supply chains were under pressure worldwide. And businesses - from grocery stores to auto manufacturers - were struggling with an exponential level of uncertainty in their operations.

The war in Ukraine has amplified these tensions revealing even more clearly the importance of the salient supply chains across every industries. Companies will need to transition their supply chains to make them more resilient, agile and transparent. Our SAP Business Network can uniquely help our customers across industries and value chains in deep ways.

My take

SAP’s stance on Russia’s aggression is to be commended and is going to come at a cost. The company won’t be the only to be impacted by the conflict, but Klein’s candor here is welcome.