Solid quarter for SAP despite impact of withdrawal from Russia

Derek du Preez Profile picture for user ddpreez July 22, 2022 Audio mode
Summary:
SAP CEO Christian Klein said that the company’s transformation plans are being executed ahead of schedule, as more customers shift to the cloud.

Klein
(SAP)

Earlier this year SAP CEO Christian Klein took a firm stand against Russia’s invasion of Ukraine and said that the software vendor would be pulling out of the region, at a revenue cost of approximately €300 million to the company. However, announcing SAP’s Q2 2022 results this week, Klein pointed to the overall strength of the company’s numbers and said that the midterm outlook continues to look solid. 

Klein said: 

This has been a good quarter for SAP despite the challenging political and macroeconomic environment. Our cloud and total revenue have exceeded market expectations and are progressing faster than we expected at 34% and 13% nominal, respectively.

Our top line cloud performance is clearly ahead of plan, further accelerated by the current macroeconomic environment and currency tailwinds. Customers are actually turning to us now more than ever to help them address their most pressing concerns, business model transformation and process automation, supply chain resilience and sustainable operations. 

As we have seen in previous economic pullbacks, companies that balance cost efficiency measures with strategic investments in technology are more resilient and better able to offset margin pressure. We are also seeing a powerful snowball effect from our platform and ecosystem businesses as the adoption of SAP solutions accelerates.

The key numbers for Q2 are: 

  • Total revenue of €7.517 billion, up 13% year-on-year

  • Cloud revenue now stands at €3.056 billion, up 34% year-on-year

  • S/4HANA cloud revenue is €473 million, up 84% year-on-year, with SAP stating the S/4HANA current cloud backlog is €2.258 billion. 

  • However, given the short term economic impacts, SAP’s operating profit was down 32% to €673 million (IFRS), or down 13% to €1.680 billion (non-IFRS)

Commenting on the overall performance, Klein said: 

Since we initiated our transformation almost 2 years ago, our performance is well ahead of plan. SAP has always been acknowledged as the category leader for ERP. Now just as SAP invented ERP decades ago, we are leading the ERP transition to the cloud. 

This has led to over €2.2 billion of current cloud backlog for SAP S/4HANA. The momentum we are seeing today increasingly comes from the power of being a platform company. Our business technology platform now has a run rate exceeding €1.4 billion, and there are more than 14,000 customers using the platform.

Klein also pointed to success for RISE with SAP, the company’s most recent offering to help organizations get to the cloud, by optimizing their processes and helping manage their hyperscalers relationship. Klein said: 

Underpinning this leadership position is our business transformation as a service offering, RISE with SAP. Since RISE with SAP was launched at the beginning of last year, we have seen the offering going from gaining traction, to gaining momentum, to becoming the preferred choice for our customers as they move to the cloud. 

RISE with SAP helps customers with the hardest part of that transition, redesigning how the companies want. We offer customers so much more than a technology transition. RISE with SAP helps them: first, to redesign their end-to-end business processes; second, transition to a new agile ERP in the cloud; and third, innovate on the platform to design their own custom solutions.

In Q2, RISE customers included Moderna, ABB Information Systems, RWE, HeidelbergCement and Bridgestone. Moderna's pioneering vaccine is helping the world overcome the COVID-19 pandemic. 

The success of RISE with SAP in turn for strong performance across our line of business applications, including S/4HANA. We see continued cross- and up-sell momentum, which means we continue to create about 2.5x the value from a customer after they have adopted RISE with SAP. We now have around 20,000 S/4HANA customers, up 15% year-over-year with more than 60% of our customers being net new.

Klein said that SAP now has approximately 6,000 S/4HANA Cloud customers, with over 600 new wins in Q2. 

Outlook

However, Klein is pragmatic about the short to medium term and recognizes that SAP will be seeing an impact from both the macroeconomic environment and its withdrawal from Russia. He said: 

I'd like to spend a little time talking about our outlook. We are entering the second half of the year with a very strong cloud pipeline. Given our strategy maps directly on to our customers' most pressing challenges, we see the shift from CapEx to OpEx spend combined with currency tailwinds completely offsetting the top line impact of our Russia exit.

On the bottom line, we are adjusting our guidance based on two one time impacts: first, our intended full withdrawal from Russia; second, in the current macro environment, our customers are shifting to the cloud faster than expected as they continue to move from upfront capital expansion to recurring operational expenditure. This leads to an additional transactional impact on our short-term profitability with clear midterm upside as our cloud strategy continues to pay off.

We are managing a significant portion of these onetime impacts with additional measures around discretionary spend.

Looking beyond 2022, we are clearly ahead of plan to deliver upon the promise we made in October 2020 when we announced our new strategy. We are confident we will achieve double-digit operating profit growth in 2023 by keeping the promise of flat to slightly declining operating profit through 2021 and 2022 versus 2020. And we are well on track to achieving all the performance goals for our 2025 midterm ambitions.

On the bottom line, the investments we made over the last 2 years put us in a good position to deliver double-digit profit growth starting next year. 

For 2022, SAP now expects €7.6 billion to €7.9 billion non-IFRS operating profit at constant currencies (down from €8.23 billion in 2021). It also estimates €25 billion to €25.5 billion in total revenues for the year, up 4-6% at constant currencies. 

My take

Whilst the market tends to take a quarter by quarter view, it’s important to look at the big picture too. Undoubtedly there are significant impacts to SAP’s bottom line this year, but the general take from Klein is that these are manageable and shouldn’t impact the company’s progress over the mid term. All the important numbers are heading in the right direction, as SAP’s shift to the cloud gains momentum

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