The SAP Financial Report Q2 2021 has described raised revenue for the quarter and increased expected profits in their outlook for the second half of this year.
Today IgniteSAP will be looking at SAP’s 2nd quarter financial report.
Increased Revenue and Profit Outlook from Accelerated Cloud Growth Across Portfolio
This quarter SAP reports that their Current Cloud Backlog and Cloud Revenue has accelerated sequentially with the current Cloud Backlog up 20% (at constant currencies), Cloud Revenue up 11% and 17%, and S/4HANA Cloud Backlog up 48%.
The SaaS/PaaS Cloud Revenue not including Intelligent Spend is up 20% and 25%., with EPS up 57% and Non-IFRS EPS up 50%.
This has led to a share of more predictable revenue up 3% to 76% in the second quarter.
SAP Revenue Growth
Commenting on the Revenue growth in th SAP Financial Report Q2 2021 CEO Christian Klein said:
“We’re seeing strong adoption of our cloud portfolio as customers select SAP for their business transformation. Our strategy is working; This is the third straight quarter of strong execution, and we continue to deliver unparalleled customer value through the strength of our platform and applications.”
SAP CFO Luka Mucic commented: “This has been another strong quarter with accelerating growth for SAP’s cloud portfolio. We saw excellent customer momentum and adoption and are raising our outlook for revenue and profit.”
SAP Business Update for 2021
SAP stated that they are seeing strong demand and adoption of Rise with SAP from customers of all sizes as a means to achieve cloud migration for their business processes. The cloud portfolio has also seen strong growth in Business Technology Platform, Business Process Intelligence, Qualtrics, and Customer Experience. Concur has now seen stabilisation of its performance for the first time since the start of the pandemic, and the Intelligent Spend category showed limited growth as it is more impacted than other software and platform services solutions. As more customers take up Rise with SAP they are seeing software licences decrease proportionately.
SAP Financial Performance Highlights of the 2nd Quarter 2021
The highlights of SAP Financial Report Q2 2021 according to SAP are:
- ‘RISE with SAP’ gained even more traction after a successful launch in the first quarter. SAP saw strong demand from companies of all sizes and closed deals with more than 250 customers in the second quarter. Large customers such as AMD, Coop Switzerland, Etihad Airways, and Siemens Energy selected ‘RISE with SAP’. Additional wins included arena, Dixons Carphone, EBANX, Fujifilm Diosynth Biotechnologies, The Great Eastern Shipping Co., Inchcape, Mollie, National Basketball Association (NBA), Randstad, R. Twining & Co., and South32 Group.
- More than 600 S/4HANA customers were added in the quarter, taking total adoption to more than 17,000 customers, up 16% year over year, of which more than 10,100 are live. In the second quarter, more than 50% of the additional S/4HANA customers were net new.
- Key customer wins across SAP’s solutions portfolio included: ABN AMRO, Clarins, Coca-Cola FEMSA, , Florida Crystals, Florida Department of Management Services, Keolis Group, LeasePlan Corporation, Moderna, Molson Coors Brewing, Nationwide Building Society, Rabobank, Roca Sanitario, The Singapore University of Technology and Design, Stanley Black & Decker, and Tenneco. Bitburger Braugruppe, Wales & West Utilities, and Weber-Stephen Products all went live on SAP solutions in the second quarter.
- SAP Business Technology Platform (SAP BTP) is the foundation of the Intelligent Enterprise, providing a single platform for integration and extensibility across the SAP portfolio and non-SAP solutions, as well as deriving insights from data. The Company already has over 8,000 productive BTP customers and more than 4,000 partners within its ecosystem actively engaged. Current cloud backlog grew in strong double digits. Hilti, Lenovo, NEC, and Renault chose SAP BTP offerings in the second quarter.
- Signavio had an outstanding first full quarter as part of SAP’s Business Process Intelligence (BPI) segment. Current cloud backlog grew in triple digits. SAP’s BPI solutions are key to our customers’ business transformation and acceleration to the cloud.
- More than 52,000 attendees from 158 countries joined SAPPHIRE NOW, SAP’s flagship customer event, across its global and regional sessions.
- In addition to driving innovation in and beyond our core, SAP is continuously expanding into new markets. SAP expects to expand its 2025 Total Addressable Market (TAM) by $150 billion, totalling $600 billion.
- Sustainability continues to be at the center of SAP’s business model. In the second quarter, SAP joined the World Economic Forum Stakeholder Capitalism Coalition.
- SAP announced ‘pledge to flex’ in April, showing its commitment to a truly flexible remote workforce operating model even beyond the pandemic.
- SAP paid out an annual dividend of €1.85 per share in the amount of €2.2 billion for fiscal year 2020 representing a year-over-year increase of €0.27 or 17%.
SAP Accelerates Cloud Transition Through 2nd Quarter
SAP Cloud momentum has been counter-balanced with lower Services revenue (down 11%) at €0.92 billion. SAP attributed this to the divestiture in 2020 of SAP Digital Interconnect which had previously contributed €80 million this time last year. This caused total revenue to be down by 1% year over year to €6.67 billion.
This was also due in part to the decrease in operating profit by 23% to €0.98 billion and the decrease of Operating Margin by 4.3 percentage points to 14.8% because of “higher share-based compensation expenses (primarily related to Qualtrics)”. Operating cash flow experienced no change year to year for the 1st half of the year at €3.77 billion. Current debt is €4.57 billion.
These figures represent the temporary effects of SAP’s transition of its core ERP business to the cloud and SAP has expanded financial disclosure and increased transparency to reassure investors as of January 2021.
Share Price Does not Reflect Long-term Growth
These figures in the SAP Financial Report Q2 2021 should also be seen in the light of the coronavirus pandemic and any discouragement to investors is greatly outweighed by strong momentum in its cloud offerings. Financial commentators have remarked recently that the more reliable revenue generated by cloud service offerings should see SAP shares increase over the long-term. The Jefferies analyst Julian Serafini said the results showed that SAP’s cloud transition “continues to succeed” but in the short term the apparent slow growth in some areas of SAP and contraction in the areas such as Services have cause the share price to fall temporarily since these figures have been published. This did not occur following SAP’s Financial Review for the 1st quarter of this year, as SAP investors were still enthusiastic due to the announcement of Rise with SAP at the beginning of that quarter.
In the virtual analyst conference webcast Christian Klein was keen to emphasise that when SAP customers adopt one product such as S/4HANA cloud in their transition to the cloud then they are far more likely to adopt other SAP solutions, in order to ensure compatibility of business processes across their systems.
“Strong Rise momentum leads first to strong adoption of S/4HANA Cloud and our Business Technology Platform… through our Business Technology Platform customers then adopt our integrated line of business applications: That’s exactly the dynamic we saw play out this quarter. Our S/4HANA Cloud Backlog growth therefore accelerated to an impressive 48%. This sets us up for significant acceleration of S/4HANA Cloud Revenue growth in half-year 2. S/4HANA Cloud revenue was up 39% in the quarter, and reached a revenue run rate of more than 1 Billion Euro.
We have in the meantime more than 17,000 S/4HANA customers: up 16% year over year, with 50% of these customers being net new.”
Aside from the strong performance of the Applications, Technology and Support segment, Qualtrics revenue was up 25% to €211 million year over year.
SAP Business Outlook for 2021
The pattern of the first half of this year is expected to continue through the next six months so SAP is raising its outlook for the full year 2021. While software licences will decline this will compensated by a strong business performance through cloud growth. This outlook assumes this next phase of Covid-19 (the Delta variant) will recede as vaccination programs roll out globally.
The SAP Business Outlook for the 2021 expects:
- €9.3 – 9.5 billion cloud revenue at constant currencies (2020: €8.09 billion), up 15% to 18% at constant currencies. The previous range was €9.2 – 9.5 billion at constant currencies.
- €23.6 – 24.0 billion cloud and software revenue at constant currencies (2020: €23.23 billion), up 2% to 3% at constant currencies. The previous range was €23.4 – 23.8 billion at constant currencies.
- €7.95 – 8.25 billion operating profit at constant currencies (2020: €8.28 billion), flat to down 4% at constant currencies. The previous range was €7.8 – 8.2 billion at constant currencies.
More predictable revenue will reach approximately 75%, up 3 percentage points compared with 2020. Operating cash flow is expected to be roughly €6.0 billion and free cash flow €4.5 billion.
SAP Business Strategy is Successful.
So despite another hasty reaction in the market, SAP has implemented a successful strategy to set the corporation up for the emergence from the Coronavirus period and is expanding in to the Cloud Services sector. As IT professionals we can be reassured that from our perspective stock market investor assessments are a secondary indicator and do not reflect badly on SAP’s strategy for the next six months. As the Rise and SAP Cloud services take hold in the software industry we can expect market reassessments to follow.
SAP CFO Luka Mucic summed up SAP’s assessment of their financial performance and strategy at the end of his presentation in the virtual analyst conference webcast:
“We are highly encouraged by the strength across our solution portfolio. Rise with SAP is clearly resonating with customers. Our current cloud backlog and cloud revenue are accelerating. The strong momentum in the first half of the year gives us the confidence to once again raise our full year outlook.”