Today IgniteSAP is going to take a look at the SAP financial report for the first quarter 2022. We will quickly share an overview of the numbers, then discuss the impact of the war in Ukraine.
This will be followed by interpretation of the financial and business highlights, and what can be expected of SAP over the course of 2022, along with comments from Christian Klein from the Q1 2022 financial conference.
SAP CEO Christian Klein:
“Customers powered another quarter of strong cloud growth as they turned to us for solutions to make their businesses more sustainable, their supply chains more resilient, and their enterprises more future-proof. Our signature ERP offering SAP S/4HANA grew at record levels demonstrating the confidence customers place in us to support their business transformations.”
SAP CFO Luka Mucic:
“We are off to a solid start to the year and our outlook remains strong. Despite the current macroeconomic environment, cloud revenue growth accelerated further, fuelling total revenue growth. Current cloud backlog grew at a healthy rate and continues to support our confidence in our long-term plans and outlook for the year.”
Immediately following the overview of SAP’s financial performance for the first quarter of this year the report addressed the changes they had to make as a result of the Ukraine war.
SAP stopped any new sales in Russia and Belarus at the beginning of March. Following requests by members of the Ukrainian government SAP began shutting down cloud operations in Russia and is intent on stopping support and maintenance of on-premise products. Although Russia is not a comparatively large market for SAP these actions have resulted in a reduction of operating profit by €70 million because of diminished on-premise profits and depreciation of data centre assets and sales commissions, and this has also caused a reduction of current cloud backlog by €60 million. This amounts to 0.8% of SAP cloud backlog growth.
“…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. For non-IFRS operating profit we expect an impact of approximately €350 million from the revenue gaps mentioned above and other expense items.”
Although the indirect knock-on effects of the war on the global economy are yet to be revealed in full, resulting in further impact on SAP’s finances, the substantial growth in cloud revenues and software revenues still maintain SAP’s overall upward trajectory.
Current cloud backlog was up 28% to €9.73 billion and up 23% at constant currencies.
Cloud revenue growth was up 31% to €2.82 billion, up 25% at constant currencies, and continued to accelerate for the fourth consecutive quarter.
Cloud gross margin was up 1.0 percentage points year over year to 68.2% (IFRS) and up 0.5 percentage points year over year to 70.0% (non-IFRS).
Revenue growth and cloud gross margin expansion, caused strong cloud gross profit growth of 33% (IFRS), 32% (non- IFRS), and 26% (non-IFRS at constant currencies).
IFRS operating profit increased 10% to €1.05 billion, due to lower restructuring expenses. Non-IFRS operating profit decreased 4% to €1.68 billion and decreased 7% at constant currencies. SAP cites the war in Ukraine and investments into R&D and sales and marketing as the reason for this deceleration.
Free cash flow down 24% to €2.16 billion, due in part to the development of profitability in the quarter, and impacts from working capital because of SAP’s continuous move to the cloud-based business model, and lower software licenses sales in the fourth quarter 2021.
Total S/4HANA adoption rose to more than 19,300 customers, up 18% year over year, of which more than 13,900 are live. In the first quarter, more than 60% of additional S/4HANA customers were net-new.
Many new Rise with SAP customers, including: 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.
Other new customers of SAP’s portfolio of others solution this quarter include: Air France-KLM, FEMSA, Heineken, L’Oréal, Merck KGaA, MLP, Nippon Telephone and Telegraph Corporation, NHS Shared Business Services, PetSmart, Pick n Pay, Salling Group, Schaeffler, and Swellfun.
Microsoft will become the first public cloud provider to adopt RISE with SAP and SAP S/4HANA to transform its own SAP ERP deployment. This will enable Microsoft to deploy new technologies faster and establish best practices that benefit joint customers.
SAP experienced excellent cloud revenue across all regions. The US and Germany demonstrated outstanding performance while Japan, China, Brazil, Canada, Switzerland, France, and the UK were very strong.
SAP announced that it had completed the acquisition of a majority stake of Taulia, a leading provider of working capital management solutions to SAP’s Business Network and strengthen SAP’s solutions for the CFO office by providing working capital management cloud solutions.
SAP and global strategic consultancy BCG announced a partnership to help companies transform their business models, become sustainable enterprises, and gain the data transparency they need to embed sustainability into their core business.
SAP announced that the SAP Signavio brand will represent our portfolio of Business Process Management solutions. SAP also announced availability of the SAP Signavio Journey to Process Analytics.
The SAP cloud strategy is accelerating growth via existing and new customers, the mid-term ambitions are comfortably within reach. This means that in 2022 SAP anticipates:
The statement made by Christian Klein at the Financial Conference for this quarter sheds light on SAP’s strategy for 2022. He also addressed the Ukrainian war, and SAP’s response to it.
He began by reiterating SAP’s solidarity with the people of Ukraine, and outlined some of the ways SAP has been changing its operations in line with the sanctions on Russia, and how SAP has been working to help displaced Ukrainians.
He pointed out that despite the fact that the Ukrainian war added to multiple macro-economic problems facing SAP, the corporation has been able to reassert its confidence in achieving its mid-term goals, and its long-term strategy of becoming a cloud-based software services company.
After discussing some of the key statistics of SAP’s performance over the period, he commented that in the face of economic volatility and successive global events, the value of SAP solutions to their customers is increasing.
“…customers around the world continue to power our growth, as they turn to ask for solutions to future-proof their business and make them more sustainable, secure and resilient. And their transformations are enabling our own. We expect continued acceleration of cloud revenue with up to 26% growth by the end of 2022, reflected in our guidance. Our strong quarterly performance is another proof point for the strategy we introduced in 2020. 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 reshape 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 grappling with an exponential level of uncertainty in their operations.”
Added to the economic uncertainty caused by this series of global events is the need for businesses to transform their operations to be far more environmentally sustainable if the world is to meet climate change reduction targets. This is another area that SAP is putting substantial efforts into: so that businesses can be part of the solution and not part of the problem.
Klein also gave an update on the uptake of Rise with SAP: on customer adoption, with some real world examples of impressively large corporations that are adopting the business-transformation-as-a-service platform, including Accenture, Microsoft and IBM.
“Since we launched Rise with SAP in January 2021 we have seen significant increases in customer adoption each quarter. Customers are adopting Rise with SAP for three key reasons: Firstly, Rise enables them to redesign their end-to-end business processes based on best practices developed from working with hundreds of thousands of SAP customers. Secondly, Rise helps them transition to a new agile ERP in the cloud. And finally, Rise provides a platform to innovate with industry, custom, and sustainability solutions.
This quarter, we have seen notable progress with our Rise with SAP offering our Business Process Intelligence offering with cloud revenue almost doubling year over year, has now fully integrated SAP Signavio. We are seen nearly 80% of Rise customers adopting our Business Technology Platform as part of their Rise solution. Transactional spend on the SAP Business Network has been growing over 95% year over year, which will drive further revenue upside. Overall Rise with SAP drives strong costs and up-sell opportunities with a conversion ratio in 2021 of greater than 2.5. This means we are creating 2.5 times the value from a customer after they have adopted Rise. This has led to our revenue run rate for the modular cloud ERP now exceeding 7 billion Euro: up more than 1 billion Euro from Q1 2021.”
We can see from SAP’s financial performance this quarter that they are not only on track to achieve their mid-term ambitions, but they are slowly changing the nature of the entire company from what was a well-established on-premise ERP system provider, to a cloud-based software as a service company. The purpose of this transformation of SAP is not just to maintain market share as the nature of global IT infrastructure changes: it is also to bring their existing and new customers along with them towards future defined by cloud technology. The wide variety of benefits provided by cloud-based provision, such as agility in operations, and scalability in business processes, is not just something that business must have to keep up with the development of their peers, but also a means to open up new markets and new possibilities.
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