SAP has released its financial results for the first quarter of 2023. This week IgniteSAP will take a look at the numbers and discuss what this means for SAP’s development and for the wider SAP ecosystem at the end of the report.
Cloud revenue up 24% and up 22% at constant currencies, up 1%. S/4HANA cloud revenue up 77% and up 75% at constant currencies
Current cloud backlog up 25%, an improvement of 1%
Cloud gross profit up 28%, and up 27% at constant currencies fueling double-digit non-IFRS operating profit growth
IFRS operating profit down 45%, non-IFRS operating profit up 12% and up 12% at constant currencies
The 2023 outlook updated to reflect the expected Qualtrics divestiture. SAP reaffirms outlook for continuing operations including anticipated acceleration of top line and operating profit growth
SAP CEO Christian Klein said:
“We have entered a powerful new phase in our strategic transformation, with top line and bottom line results clearly demonstrating the tipping point we passed in the fourth quarter 2022. Our cloud momentum continues at a fast pace which is contributing to our strong revenue and double-digit non-IFRS operating profit growth this quarter.”
SAP’s new CFO Dominik Asam said:
“The year is off to a good start. I am excited to have joined an organization which is delivering and staying on the right track. We have accelerated topline growth and have already achieved double-digit non-IFRS operating profit growth in Q1. Our results set solid groundwork for our full year outlook, thereby pivoting back to profitable growth in 2023. Saying what we do, and doing what we say, will continue to be of great importance to us.”
SAP’s current cloud backlog grew by 25% to €11.15 billion and was up 25% at constant currencies, up 1% on last quarter.
The SAP S/4HANA current cloud backlog was up 78% to €3.42 billion and up 79% at constant currencies.
Cloud revenue at SAP was up 24% to €3.18 billion and up 22% at constant currencies, up 1% on last quarter.
SAP S/4HANA cloud revenue was up 77% to €716 million and up 75% at constant currencies.
Several major transactions supported software licenses revenue which decreased by a moderate 13% to €276 million, 13% at constant currencies.
Cloud and software revenue rose to 10% to €6.36 billion, 8% at constant currencies.
Services revenue increased by 12% to €1.08 billion and rose by 11% at constant currencies. Total revenue was up 10% to €7.44 billion, 9% at constant currencies.
The share of more predictable revenue increased by 1% to 82% in the first quarter.
Cloud gross profit rose 28% (IFRS) to €2.24 billion, up 28% to €2.27 billion (non-IFRS), and up 27% (non-IFRS at constant currencies).
IFRS operating profit decreased 45% to €803 million. The reduction mainly driven by higher share-based compensation, reflecting the increase in share price over the first quarter compared to last year’s decline during the same period.
IFRS operating profit was reduced by restructuring expenses, and by provision for pre-existing regulatory compliance matters. Non-IFRS operating profit increased 12% to €1.87 billion.12% at constant currencies.
This reduced IFRS basic earnings per share by 60% to €0.35. Non-IFRS earnings per share (basic) increased 8% to €1.08. The effective tax rate was 40.5% (IFRS) and 28.3% (non-IFRS). For IFRS, the year-over-year increase mainly resulted from changes in non-deductible expenses and valuation allowances on deferred tax assets. For non-IFRS, the changes in non-deductible expenses do not apply due to respective adjustments of pre-tax figures.
Free cash flow was down 9% due in part to the effect of sale of trade receivables in the fourth quarter last year.
SAP’s business operations in Russia and Belarus have almost completely ceased. Further escalation of the conflict may have a corresponding detrimental effect on SAP revenues.
In the first quarter, new SAP customers included BMW Group, DOLCE & GABBANA, GAMA, GlasfaserPlus, The Government of Manitoba, Henkel, KANSAI PAINT CO, Lingong Heavy Machinery, MLS, NEC Networks & System Integration Corporation, Pastificio Rana, Sempra Infrastructure, Sodexo BRS, Sri Intellectual, Thales Defense & Security Inc, VEM Conveniência, and Zagis.
SAP S/4HANA Cloud deployments in the first quarter included Advanced Micro Devices, Air India, Aurobay, FLYING WHALES, Hengan Group, JFE Steel Corporation, Ourofino Agrociência, REPETCO Innovations, and Shinsegae International.
Other SAP solutions were adopted by A.S. Watson, BayWa, Berlin Hyp, Brisanet, Dr. Martens (Airwair International Limited), Envision Energy, Grupo Estrella Blanca, Grupo Minero Bacis, Haffner Energy, HCLTech, Hitachi High- Tech Corporation, N+, NTT DATA Business Solutions, Lee Kum Kee Sauce Group, SMA Solar Technology, Soleum, University Hospital Bonn, and Whirlpool Corporation.
SAP’s cloud revenue performance in Q1 was strong in all regions. Brazil, Germany and India had outstanding cloud revenue growth and the strong performance of China, Japan, Mexico, the Netherlands, Switzerland, and the United States was notable
A dividend of €2.05 per share was proposed for the fiscal year 2022. This represented a year-over-year increase of 5% compared to the regular dividend paid for fiscal year 2021.
In February, SAP and Red Hat, Inc., the leading provider of open-source solutions, announced an expanded partnership to significantly increase use of and support for Red Hat Enterprise Linux by SAP.
A strategic partnership with Merck KGaA, Germany, was created to drive sustainable innovations in business practice. This is expected to accelerate the cloud migration of Merck KGaA systems with RISE with SAP, including SAP S/4HANA Cloud.
SAP also announced that the Supervisory Board of SAP SE nominated Punit Renjen for election as a new member of the Supervisory Board as the designated successor to Chairman Hasso Plattner.
In March, SAP announced filing of the SAP Annual Report on Form 20-F for the year ended December 31, 2022, with the US Securities and Exchange Commission.
SAP Datasphere solution was also released that month as the successor of its data management solutions. SAP also introduced strategic partnerships with industry-leading data and AI companies Collibra NV, Confluent Inc., Databricks Inc. and DataRobot Inc.
SAP agreed to sell all of its 423 million shares of Qualtrics International Inc. in March as part of the Qualtrics acquisition by investment groups affiliated with Silver Lake as well as Canada Pension Plan Investment Board. The sale means a Qualtrics equity value of approximately $12.5 billion US on a fully diluted basis, representing a 73% premium over the 30-day average trading price prior to SAP’s announcement to explore a sale. SAP’s stake will be acquired for roughly US$7.7 billion.
SAP announced it had created a new sustainability-linked revolving credit facility with a volume of €3 billion and a tenor of five years plus two one-year extension options.
GROW with SAP was announced on 21 March, it is a new offering to help midsize customers adopt cloud ERP with all the advantages of cloud deployment. The end-to-end package is built on SAP S/4HANA Cloud, public edition and SAP Business Technology Platform.
SAP also announced it had extended the contracts of Executive Board Members Julia White, Chief Marketing & Solutions Officer, and Scott Russell, the leader of SAP’s Customer Success organization, for three years until 2027. Sabine Bendiek, Chief People & Operating Officer and Labor Relations Director, informed the Supervisory Board that she will not renew her Executive Board contract, which ends on December 31, 2023.
In Q1 revenue in the AT&S segment increased 9% to €7.14 billion year-over-year, 8% at constant currencies, due to strong cloud revenue growth, supported by SAP S/4HANA and the Business Technology Platform. Software licenses revenue decreased as expected because of widespread cloud migration as more customers adopted ‘RISE with SAP’. Segment services revenue rose 12% to €1.08 billion year-over-year, an 11% increase at constant currencies.
In the first quarter of 2023, SAP announced a targeted restructuring program to focus more on areas of strategic growth and accelerated cloud transformation. Associated expenses of between €250 million and €300 million are expected with the vast majority of €255 million already recognized in the first quarter. This move program should contribute to cost savings in 2023 and to achieve its full annual cost savings rate of €300m to €350m by 2024, impacting both IFRS and Non-IFRS operating profit.
In the investor relations call accompanying the Q1 financial results SAP CEO Christian Klein summarized SAP’s new position:
“This has been a very good Q1. We continue to see strong demand across our portfolio… for S/4HANA specifically, cloud revenue grew 75% and current cloud backlog grew 79%… In Q1 we delivered double-digit operating profit growth, demonstrating the significance of Q4 2022 as a tipping point of our transformation. We have now entered a new phase… In 2023 we are continuing to execute on our focussed growth strategy with S/4HANA and BTP at the core.”
Based on indications from SAP’s cloud-centric growth strategy we can expect corresponding changes in the wider SAP ecosystem. Rise with SAP has gathered momentum as success stories filter out to the SAP community from early adopters among large enterprises, and we can expect a similar wave as the new cloud offering for small to medium enterprises, Grow with SAP, gains traction in that section of ERP markets.
Along with the popular adoption of new products, SAP customers and partners will see further adoption at an accelerated rate through 2023 and beyond as current and new SAP customers migrate to S/4HANA and S/4HANA cloud. While there has been push-back among existing users of legacy SAP products and SAP user groups concerned to protect their previous investments in SAP technology, the corporation is now standing firm on its 2027 support and maintenance deadline.
Due to the length of migration projects we can expect a rush in the next two years to scope and begin migrations in all areas of the market. Along with the shortage of skilled SAP practitioners this will create a massive spike in demand for SAP consulting services so IgniteSAP is strongly recommending that professional IT consultants augment and update their skills and certifications to include modules complimentary to projects for cloud-based deployments of SAP systems.
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