SAP announced financial results for the second quarter and half-year 2022.
This week IgniteSAP will provide a summary of the quarterly statement and put those into the context of SAP’s long term strategy.
Before we get into that, a brief word on SAP’s acquisition of Askdata, a startup that specialises in AI and natural language processing.
Askdata’s intellectual property has been acquired to contribute to the Business Technology Platform and SAP Analytics Cloud. The product will be used to connect live to source applications so that users can get contextually relevant answers to data searches as well as proactive insights, without having to learn to use data analytics software.
SAP’s Chief Product Officer for SAP HANA Database & Analytics, Irfan Khan commented on the acquisition:
“…It is imperative that we provide simpler user experiences that will empower casual users to be able to make data-driven decisions independently. The ability to cater to a wide range of user profiles will be the primary driver of data and analytics adoption. Askdata provides SAP with a path to lead this transition to the benefit of our customers.”
Here is a summary of the financial results for the 2nd quarter and half year. Our interpretation of those results will follow below.
Cloud revenue up 34% and up 24% at constant currencies to become the largest revenue stream.
Current cloud backlog exceeds €10 billion, up 34% and up 25% at constant currencies.
SAP S/4HANA current cloud backlog extends its growth trend, up 100% and up 87% at constant currencies.
Cloud gross profit up 39% (IFRS), up 38% (non-IFRS) and up 28% (non-IFRS at constant currencies), leading to a strong cloud gross margin expansion.
IFRS operating profit down 32%, non-IFRS operating profit down 13% and down 16% at constant currencies, primarily due to the impact of the war in Ukraine.
SAP reaffirms 2022 revenue and free cash flow outlook, updates operating profit outlook range.
Christian Klein, CEO said: “As our Q2 results demonstrate, SAP’s portfolio is more relevant than ever. Our transition to the cloud is ahead of schedule and we have exceeded topline expectations, with cloud revenue becoming SAP’s largest revenue stream. Our pipeline is strong, and we are winning market share underpinned by the very strong 100% growth of S/4HANA current cloud backlog.”
Luka Mucic, CFO said: “This quarter again proves that our strategy is resonating, even in an increasingly challenging external environment. We continued to deliver strong topline growth, exceeding revenue expectations and increasing cloud profitability. This quarter, we have recognised the main impact of the war in Ukraine. We believe that we are now able to capitalise on our substantial growth investments of the last 18 months, by delivering sustained growth and profitability expansion.”
SAP has demonstrated a strong foundation for future cloud revenue, with cloud backlog exceeding €10 billion. The rate of increase has accelerated from up 23% in the last quarter to up by 25% this quarter. The SaaS and PaaS portfolio contributed €3.06 billion to cloud growth.
Despite increased investments in the SAP cloud delivery program, cloud gross margin was up 2.3 percent to 69.8% (IFRS). Cloud gross profit growth reached 39%.
The war in Ukraine, along with a reduced contribution from software licenses (due in part to the new cloud-based business model), decreased operating profit 32% to €673 million and IFRS operating margin decreased by 5.8 percent to 8.9%.
Significant expenses related to the war in Ukraine, along with restructuring expenses (approximately €120 million) due the to exit from Russia and Belarus are the primary reasons for this. Second quarter current cloud backlog was approximately €64 million lower due to the termination of existing cloud engagements, reducing current cloud backlog growth by approximately 1%. Total revenue impact over the next year from discontinued business and lack of new business is expected to reach €300 million.
Development of profitability and impacts from working capital due to SAP’s continuing move to the cloud meant that free cash flow for the first six months was down 36% to €2.08 billion. SAP has also been carrying out a share repurchasing program over the last six months to a value of €997 million and is extending this to a further €500 million in order to service awards granted under a share-based compensation plan for employees.
In the 2nd quarter for 2022 SAP gained another 650 SAP S/4HANA customers, raising total adoption to above 20,000: up 15% year over year. More than 60% of Q2 S/4HANA customers were net new.
The list of large corporate Rise with SAP customers includes: ABB Information Systems, Bridgestone Australia, Capitec Bank, EisnerAmper, Hisense Group, Mitsubishi Materials Corporation, Moderna, Pitney Bowes, RWE, Sumitomo Rubber Industries, Zoomlion and Microsoft.
Customers adopting other SAP solutions this quarter include ALTANA, Analog Devices, ASUS, BeiGene, Coop Genossenschaft, Corning, Ericsson, Fisker Inc., FUNKE Mediengruppe, Kyndryl, Moët Hennessy, Persán, Positivo Tecnologia, Sportradar, Votorantim, Wieland-Werke, Antonio Puig, CONA Services, HCL Technologies, and Wittenstein.
SAP also announced further and greater expansions of their partnerships with Google Cloud and IBM.
Cloud revenue performance was strong in all regions, particularly in Germany, America, Brazil, Japan, India and Switzerland.
In the Applications, Technology and Services segment SAP achieved 11% growth (up by 4%) to €7.11 billion year over year, driven by cloud growth, S/4HANA adoption, and SAP BTP. Qualtrics segment revenue was up 57% to €330 million year over year, up 39% at constant currencies.
In 2022 SAP is expecting €7.6 – 7.9 billion operating profit, down 4% to 8%. This range reflects the expected 2022 operating profit impact of approximately €350 million from the war in Ukraine, and a potential continued marked decline of software licenses revenue.
In line with previous predictions SAP continues to expect €11.55 – 11.85 billion cloud revenue (up 23%), €25.0 – 25.5 billion cloud and software revenue. The share of more predictable revenue is expected to reach 78%, and free cash flow above €4.5 billion.
Also: “SAP reiterates its mid-term ambition published in its Q3 2020 Quarterly Statement including the commitment of double-digit growth of operating profit in 2023. In light of its strong cloud momentum and most recent favourable currency exchange rates development, SAP expects to update its mid-term ambition in the upcoming quarters.”
What does this all mean for SAP professionals?
As the SAP business model evolves into a cloud-based Software-as-a-Service model they are inevitably going to see reduced profits for the period of transition. As well as the costs of investment in the new cloud service provision, they have delay in revenue as their customer base, existing and new, move past their own reticence and fear of change.
The over ten billion in cloud backlog is testament to this current state of affairs. While many new customers are fully onboard with the need for cloud service provision rather than maintaining legacy systems, the process of transformation itself takes time. Despite the catalyst of Rise with SAP, making the business case for transformation, carrying out analysis of the existing system and all other pre-transformational activities create latency in SAP’s revenue streams, even as they diversify.
However, despite the inertia involved in SAP’s metamorphosis, and the substantial headwinds related directly and indirectly to the war in Ukraine, the case for cloud-based SAP SaaS and S/4HANA Cloud is being made, and as more and more large corporations engage SAP’s services other companies will follow as the potential benefits to them are demonstrated in a greater variety of use cases.
The respondents to studies by the SAP user groups from all locations have expressed that they are intending to adopt S/4HANA, even if they don’t necessarily know about Rise with SAP yet. Companies who are still operating legacy SAP systems are well aware that they need to make the move, preferably before their competitors, and as the needle tips from a majority of on-premise to cloud implementations, we will see a steady stream of activity in the SAP implementations market over the next few years.
Whether you are working for a consultancy, or as an independent SAP professional, the number of companies looking for your skills is going to increase: not least because of the technology skills gap, which includes a shortage of SAP consultants.
Since the revised outlook of mid-term ambitions SAP stock has been severely undervalued, but it is not our concern to make that case, but rather to make the point that the perceived value of SAP stock has no direct bearing on SAP technology’s value to companies and organisations.
As a consequence SAP professionals should be doubling down on their own investment in SAP with training: in the key areas of SAP’s portfolio that will be increasingly necessary in the future as corporations and companies of all sizes seek to implement SAP systems as a means to resilience and agility.
Are you an IT consultant specialising in SAP? If you would like someone on your side, guiding you and even negotiating higher salaries and contracts on your behalf, reach out and contact IgniteSAP
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