SAP’s Q3 2022 Performance

SAP has announced the financial results for the 3rd quarter 2022.

This week IgniteSAP will be sharing some of those results and providing context regarding how these relate to SAP’s long-term strategy for growth.

Here are the key facts:

Cloud growth has further accelerated over this period.

Cloud revenue has increased to 38% to €3.2 billion.

Cloud backlog is up by 38% to €11.2B billion.

SAP S/4HANA current cloud backlog has substantially increased to 108%.

Cloud gross profit now stands at 44%, up 30% (at constant currencies).

Operating profit is down 1%.

Total revenue is up 15% to €7.8 billion.

Executive Summaries

SAP CEO Christian Klein commented:

“Our cloud solutions are the answer, as customers turn to us to help them future-proof their businesses. This trust in SAP is reflected in our accelerating cloud momentum. With a recurring revenue share of more than 80%, it’s clear that our transformation has reached an important inflection point, paving the way for continued growth in the future.”

Luka Mucic, SAP’s chief financial officer said,

“We have delivered a strong cloud quarter with accelerating momentum across all key cloud indicators. We’re at an important inflection point in our transformation which we anticipate will lead to accelerating revenue growth and double-digit operating profit growth in 2023.”

Financial Highlights of the 3rd Quarter

The cloud backlog for this quarter has expanded to €11.27 billion.

The SaaS and PaaS portfolio experienced double-digit growth, leading to a 38% increase in cloud revenue.

Gross cloud profit is up by 44%, and year-over-year the cloud gross margin is up by 2.8% to 69.8% Efficiency gains in this area led to increased margin despite large investments into the next generation cloud delivery program.

Operating profit maintained a figure of €2.09 billion. This follows a recent pattern of a reduced revenue from software licenses and increased R&D, along with investment in sales and marketing to increase future revenue opportunities. The launch of SAP Fioneer led to a disposal gain of €77 million for the year from the previous 3rd quarter.
Further strategic adjustments to develop profitability and impacts on working capital led to a decrease in free cash flow, which was down by 38% to €2.54 billion for the period since the beginning of the year. This figure is expected to improve for the 4th quarter with lower payments out for taxes and share-based compensation.

As part of a share buyback program SAP repurchased 5,715,512 shares at an average price of €87.50 with a purchase value of approximately €500 million. Repurchased shares will primarily be used to service awards granted under share-based compensation plans for employees.

The War in Ukraine

SAP’s decision to wind down operations in Russia and Belarus has also impacted revenue. The end of existing cloud contracts in these countries has reduced cloud backlog by 1%, or approximately €64 million.

Over the full year this impact of ending existing business engagements and the lack of new business and other expenses is likely to be in the region of €250 million.

Business Highlights

New Rise with SAP customers this quarter included Centre for Pandemic Vaccines and Therapeutics (ZEPAI) at the Paul-Ehrlich-Institut, Dabur India Limited, Fonterra, HELLENiQ ENERGY, Nikon Corporation, Prada, RICOH CO., Roborock, Salzburg AG, Schneider Electric, Wistron Corporation and 11teamsports.

Notable S/4HANA Cloud customers were BioNTech, Birlasoft, Bosch BASF Smart Farming, Dufry International, NBA, Petrobras and Wipro.

Customers choosing other solutions from the SAP portfolio included Allianz Technology, Cognizant, DB Schenker, Domino’s Pizza Enterprises, Endress+Hauser, Fujitsu Limited, Grupo Energía Bogotá, Gustavo Gusto, Hapag-Lloyd, L.L.Bean, Salzgitter, Schiphol Nederland, Siemens Energy, The Pennsylvania State University, The State of Missouri, Trent Limited and Valio.

Cloud revenue was high in all global regions, with outstanding figures for the US and Germany and very high numbers for Brazil, China, India and Switzerland.

SAP announced the acquisition of Askdata, a search-driven analytics startup on the 21st of July.

SAP announced on the 17th of August that SAP and Francisco Partners signed an agreement with SAP America Inc. in which FP will acquire SAP Litmos from SAP.

On the 31st of August SAP announced that the Supervisory Board will appoint Dominik Asam, currently CFO of Airbus as CFO and member of the executive board of SAP SE, replacing Luka Mucic.

New capabilities for Successfactors were announced in September which allow organisations to implement an integrated talent development strategy and a future-ready workforce.

Most recently, on the 20th of October, Taulia (which SAP acquired in January) and Standard Chartered Bank signed a partner agreement to collaborate across a range of working capital finance solutions. Taulia has also reached an agreement with Mastercard to embed the Mastercard Virtual Card platform which provides access to multiple global banks.

In addition SAP won several accolades this year including being named a leader in the Gartner Magic Quadrant for Digital Commerce and for Data Integration Tools, being named a leader in the Forrester WaveDigital Operations Platforms for manufacturing and Distribution. IDC Marketscape also named SAP a leader for Worldwide Talent Acquisition Suites.

The SAP Business Outlook for 2022

SAP’s cloud strategy is accelerating cloud growth through new and existing customers. This rate of growth places SAP on track to meet and exceed its mid-term ambitions. In 2022 SAP expects:

€11.55 – 11.85 billion cloud revenue at constant currencies

€25.0 – 25.5 billion cloud and software revenue at constant currencies

€7.6 – 7.9 billion non-IFRS operating profit at constant currencies

The share of more predictable revenue (defined as the total of cloud revenue and software support revenue) is expected to reach approximately 78% (2021: 75%).

A full-year 2022 effective tax rate for IFRS of around 45.0% (previously: 34.0% to 38.0%).

SAP Long Term Goals

SAP has had a tough couple of years since they revised their mid-term ambitions and publicly stated they were changing their business model.

The initial divergence from customer and shareholders’ expectations drew criticism and reduced the share price dramatically. At the time customers wanted on the whole to continue with on-premise systems and shareholders just wanted to continue with the same winning formula as before.

Then the pandemic, lockdowns, and the Ukraine war happened and everyone’s assumptions about what the future held were shaken.

These macro-economic events demonstrated repeatedly the need for cloud-based software as a service: to provide the scalability and resilience, to facilitate agility and innovation in order to meet the changing context of business and commerce.

“An Inflection Point”

SAP held a teleconference today as part of their investor relations in which SAP CEO Christian Klein and CFO Luka Mucic discussed this quarter’s financial results and SAP’s plans for the next quarter and into 2023.

At this event both Klein and Mucic recognised that economic disruption was likely to continue but despite significant headwinds SAP is likely to succeed in its aims to become primarily a cloud-based software-as-a-service provider, while simultaneously achieving double digit growth.

IgniteSAP has demonstrated elsewhere many times that the macro trends of digitalisation, sustainability, and cloud transformation all require a new form of ERP system. SAP’s own transformation may have unnerved the markets in the short term but their future-oriented strategy is paying its own form of dividends. They have been investing in themselves.

As a result of this SAP has laid the foundations for prosperity among a variety of groups of stakeholders in the SAP ecosystem. SAP has shown this quarter they are increasing their own profits, but also they and their partners are helping SAP customers to make sure their own businesses are future-proof.

At the recent DSAG congress, as well as in a recent study released jointly by several SAP user groups, SAP users (either businesses or individuals) have shown that they understand the need for moving to cloud-based versions of S/4HANA and other SAP solutions: they just want to ensure that legacy support continues for use with hybrid deployments.

All of these stakeholders now understand that if they are to meet their own customers requirements and provide them with a personalised experience, in the face of extreme fluctuations in the economic context of these activities, then they must modernise, digitise, and move to the cloud, or risk losing out of substantial revenue.

Klein summarised the strength of SAP’s current position today:

“Our financial outlook for 2022 remains on track, both for the top and the bottom line. Overall, our strong cloud momentum has offset the top line impact from exiting Russia. On the bottom line, we anticipate meeting the guidance we provided last quarter. We are expecting our largest Q4 on record for overall order entry and new cloud business.

SAP’s cloud transformation has reached a tipping point. And we had an important inflection point for the company. After beginning our transformation two years ago, we feel very positive about the resilience we have built into our future business.”

While the stock price still does not reflect SAP’s self-confidence there is now certainly room for optimism among the wider SAP community who will also reap the benefits of SAP’s transformational work over the last couple of years.

Are you looking for a new position in the rapidly changing SAP ecosystem? If you want help to navigate this complex software services market and find your best role then join us at IgniteSAP