SAP has announced their financial results for the 4th quarter and the full year for 2022.
This week IgniteSAP will be sharing the numbers and putting those results in the context of SAP’s long-term growth strategy.
Here are the main points of interest:
All financial outlook metrics were met for the financial year 2022
Cloud revenue for the year is up 33%
Q4 SAP S/4HANA cloud revenue accelerated: up by 101% (or 90% at constant currencies).
Current cloud backlog increased by roughly a quarter to more than €12 billion.
Cloud gross profit is up 36% (28% by constant currencies).
Operating profit is remains stable, but slightly down measured by constant currencies.
SAP’s targeted restructuring in 2023 reflects a focus on strategic growth areas and accelerated cloud transformation.
SAP has decided to consider a sale of its stake in Qualtrics.
SAP CEO Christian Klein commented:
“SAP is more resilient than ever. We end 2022 with continued strong cloud momentum and a return to operating profit growth in the fourth quarter, marking an important inflection point. Heading into 2023, this gives us great confidence in delivering on our promise of accelerating topline and double-digit non-IFRS operating profit growth. As we enter the next chapter of SAP, I want to thank Luka for his great partnership on this journey.”
Luka Mucic, SAP’s outgoing chief financial officer said:
“In my 37th and final earnings for SAP, I am proud that the SAP team is announcing excellent results and continued cloud momentum. We are on track to deliver our growth and profitability commitments for 2023. I am extremely confident in the continued success of SAP’s most exciting transformation in its history. Thank you to the wonderful SAP family that I have been part of for 27 years.”
Cloud revenue was up 30% to €3.39 billion and up 22% at constant currencies in the fourth quarter, and SAP S/4HANA cloud revenue continued to accelerate by 101% to €0.66 billion (90% at constant currencies).
Revenue from software licences was down 38% to €0.91 billion as customers move to SaaS.
Together cloud and software revenue was up 4% to €7.29 billion and flat at constant currencies. Services revenue rose by 15% to €1.14 billion and up 10% at constant currencies. Total revenue was up 6% to €8.44 billion (1% at constant currencies).
Due to restructuring the share of more predictable revenue increased by 6% points to 76% in the fourth quarter.
Cloud gross profit is up 36%, cloud gross margin by 2.3% to 71.3%. The increase was due to expansion of gross margins across SAP’s cloud business models. Gains in efficiency overcompensated increased investments into the cloud delivery program.
Non-IFRS operating profit increased by 5% to €2.58 billion (2% at constant currencies). Operating margin decreased by 0.3% to 30.6% and was up 0.3% to 31.2% at constant currencies. Disciplined spend management in the 4th quarter increased profitability.
The IFRS operating profit included a disposal gain of €175 million and non-IFRS operating profit of €109 million related to the sale of the SAP Litmos business.
By the end of 2022 cloud backlog expanded to €12.03 billion, growing by 27%. The divestiture of SAP’s Litmos business and the severe reduction of operations in Russia and Belarus impacted cloud backlog negatively, but SAP S/4HANA current cloud backlog was up 86% to €3.17 billion. The total contractually committed cloud backlog by the end of 2022 increased by 35% to €34.2 billion.
Cloud revenue for the full year was up 33% to €12.56 billion due to double-digit growth across the SAP SaaS and PaaS portfolio, with SAP S/4HANA cloud revenue up 91% to €2.08 billion.
In spite of lower software licenses revenue, cloud and software revenue increased10% to €26.52 billion, while services revenue rose by 16% to €4.35 billion. These factors contributed to an increased in total revenue of 11%, reaching €30.87 billion.
The more predictable share of this revenue increased to 79%.
“Free cash flow for the full year was down 14% to €4.35 billion, in line with the revised outlook of approximately €4.5 billion. This is predominantly due to lower profitability and adverse working capital impacts in other assets. While tax payments developed positively, smaller negative impacts came from share-based payments as well as capital expenditures and leasing. In addition, the increased volume of trade receivables sold in 2022 amounting to €0.8 billion versus €0.5 billion in 2021 had a positive impact on free cash flow. At year end, net debt was €2.07 billion.”
Through the course of 2022 SAP dramatically reduced operations in Russia and Belarus. Due to the termination of existing cloud engagements in Russia and Belarus, by the end of Q4, current cloud backlog was approximately €62 million lower. The impact of this reduction on the full year was approximately €410 million because of reduced revenues and bad debt provisions.
New Rise with SAP customers in the 4th quarter included: Al-Futtaim Group, City of Vancouver, ExxonMobil, Fujitsu Limited, German Football Association (DFB), Imperial Brands, Kanton Aargau, Lockheed Martin, Merck KGaA, Munich Leukemia Laboratory (MLL), Lenovo, Lumen Technologies, Natuzzi, PETRONAS, Port of Rotterdam, Renault Group, Swarovski, Warsteiner Brauerei, and ZF Friedrichshafen AG.
New SAP S/4HANA Cloud customers in the 4th quarter included: Accenture, Canon Production Printing, Daimler Truck AG, Ducati Motor Holding, Mahindra Group, Walgreens Boots Alliance, and Zespri.
Across the rest of the SAP portfolio of products some of the new customers were: ArcelorMittal Europe, C6 Bank, Caixabank Tech, Euronews, Groupe SEB, Groupe TF1, Fressnapf, Haier, Hisense, Macquarie Banking and Financial Services, NBA, DOUGLAS, Qualcomm, Robert Bosch, SCOTT Sports, Soriana, Technical University of Munich, Transport for London, VINCI ENERGIES.
Regionally SAP cloud revenue in the 4th quarter was strong in all areas. Brazil, Germany and japan stood out as particularly good. Through the full year Germany, America and Japan were consistently outstanding, followed by Brazil, Chile, China, Italy, Saudi Arabia, South Korea, and Switzerland.
Other notable events in the last few months include the launch of SAP Build, also a new partnership with Coursera to make facilitate study for SAP developers, the divestiture of SAP Litmos, and the new SAP and PwC sustainability partnership.
SAP was also recently recognised as:
A Leader in 2022 Gartner Magic Quadrant for Configure, Price, and Quote Application Suites
A Leader in Forrester WaveTM: Digital Operations Platforms for Manufacturing & Distribution
A Leader in IDC MarketScape: Worldwide Holistic Supply Chain Planning 2022 Vendor Assessment.
An industry leader in the software industry in the S&P Global Corporate Sustainability Assessment for the 16th consecutive year.
One of the 100 most sustainable companies in the world, joining the Corporate Knights Global 100 once again.
SAP also announced that on the 25th of January BMW chose Rise with SAP and other SAP solutions in their strategic cloud transformation and to S/4HANA.
In SAP’s Application, Technology and Services segment revenue rose 4% to €7.74 billion year-over-year and the Qualtrics segment revenue was up 37% to €389 million year-over-year.
For the full-year 2023, SAP expects:
“€15.3 – 15.7 billion cloud revenue at constant currencies (2022: €12.56 billion), up 22% to 25% at constant currencies.
€28.2 – 28.7 billion cloud and software revenue at constant currencies (2022: €26.52 billion), up 6% to 8% at constant currencies.
€8.8 – 9.1 billion non-IFRS operating profit at constant currencies (2022: €8.03 billion), up 10% to 13% at constant currencies.
The share of more predictable revenue (defined as the total of cloud revenue and software support revenue divided by total revenue) is expected to reach approximately 83% (2022: 79%).
Free cash flow of approximately €5.0 billion (2022: €4.35 billion).
A full-year effective tax rate (IFRS) of 28.0% to 32.0% (2022: 44.6%) and an effective tax rate (non-IFRS) of 26.0% to 28.0% (2022: 29.5%), strongly depending on the development of Sapphire Ventures’ investments.”
By 2025 SAP continues to expect more than €36 billion total revenue, cloud revenue to exceed €22 billion, above €11.5 billion non-IFRS operating profit, a cloud gross margin of roughly 80%, expansion of the more predictable share of revenue to 85%, and free cash flow of approximately €8 billion.
Luka Mucic summarised the result of the strategic restructuring that SAP has been conducting over recent years:
“We also see… continued outsize growth in our core ERP cloud product. As Christian said a couple of years ago, that was a rounding error in our cloud figures. Now, it’s already from a backlog performance, the largest of our senior cloud businesses still growing at very, very high rates, 82% backlog growth, at the end of the year, actually in Q4, even higher revenue growth, so still accelerating to 90% growth. 79% for the full year, and next year.
So in 2023, it was also not only from a backlog, but also on the revenue side, be the largest of our cloud businesses. And that underpins the success of the business transformation. We also see already now a re-acceleration of total revenue growth, we ended up at 5% at constant currencies. Last year was 3%. This year will be also further better.
So now we’re entering the second leg of our business transformation, in which we will see acceleration both on the top as well as on the bottom line and very important, the predictability of our business increases as well. We increased our share of predictable revenues by 4%. During the year so close to 80% of our revenues are already now highly resilient, highly shielded from macro challenges and very predictable that will further increase at the same rate to already 83% in 2023.”
Other IT vendors have also announced reductions of their workforce this month, including Salesforce, Amazon, Microsoft, IBM and Alphabet, indicating that SAP’s cloud shift is not the only reason for the job cuts.
One of the crucial aspects of this restructuring process so far has been to not only compete at the leading edge as a technology company, but also ensure a greater share of “more predictable” revenue. In addition this second stage of adjustments to the business will involve more focus on profitability, as well as simplifying and consolidating the portfolio.
While this difficult step will cause pain for some, the optimisation of the business will lead to more sustainable revenue streams and a steadier road ahead, encouraging greater confidence in the future of the corporation from the majority of customers, shareholders, and those working in the SAP ecosystem as partners and individual IT consultants.
Are you an SAP consultant? If you would like help finding your ideal position in the new landscape of SAP, and support negotiating a competitive salary in your next role, then join us at IgniteSAP.
