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SAP Q4 and Full Year Report 2021

The SAP Q4 and Full Year Report 2021 has been released in a preliminary summary. The full report is expected at the end of January. This week IgniteSAP is interpreting what the results mean for SAP’s long term strategy.

SAP announced an “Outstanding Fourth Quarter and Full-Year 2021 With Record Cloud Performance”, and that it “Exceeds High End of Outlook for Cloud & Software Revenue and Operating Profit”.

This is a pretty strong assertion but the (preliminary) facts of their financial performance are:

Fourth Quarter 2021

Expansion of current cloud backlog to €9.45 billion, up 32% (up 26% at constant currencies), a sequential growth acceleration by 4% at constant currencies.

SAP S/4HANA current cloud backlog performance, up 84% to €1.71 billion (up 76% at constant currencies), driven by strong adoption of RISE with SAP.

Cloud revenue up 28% (up 24% at constant currencies), accelerating further with strong execution across the entire cloud portfolio.

Software licenses revenue was down 14% year over year to €1.46 billion and down 17% at constant currencies.

Cloud and software revenue was up 6% to €6.99 billion and up 3% at constant currencies.

Services revenue was up 3% year over year to €0.99 billion and flat at constant currencies.

Total revenue was up 6% year over year to €7.98 billion and up 3% at constant currencies.

The share of more predictable revenue grew by 5% year over year to 69% in the fourth quarter.

Full Year 2021

Continuing cloud acceleration across the board, delivering results above expectations.

IFRS cloud revenue up 17%, non-IFRS cloud revenue up 16% (up 19% at constant currencies), hitting high end of revised 2021 outlook.

Cloud & software revenue up 4% (up 5% at constant currencies), exceeding high end of revised 2021 outlook.

IFRS operating profit down 30%, non-IFRS operating profit down 1% (up 1% at constant currencies), exceeding high end of revised 2021 outlook.

Operating cash flow expected above €6.0 billion; Free cash flow expected at around €5.0 billion.

Strong, accelerating cloud growth reflected in 2022 outlook, targeting up to 26% non-IFRS cloud revenue growth at constant currencies.
Software licenses revenue was down 11% year over year to €3.25 billion and down 11% to €3.24 billion at constant currencies.

Total revenue was up 2% year over year to €27.84 billion and up 3% to €28.23 billion at constant currencies.

The share of more predictable revenue grew by 3% year over year to 75% for the full year 2021.

Statements by SAP Executives

The statements by CEO Christian Klein and CFO Luka Mucic put some context to these numbers:

“The magnitude of our cloud strength is evident. More and more companies are choosing SAP to help them transform their businesses, build resilient supply chains and become sustainable enterprises as they move to the cloud. This momentum is reflected in the tremendous success of RISE with SAP, our signature cloud offering, as well as excellent growth across our entire portfolio. Our growth acceleration points to even greater potential ahead.” – [Christian Klein]

“I am proud that our team has delivered an exceptional year with strong results, far exceeding our expectations. After three quarters of home runs with our cloud momentum, we hit it out of the park this quarter. We are confident that we will continue our Q4 current cloud backlog growth in 2022. This is reflected in our accelerated cloud guidance for 2022 as we make great progress towards our mid-term ambition.” – [Luka Mucic]

The SAP Business Update

The Business Update points out that there is a background trend to their pattern of growth of digitisation and cloud adoption. They point to other aspects of the current economic climate like supply chain disruptions and increasing change in regulatory restrictions as a reason why businesses are looking for solutions which increase the ability of businesses to adapt and be flexible.

The core of SAP’s business strategy is to provide these solutions and they point to their experience of doing so across all sizes and areas of business and commerce as a reason why they are showing strong growth.

The SAP Cloud portfolio is currently held to be their biggest driver in growth. The Rise with SAP package that they have been marketing since last year along with S/4HANA Cloud have contributed to this trend.

SAP also point out that customer satisfaction with their products is increasing (presumably based on surveys) and this is supported by high rates of renewal among their customer base.

There was a predicted drop in software licences revenue which reflects a large portion of the customer base transferring to software services as part of cloud growth. Operating profit and margin were also impacted by higher share-base compensation expenses due in large part to the Qualtrics IPO, and also the increase in SAP’s share price over the year.

At the time of writing SAP shares are $138.90 (USD) compared with $125.00 this date last year.

SAP expects the full year’s operating cash flow to be above €6.0 billion. Free cash flow is expected to be at around €5.0 billion.

SAP’s Business Outlook for 2022

In 2022 the growth in the cloud portfolio of SAP will accelerate and this is expected to put SAP on the path to achieving the mid-term ambitions that were defined in the third quarter statement of 2020.

SAP states that over the course of 2022 it expects:

€11.55 – 11.85 billion non-IFRS cloud revenue at constant currencies (2021: €9.42 billion), up 23% to 26% at constant currencies.

€25.0 – 25.5 billion non-IFRS cloud and software revenue at constant currencies (2021: €24.08 billion), up 4% to 6% at constant currencies.

€7.8 – 8.25 billion non-IFRS operating profit at constant currencies (2021: €8.23 billion), flat to down 5% 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%).

SAP long-term Strategy

In the third quarter statement of 2020 SAP “revised its mid-term goals” and this resulted in much criticism and a substantial drop in share price. However since this time the leadership of Christian Klein and Luka Mucic has been shown to be correct in it’s long-term strategy.

The fiscal reasons behind the change in strategy were shared by Mucic at the time:

“…we’ll be moving large parts of our ERP customer base from on-premise to the cloud, move them out of the upfront software licensing model and into the rateable subscription licensing model, a little bit like other players. For instance, Adobe have done it before, so it will not be as rapid in our case as we are talking about an option for the customers. Why does this make financial sense? That’s the second important point, because we are increasing customer lifetime revenue as we are expanding our role from a software vendor to a cloud provider for a significant part of our portfolio. This means we not only deliver software and support services but also the required IT infrastructure and operational services. But we are effectively expanding our share of wallet.
The potential uplift here is substantial, but even more important is the associated up-selling potential of the Business Technology platform, additional SAP solutions and partner applications developed on top of it.”

Although the process of moving the customer base to the cloud and to a subscription licensing model had already been shown to be a successful long-term strategy by other software vendors, shareholders were alarmed that the rate of revenue growth would slow for a time.

Benefits for Other SAP Professionals

Now we can see the early fruits of this change in SAP’s business model and it is not only beneficial to SAP and their shareholders in the long-term. SAP works with a large number of business collaborators and strategic partners, and the SAP ecosystem maintains countless IT consultants.

SAP’s shift to a more predictable revenue stream rather than upfront purchasers will have an effect for others working with SAP, as will the move to cloud services.

Previously IT consultants would be asked to implement a single instance of an SAP solution and that customer would make a single one-off payment for services. Now the trend is towards software provision as a service there is an extended customer lifetime with more points of interaction, and more potential for regular revenue, and up-selling, for all IT services providers.

As an industry the larger move toward global digitisation of commerce and industry will result in years of growth in the IT services sector, but following that period the resulting global IT infrastructure for business will be one which is service-based.

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The advantage for those running businesses is that they will not have to constantly think about IT infrastructure as it will be taken care of by IT specialists, and they can concentrate on producing, marketing and building relationships with customers.

Initiatives like S/4HANA Cloud and Rise with SAP are part of this wider campaign to move large numbers of businesses to the cloud and make it much easier to do so.

There are also other changes taking place within SAP which will encourage the uptake of Rise with SAP such as a change in the discounts so that Rise becomes a much better value proposition for the customer, and a deal with partner managed clouds so that the intermediary party can sign up to Rise rather than the end user.

So although there was some hesitancy in uptake of Rise with SAP, as there was initially with S/4HANA Cloud, now we are seeing strong progress on both and this is all designed to encourage a change across the board in the way that businesses implement IT services.

If this strategy of SAP is successful then the positive ripple effect will be felt by all those involved in the wider SAP ecosystem.

What does this mean for you as an IT professional? Get in touch with IgniteSAP so that our team can answer your questions on how you can make the most out of the new IT services landscape.