SAP leadership reported €7.84 billion in total revenue (up 15%) and €3.23 billion in cloud revenue (up 38%, declaring 2022’s third-quarter performance “a strong cloud quarter.” Cloud continues to gain momentum as the leading revenue source for SAP amid double-digit growth across the SaaS and PaaS portfolio.
Also prominently featured in results for the quarter end on Sept. 30: total cloud and software revenue was at €6.71 billion (up 14%), current cloud backlog was at €11.2 billion (up 38%), and the recent S/4HANA cloud backlog was at €2.7 billion (up 38%). Meanwhile, S/4HANA cloud revenue was at €546 million (up 98%).
"Our cloud solutions are the answer, as customers turn to us to help them future-proof their businesses,” said SAP CEO Christian Klein. “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.”
A Bright Future
During the financial report session, Klein said that the company’s financial outlook for 2022 remains on track, with cloud business driving faster-than-expected quarterly revenue growth. “We are seeing accelerating momentum across all our key cloud indicators, with cloud revenue now representing our largest revenue stream for two sequential quarters,” he said.
Cloud momentum led the positive profit numbers, SAP reporting a 44% increase in cloud gross profit to accompany its 14% increase in gross profit. SAP International Financial Reporting Standard (IFRS) operating profit was at €1.24 billion (down 1%), and its non-IFRS profit flat at €2.09 billion.
In published remarks, the company attributed these results to a “reduced contribution from software licenses revenue” as well as “accelerated investments into research and development and sales and marketing.” In addition, prior third quarter IFRS and non-IFRS operating profit included a disposal gain of €77 million related to the launch of SAP Fioneer.
Earlier this year, SAP announced plans to exit its business in Russia. The “dampening impact” of war in Ukraine was noted during the financial report session. For the full year, given this evolving situation, SAP estimates total revenue impact of €250 million at constant currencies, from lack of new business and discontinuation of existing business. Current cloud backlog was particularly impacted by the termination of existing cloud engagements in Russia and Belarus, decreasing by €64 million and reducing growth by one percentage point.
In discussing business highlights, Klein spoke to the strength of the company’s integrated portfolio as a continued draw for customers.
Calling it “the foundation for our customers’ business transformation,” Klein discussed the importance of the SAP Business Technology Platform (BTP) by allowing customers and partners to integrate SAP and non-SAP system landscapes, accelerating overall process automation. “This leads to a powerful flywheel effect,” said Klein, pointing out BTP’s €1.5 billion contribution to overall cloud revenue growth.
RISE with SAP is driving end-to-end business transformation worldwide and “has cemented itself as the preferred choice for customers as they move their ERP to the cloud,” Klein added; nearly 2,500 customers are running RISE in more than 100 SAP and partner data centers around the world, a significant year-over-year take-up since RISE was introduced at the beginning of 2021.
Klein also commented upon RISE’s utility as a “great mechanism for cross-sell and upsell,” with more than 80% of RISE customers deciding to invest in SAP BTP and more than 60% opting for additional cloud solutions. SAP showcased several brands investing in RISE with SAP and SAP S/4HANA, including Prada, Ricoh, the BBC, and Schneider Electric.
The Center for Pandemic Vaccines and Therapeutics (ZEPAI) at the Paul-Ehrlich-Institute (PEI) in Germany is using BTP as its technical foundation, given the importance of data protection and security. “We are proud to host a complete vaccination distribution system in our German data center,” Klein said.
Klein highlighted wins for the Intelligent Spend Business Network portfolio, buoyed by accelerating business travel combined with an increased focus on managing costs and Business Process Intelligence wins under the SAP Signavio portfolio market, which almost doubled in cloud revenue since Q3 2021.
“Businesses everywhere are dealing with a combination of profound challenges, including inflation, labor and energy shortages, and disrupted supply chains,” Klein said. “Despite these challenges, our results demonstrate the relevance of our strategy during these volatile times and reflect how SAP is uniquely positioned to help our customers becomes stronger for the future.”
SAP cloud transformation has reached a tipping point, Klein said, reflecting on the company’s path since beginning its journey two years ago. Predictable revenue now accounts for 80% of revenue, up from 72% in 2020, back at the starting point of the company’s cloud transformation.
“Overall, our strong cloud momentum has offset the topline impact from exiting Russia,” said Klein. “On the bottom line, we anticipate meeting the guidance we provided last quarter. We are expecting our largest Q4 on record.”
Klein expressed enthusiasm about the SAP innovation pipeline and teased new announcements to come at the company’s TechEd event in November.
“SAP North America hit its stride in Q3, with a solid performance in the region,” said Lloyd Adams, President, SAP North America, said of the Q3 results in a social media post. While noting momentum driven by Midmarket, SAP Concur, and BTP business streams, Adams pointed to SAP S/4HANA as the quarter’s big winner, “with unprecedented year-over-year revenue growth adding almost 200 customers to our roster.”
Adams added: “Strong cloud bookings and renewal rates, including a 97% renewal rate from SAP S/4HANA Public Cloud customers in North America, continue to reinforce the value our customers are seeing from SAP.”
Expert Analysts’ Insights
In the SAP analyst community, the third-quarter financials were positively received, though some expressed skepticism at Wall Street’s bullish reaction to the results.
Joshua Greenbaum, Principal at Enterprise Applications Consulting, noted that SAP shares were up by 4%, a level not seen since the end of June. “There’s a real appetite for good news from the tech sector, and SAP definitely delivered what the Street saw as a solid quarter,” Greenbaum said. “While I find the focus on RISE to be a distraction for customers—the majority of whom shouldn’t be doing RISE deals due to the complexity of their SAP landscapes—SAP needs Wall Street’s blessings, and Q3’s RISE numbers were definitely solid.”
Greenbaum commented that SAP appears to have “exited relatively gracefully” in its movement to end software support and cloud services in Russia and Belarus. SAP “still has some contractual requirements to fulfil, but the impact of withdrawal from Russia can’t be seen in the numbers,” he said.
Reflecting on the importance of cloud momentum to the SAP Q3 results, Greenbaum said that the real inflection point the company has reached is “more in the minds of Wall Street than in the minds of the customers,” who have been on board with cloud transformation for some time now. “From a practical standpoint, there aren’t any on-premise growth opportunities for SAP; there’s simply no innovation happening on premise of any note,” Greenbaum added.
Fabio Di Capua, Gartner VP and Analyst, Tech Product Manager, noted that SAP did not disclose any SAP S/4HANA or RISE with SAP sales numbers, as Q3 is normally a slow quarter compared to the stronger Q4, when the SAP fiscal year ends. “Overall, SAP Q3 revenues showed good financial numbers, with improved operating margin,” he added.
“What was reported is a steady 60% net-new customer, not moving the needle on the existing SAP Business suite customer migration,” Di Capua continued. “This confirms the challenges existing customers have in defining the business case for migration to S/4HANA and the move from perpetual licenses to subscription.”