Today, enterprise and ERP Cloud technology provider SAP SE reported both Q2 and half-year financial performance. In addition, over the weekend, the technology provider made what can only be described as an eye-opening announcement, one that may garner more headlines.

In this first of a two-part Supply Chain Matters blog commentary we provide key highlights of SAP’s latest financial performance and potential implications.

Supply Chain Matters This Week in Supply Chain Technology

Financial Performance

The financial performance headlines for Q2 included:

  • Total quarterly revenues of €6.74 billion (IFRS), up 2 percent year-over-year.
  • Operating profit of €1.28 billion (IFRS), up 8 percent year-over-year.
  • Cloud based revenues of slightly over €2 billion (IFRS), up 21 percent year-over-year. The company indicated that revenues in this category were: “impacted by lower pay-as-you-go transactional revenue as a result of the COVID-19 crisis.”
  • Software license revenues of €0.77 billion (IFRS), declining 18 percent year-over-year.
  • Cloud and software revenues of €5.71 billion (IFRS), up 4 percent year-over-year.
  • The share of predictable revenue growing 5 percentage points in the second quarter to 73 percent.
  • Cloud gross margin growing 3.4 percentage points to 66 percent, up 1.6 percentage points.

SAP further reported that operating cash flow and free cash flow grew substantially in Q2, mainly driven by lower payments to suppliers and lower than expected tax payments.  Lower travel, facility, and event costs as a result of the pandemic also helped to drive positive cash flow. Operating cash flow for the first six months was reported as €3.77 billion, up 41 percent year-over-year.

 

Half-Year Performance and Outlook

Half-year financial performance highlights included:

  • Total revenue of €13.3 billion (IFRS), up 4 percent year-over-year.
  • Operating profit of €2.5 billion compared to €691 million in the year-earlier quarter.

Regarding the business outlook for the remainder of 2020, SAP confirmed its earlier outlook of total revenues in the range of €29.2 to €29.7 billion, based on the assumption of further business reopening of economies and easing of population lockdowns and a gradually improving demand environment for the latter part of this year. The share of predictable revenue is still expected to reach 72 percent according to the company’s recent outlook.

From our lens, with the exception of Cloud predictable revenues, SAP will likely be challenged in the remainder of this year with total revenue and profitability growth.

Indications from partners and customer indicate a continued reluctance to take-on any significant SAP transformations given the high business and global uncertainties that the pandemic continues to fuel, especially across the U.S. and in some parts of Europe. Risking an SAP technology induced  business interruption could indeed be career-threatening. However, smaller phase technology investments in specific areas badly needing business process support investment could likely be supported. But SAP cannot support its corporate mission and long-term financial objectives on smaller-scale implementations.

As noted in our prior blog commentary highlighting this technology provider’s 2019 full-year financial performance, we continue highlighting these specific financial highlights for our Supply Chain Matters readers because as we had stated several months ago, SAP is now under the looking glass of a very influential private equity firm which has a keen eye on existing and longer-term metrics related to overall margins, operating cash flow and share of predictable revenues.

 

Business Segment Performance

Highlights of Business Segment performance remained thin but included:

SAP S/4 HANA ERP customer growth of 500 customers in the most recent quarter, with total adoption reported as 14,600 customers. At the end of 2019, SAP had reported 13,800 customers adopting the company’s relatively new Cloud ERP suite so it would appear that adoption increased by 800 customer in six months. Of that adoption total, more than 7400, roughly half, are reported, as in live status. This segment remains a challenge for SAP.

For the SAP Ariba, SAP Fieldglass and SAP Concur Cloud based platforms, which together represent SAP’s Intelligent Spend platform, no business unit revenues were reported. What was indicated was that SAP Ariba is embedding the Qualtrics experience-based technology in order to support a continuous feedback loop for buyers and suppliers on the network.

The takeaway from our lens is that although SAP provides an optimistic financial outlook and some success in garnering all-important predictable revenue flow, the second-half of the year will not likely be a slam dunk. Especially as customers continue to be confused in overall SAP product strategy and direction. Crucial to SAP is broader customer go-lives of S/4 HANA as well as elements of SAP SCM digital supply chain, and both remain challenged.

 

Bob Ferrari

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