In this Supply Chain Matters commentary, we highlight SAP SE’s rather positive Q3-2022 financial performance and what is likely ahead.

In a period where multiple enterprise and specialty software firms are reporting what are perceived to be disappointing or declining profitability, replete with select headcount reductions, SAP SE seems to have countered this trend, reporting better than expected Q3-2022 financial performance.

The tech provider reported total revenues of € 7.8 billion euros, an increase of 5 percent in constant currency. Cloud revenue increased 25 percent to € 3.3 billion euros at constant currency. Revenue growth reflected positive growth rates across major geographic regions. The Americas sector grew 26 percent in the quarter, EMEA grew 23 percent and Asia Pacific grew 27 percent. Profitability in the Cloud segment were reported as € 2.3 billion, rising a healthy 44 percent year-over-year in constant currency. Gross margins in the Cloud segment increased 2.8 percentage points to 71.7 percent.

These results were positively impacted by the current high value of the U.S. dollar.

In the all-important S/4 HANA Cloud segment, quarterly revenue increased 87 percent to € 546 million (Non-IFRS). This segment’s current backlog is noted as up 90 percent at € 2.7 million euros.

Free cash flow for the nine-month period declined 38 percent to € 2.5 billion euros. The company adjusted its free cash outlook for the year to approximately € 4.5 billion euros.

Executives additionally reaffirmed an optimistic outlook for revenue and profitability goals for this year, a statement that investors and equity markets received positively. Initial news of this performance led to a 4 percent rise for this global enterprise tech company’s shares.

Investors were additionally pleased in that in July, SAP announced its second stock buyback program, with a purchase value of upwards of €500 million euros,  which was completed in early September.

In comparison, in September, arch-rival Oracle reported a $3.6 billion in Cloud related revenues, representing a 45 percent year-over-year increase. However, the enterprise technology provider has since initiated efforts to reduce costs, including a recent headcount reduction, with ongoing speculation that a further one is in the works.

This week, enterprise tech provider Microsoft reported its latest quarterly results that included a 14 percent decline in net income, noted as the worst quarterly income decline reported in more than two years. Total revenues rose 11 percent to $50.1 billion. The tech provider attributed the decline in profitability to a significant cutback in global-wide personal computer sales and corresponding Windows operating systems revenues during the quarter. While this provider’s Azure Cloud based platform revenues grew 35 percent on a year-over-year basis, it was down from previous mid-forty percent growth in prior quarters. Microsoft has also initiated a reported two rounds of select headcount reductions.

 

What’s Likely Ahead for SAP

As Supply Chain Matters noted in our highlights of SAP’s mid-year financial report, the key enabler of Cloud growth momentum involves conversion of the company’s legacy on-premise R3 customer base to the SAP S/4 HANA and Business Technology Platform platforms, and the principal method to accelerate this effort has become the RISE with SAP program. While the RISE program appears to be making a positive contribution in providing customers with various on-ramps to Cloud adoption, full suite adoption cycles among many customers span multiple quarters and perhaps, years.

Evidence is growing that a changing and more uncertain global economy that is fraught with additional unknowns is indeed beginning to impact corporate and technology companies, along with their investors, in their strategies and outlooks over the coming months. Economists indicate that the European economy is probably close, or already in economic recession, and the outlook for 2023 does not get better. Economists and business leaders have similarly become more vocal in indication of an economic setback involving the two economies of China and the United States in 2023.

That stated, multi-industry supply chain challenges remain globally, and many organizations surely have more work to do in improving supply chain agility, achieving more forms of supply network resiliency and timelier, and better-informed decision-making.

SAP, as well as the provider’s partners, are likely cognizant of these market headwinds, especially considering that upwards of 40 percent of its customer base is estimated to reside in Europe. High inflation levels globally, and the consequent ongoing strength of the U.S. dollar are impacting Asian and developing economies as well.

It is great to bask in an upbeat quarterly financial performance, and congratulations to all at SAP and hyperscaler partners for this momentum performance. But added challenges remain including more efforts toward achieving SAP’s Ambition 2025 goals.

We submit it would behoove SAP to begin to tone down the ebullient messaging of the RISE and other customer Cloud adoption program momentum and perhaps work closer with partners in helping these customers to surgically deploy the needed supply chain and other technology required to be able to overcome the challenges of added business change and pivot dimensions. Such goals will likely have to be achieved with prudent budgeting and resource allocation.

The takeaway is that in 2023, assisting customers equates to fully understanding their business and supply chain challenges and providing programs and services that can surgically address and solve such challenges without risks of business disruption and within a likely environment of constrained spending budgets.

 

Bob Ferrari

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