Enterprise and supply chain management software applications provider SAP SE has reported second quarter and half year financial performance. Whereas the executive commentaries indicate strong Cloud applications adoption along with added momentum in customer movements from on-premise to Cloud, the financial numbers would indicate mixed results.

 

Financial Performance

Second quarter total revenues were reported as € 6.67 billion (IFRS and non-IFRS), and reflected a 2 percent decline on a year-over-year basis, but a 5 percent quarter on quarter increase.

Cloud revenues increased 11 percent to € 2.28 billion (IFRS) reflecting an 11 percent year-over-year growth. Software license revenues declined 16 percent year over year to € 0.65 billion. Cloud and software revenues were up one percent to € 5.75 billion. That compared to a figure of €5.43 billion reported for the first quarter.

The share of more predictable revenues reportedly grew 3 percentage points year over year to 76 percent. That compares to a 78 percent number reported in the first quarter.

IFRS Operating Profit was reported as € 0.98 billion reflecting a 23 percent year over year decline. However, net profit after tax increased 64 percent to € 1.45 billion after accounting adjustments.

For the six months ending on June 30, total revenues were reported as € 13.0 billion (IFRS), a 2 percent decline. Operating profit declined 22 percent to € 2.52 billion while profit after tax increased 48 percent to € 2.52 billion.

Operating cash flow for the six months was flat on a year over year basis, reported as € 3.77 billion. Free cash flow increased 4 percent to € 3.25 billion.

Net debt now stands at € 4.57 billion.

Relative to global regional revenue performance, the technology provider indicated that Cloud and software revenues in the EMEA region increased 4 percent in the quarter while the Americas region revenues decreased 3 percent. Specifically noted was that for the U.S. specifically, there was reportedly strong sequential acceleration in Cloud revenue growth combined with stronger backlog growth.  Cloud and software revenue growth in the APJ Asian region reportedly increased 18 percent with Japan, Australia, and South Korea noted as highlights.

 

Executive Commentary

SAP CEO Christian Klein indicated in a published Investor Relations update:

“We’re seeing strong adoption of our cloud portfolio as customers select SAP for their business transformation. Our strategy is working; This is the third straight quarter of strong execution, and we continue to deliver unparalleled customer value through the strength of our platform and applications.”

SAP CFO Luka Mucic added:

“This has been another strong quarter with accelerating growth for SAP’s cloud portfolio. We saw excellent customer momentum and adoption and are raising our outlook for revenue and profit.”

With this latest performance update. the enterprise software technology provider was more transparent in the reporting of specifics related to ongoing customer momentum. Select data included:

  • The ‘Rise with SAP, which has been tagged by executives as being a massive accelerator to customers digital transformations, reportedly led to the closing of 250 customer deals in the second quarter.
  • More than 600 SAP S/4 HANA ERP customers were added in the quarter resulting in a cumulative number of more than 17,000 customers, with 10,100 customers indicated as live. That total number was up 16 percent on a year over year basis. Further noted was that more than half of additional S/4 HANA customers were net new. Names of manufacturing or supply chain related included Coca-Cola, Moderna, Molson Coors Brewing, Stanley Black & Decker and Tenneco.
  • Further indicated was the existence of more than 8,000 productive SAP Business Technology Platform customers, the defined single platform for integration and extensibility across SAP’s technology portfolio. As with customer metrics provided by many software providers, a tick mark of productive may or may not involve the entire technology suite. Often it can be a spefic element.

 

Added Perspectives

This Editor’s commentary relative to SAP’s prior pre-announced Q1 financial performance in April was that we anticipated that financial analysts and investors would be seeking a lot more detail relative to customer momentum along with more quantitative details relative to the RISE with SAP program.  As noted in these highlights of the latest quarterly performance, SAP has indeed responded to such pressures for added tansparency.

That stated the mismatch between the financial performance and management narrative would indicate that there are continual pressures related to boosting financial and sales performance particularly for the Americas region, which is this tech providers largest market. That is likely why CEO Klein’s narrative of three consecutive quarters of strong execution will surely need to be amended to execution, market growth and financial performance.

SAP’s strategy for added reliance on partners to boost customer and financial growth needs does not seem to be making a discernable balance sheet presence thus far. Perhaps that will change for the remainder of this year and into 2022.

Indications are that SAP’s installed base customers are more inclined to adopt a two-stage applications digital transformation strategy. The first is a direct movement to Cloud applications to aide in business strategy and process transformation priority needs. The second is he migration from on-premise to the SAP S/4 HANA ERP suite, but indications are that customers remain concerned relative to risks of major business disruption or elongated technology timetable conversion.

That is why the “RISE with SAP” initiative has become so critical to SAP’s business needs.  But that may not be the case for individual customer’s business strategy needs, particularly now in the midst of growing product demand but significant supply chain related challenges. Thus the tendencies to move direct to Cloud but with specific business process entry point objectives vs. broader process conversion.  As we have noted, that entry can often be in supply chain or online customer fulfillment business process automation areas.

That stated, details regarding SAP’s customer momentum and uptake in the supply chain management and manufacturing support sector require added transparency and we trust that will be included in future updates or briefings.

The reader takeaway is that the stakes in the Cloud applications technology sector remain high, and the overall enterprise applications competitive landscape is really heating up.

Bob Ferrari

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