Enterprise and supply chain management software applications provider SAP SE has reported Q3-2021 financial performance. In this Supply Chain Matters perspective we highlight important financial indicators and our added perspectives relative to SAP market and customer adoption momentum.
It is our belief that Q4 financial performance will be a more critical indicator of Cloud adoption momentum among SAP customers.
Highlights of Financial Performance
Third quarter total revenues were reported as € 6.845 billion (IFRS and non-IFRS), reflecting a 5 percent increase on a year-over-year basis, along with a 2.6 percent quarter on quarter revenue increase.
Cloud revenues increased 20 percent to € 2.39 billion (IFRS) reflecting 20 percent year-over-year growth, along with a 4.8 percent quarter-on-quarter revenue increase. Software license and support revenues declined one percent to € 3.52 billion.
The share of more predictable revenues reportedly grew three percentage points year over year to 77 percent, reflecting the same growth rate reported for Q2. That compares to a 78 percent number reported in the first quarter.
IFRS Operating Profit was reported as € 1.25 billion reflecting a 15 percent year over year decline, but somewhat better than the 23 percent decline reported for Q2. Net profit after tax declined 14 percent to € 1.25 billion after accounting adjustments.
For the nine months ending in September, total revenues now reflect € 19.9 billion (IFRS), just about the same level at this point in 2020. Operating profit has declined 20 percent to € 3.2 billion while profit after tax increased 18 percent to € 3.9 billion.
Operating cash flow for the cumulative nine months is now down 3 percent on a year over year basis and reported as € 4.1 billion. Free cash flow decreased 1 percent year-over-year to € 3.6 billion. Net debt has declined € 0.95 billion from the previous quarter. Operating margin (IFRS) at the end of Q3 was 18.2 percent compared to 22.5 percent reported in the year earlier quarter.
Regional revenue performance indicated that Cloud and Software revenues in the EMEA region increased 7 percent in constant currencies during the quarter, slightly better than 4 percent growth reported for Q2. For the Americas region revenues increased 6 percent at constant currencies, a noteworthy increase compared to a 3 percent decline reported in the previous quarter. Cloud and software revenue growth in the APJ Asian region reportedly increased 6 percent compared to 18 percent growth reported for Q2.
Added Supply Chain Matters Perspectives
In press release statements, SAP senior executives pointed to record adoption of applications and Cloud based platforms. The technology provider also raised its full year revenue and profit outlook on the basis of a perceived strong Q3 quarter.
Yes, some of the financial numbers for Q3 are somewhat better than that of the prior quarter but operating profit goals remain a challenge for SAP going into the final quarter and it would appear that there is an overall expenses challenge.
As indicated in our prior published commentaries, SAP’s strategy for added reliance on Cloud infrastructure hyper-scalers and other partners to boost customer upgrade and financial growth needs does not seem to have provided a discernable boost thus far, but that may be more related to scaled back customer adoption tendencies related to broader based SAP technology. On the other hand, some hyper-scalers like Microsoft, Oracle and to some extent Google Cloud, are indeed garnering added financial momentum.
From our lens, what has been troubling has been a series of quarterly financial performance press releases that read more like a marketing vs. a financial reporting document.
There has been a strong emphasis in declaring significant Cloud based technology growth momentum along with a particular emphasis on the RISE with SAP adoption program. The latter is aimed to convert the company’s legacy on-premise R3 customers to accelerate their adoption of the Cloud based S/4 HANA offering for core ERP business process support. The technology provider reported that three hundred customers signed on to the RISE program in in the most recent quarter, while 250 were reported for Q2 adoption, which seems to reflect a 20 percent increase in momentum. Yet the scope of legacy on-premise customers is significantly high in overall number and scope.
The S/4 HANA suite includes elements of supply chain management, engineering and manufacturing, along with associated data management, analytics and integration capabilities utilizing SAP’s HANA database technologies. Such a broad scope implies an elongated roadmap if all of these applications are to be implemented, not to mention a significant added expense for customers at a time when unprecedented global supply chain disruptions and concerning inflationary pressures are impacting broader business financial performance. Once more, SAP’s data and integration product strategies related to HANA Cloud are still a work in progress with roadmaps that extend into 2022.
In this Editor’s commentary related to SAP’s Q2 financials, I pointed to indications that 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 to specially targeted process transformation priority needs. There remain indications that customers remain concerned relative to risks of major business disruption or elongated technology timetable conversion. Some are turning to specific best-of-breed Cloud providers to address specific supply chain management business process needs in planning, online customer fulfillment, warehouse and transportation process enhancements. Now in the critical final quarter of 2021, many SAP customers are laser-focused on ensuring that their company revenue and profitability goals are accomplished amid the significant supply chain challenges at-hand. A further reality is that in some global regions, the COVID-19 delta variant remains a threat to business and economic performance.
This is why the RISE with SAP initiative has become so critical to SAP, not only for spurring the movement to Cloud but also to maintain a pulse as to customer intent, needs and internal road mapping..
For all of the above reasons, it is our belief that while SAP needs to experience a blowout Q4 to really boost profitability and margin, and the challenges for that seem dauting.
Bob Ferrari
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