Supply Chain Matters highlights enterprise systems and supply chain software technology provider SAP SE’s most recent report of Q2-2022 and half-year financial performance, along with added perspectives for this tech provider’s supply chain management focused customer community.
The primary financial media headline was the lowering of the company’s profitability outlook for the remainder of 2022. The technology market and SAP customer perspective is that this tech provider is not immune to developing headwinds now occurring in the global economy nor to the continuing supply chain management transformational timetable needs of its customers, and who they partner with for such needs.
Q2-2022 Quarterly Performance
The financial performance headliners for Q2-2022 included: (Expressed in euros):
- Total Revenue of € 7.52 billion, up 13 percent from the year-ago quarter.
- Cloud Revenue of € 3.1 billion, up 34 percent, driven by reported double-digit growth among SaaS and PaaS .
- S/4 HANA Cloud revenue of € 472 million, up 84 percent.
- IFRS Operating Profit of € 673 million, down 32 percent. Profitability decline was attributed to reduced software license revenue along with significant bad debt associated with the war in Ukraine and restructuring expenses related to market exit from both Russia and Ukraine.
- Current IFRS Cloud Backlog volume equivalent of € 10.4 billion, up 34 percent, or 25 percent at constant currencies.
Commentary accompanying the financial results press release indicates that Q2 Cloud backlog was specifically impacted by upwards of € 64 million due to the termination of existing Cloud engagements associated with Russia and Ukraine based customers. SAP elected to exit its business operations in the region.
Reportedly more than 600 customers elected to move to SAP S/4 HANA, SAP’s Cloud based ERP offering during Q2, raising the customer adoption figure to upwards of 20,000 customers.
2022 Half-Year Results
The financial performance headlines for this tech provider’s 2022 Half-Year Report included:
- Total IFRS Revenue of € 14.6 billion, a 12 percent year over year increase.
- Operating Profit of € 1.7 billion, a year-over-year decrease of 11 percent, while operating margin declined 3.1 percentage points to 11.8 percent.
The report indicates that first-half revenue increase was primarily driven by strong performance in the Applications, Technology and Services segment, and specifically SAP S/4 HANA and SAP Business Technology Platform Cloud based revenues.
Operating expenses increased 16 percent in the first-half due to accelerated investments in research and development, the market exit from Russia, along with sales and marketing expense increases.
A mandatory regulatory section titled Risk Management and Risks identifies two broad categories of what are now described as business-critical risks. They are described as Global Economic and Political Environment, which includes events concerning Russia, Belarus and Ukraine, and the continued Covid-19 pandemic.
The other is Cybersecurity and Security which umbrellas the area of cyberattacks that involve SAP or the company’s customers, along with suppliers. This category risk is expressed in the specific risk related to the Ukraine conflict’s effects of added cyber incidents. . Both of these defined categories have been elevated to a business-critical high-risk definition.
2022 Financial Outlook
SAP has now lowered its revenue and profitability outlook for the remainder of 2022 after reporting impacts related to the ongoing Ukraine conflict involving Russia.
For all of 2022, SAP now anticipates between € 7.6 billion to € 7.9 billion in non-IFRS operating profit at constant currency, compared to a previous range of between € 7.8 billion to € 8.25 billion. That is down 4 percent to 8 percent in constant currency.
The company continues to anticipate between € 11.5 billion to € 11.85 billion in Cloud revenues based on constant currency.
While this tech provider forecasted its outlook in constant currency, performance in actual currency is expected to be impacted by exchange rate fluctuations, noted as between 7 to 9 percentage points from a positive nature for Cloud revenue growth. The euro recently dropped to parity with the U.S. dollar, as the latter currency gains more value globally, which is significant for SAP.
Recently, other enterprise and B2B supply chain technology providers have begun issuing warnings relative to currency conversion fluctuations. The latest have been Microsoft, Salesforce and B2B platform technology provider E2open.
Regarding SAP’s longer-term investor focused Ambition 2025 effort published in Q3 2020, which calls for € 36 billion in total Cloud revenues and € 11.5 billion in operating profits, the tech provider indicated that in light of favorable currency exchange rates, it expects to” “update it’s mid-term ambition in the coming quarters.”
Other Related Financial Developments
In conjunction with the most recent report of financial performance, SAP announced an added share repurchase program with a noted volume of up to € 500 million. This program will reportedly be executed between August thru December of this year. It follows the company’s 2020 stock repurchase program of upwards of 14 million shares valued at € 1.5 billion, and the repurchase of upwards of 10 million shares for upwards of € I billion in the first half of this year.
This pattern of now € 3 billion in stock buy backs parallels an ongoing pattern among the large Cloud based enterprise tech providers of more lucrative returns for investors, and especially those where influential private equity players have a high profile investing interest.
SAP further announced the acquisition of start-up search driven analytics tech provider Askdata which leverages AI-driven natural language searches to assist software users to search, interact and collaborate on live data without having to learn a separate self-service analytics software program. Reportedly Askdata IP will become a part of SAP Business Technology Platform. There is no disclosure from both companies regarding the transaction and financial details.
Supply Chain Matters Perspectives
As reinforced by many of our prior commentaries focused on SAP, this tech provider’s primary goal is to aggressively grow its Cloud based revenue base to accelerate subscription-based revenue growth. The key enabler of this effort involves conversion of the company’s legacy on-premise R3 customer base to the SAP S/4 HANA and Business Technology Platform, and the principal method to accelerate this effort has become the RISE with SAP program. According to published data, two-thirds of existing SAP ECC customers have not as yet adopted RISE, while others are adopting traditional approaches involving SAP and/or an implementation partner(s).
As noted in our summary highlights above, upwards of 20,000 customers are now reported to be in some form of adoption for various software or data analytics applications within S/4 HANA. That is admirable, but as this technology industry analyst has communicated in many prior commentaries, SAP’s timetables related to RISE adoption phases, and that of the installed customer base, or of the particular implementation partner, may be at odds relative to timing and scope.
While the latest financial reporting would imply that momentum has been gained, as with all enterprise software providers, the most important determinants are what specifically the numbers imply, especially with enhanced, more streamlined programs designed to springboard a technology implementation or Cloud conversion effort. Adoption and overall scope of implementation are two different determinants.
Formal financial reporting and SAP senior executive commentary now specifically includes performance information related to the RISE, S/4 HANA, and Business Technology Platform efforts because they tend to emphasize momentum to the Cloud.
SAP elected to turn over the implementation elements of RISE to its global based system integrator and Cloud hosting platform hyperscale partners as a means to accelerate momentum. In ceding these efforts to so many partners, some of which having their own market growth needs, SAP runs the risk of losing direct control of its customer base, and more importantly, the voice of individual customers in their specific technology and implementation support needs. It should be no surprise that SAP focused customer communities such as ASUG or to some extent, SAP Insider, have been so focused of late on customer polling and sentiment survey activities, research and outreach efforts. Ensure that your customer voice is not filtered and effectively communicated.
The other challenge is that a considerable number of SAP’s mainstream and larger customers have a history of business process complexity, customized processes and data flows that are stovepipe in individual functionally focused legacy software applications. This is especially the case in the needs for supply chain digital transformation.
Some effort and supply chain domain expertise is required for the conversion to more standardized business processes and enhanced data flows. Some have already elected to adopt other software technology for specific process or particular advanced analytics transformational support needs. Further as we have noted, the particular customer’s supply chain transformation timetable and available spending budget for transformation may not necessarily be aligned with the implementation partner or with SAP’s or a partner’s pricing strategy. This is why specific niche and boutique partners with proven supply chain management focused domain expertise and customer experiences have been so successful in assisting SAP customers in their supply chain transformational needs from a technology and transformational timetable perspective. They are not likely to be consumed and driven by an enterprise-wide transformational scope. They further tend to understand all of the critical external and internal information and decision-making requirements that make up an effective and more responsive supply chain business process.
As our reader audience is well aware, the needs for supply chain digital transformation have accelerated, yet budgets are such that there is often a prioritization established as to which process areas will be undertaken initially. Programs such as SAP’s RISE and others provided by supply chain tech providers often focus on the specific business process area that is providing the most challenge, affording the customer a faster time to solution, and the ability to have a baseline beach front to undertake subsequent added transformation. They provide the customer the baseline as well as the means to take on added phases of transformation in a controlled change management and available budget timeline umbrella.
Our overall reader takeaway in this commentary is twofold.
As we have highlighted in prior commentary, a changing and more uncertain global economy that is fraught with additional unknowns is beginning to impact corporate and technology companies, along with their investors, in their strategies and outlooks over the coming months. At the same time, industry supply chain challenges and disruption continue, and so is the need for added agility, resilience and more data driven decision making anchored in advanced analytics.
Enterprise and specialty software providers are aware of such forces, and at the same time, will have to balance investor needs for increased Cloud based SaaS adoption and customer momentum with realities of highly uncertain global business environment right now. That, however, does not take away from the fact that equity investors are going to be laser focused on Cloud adoption, profitability and free-cash growth performance in the coming months.
Ensure that your organization’s priorities regarding technology enabled transformation are understood and supported and not solely driven by that of your technology suppliers. In today’s Cloud based architectures, businesses do not necessarily have to compromise on acquiring best-of-breed technology that can co-exist with other technology brands.
Seek out and nurture relationships with tech providers that have their direct focus on managing customer tech deployment, overall responsiveness, time-to-value, as well as their equity investor needs.
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