Frankfurt SAP is making faster progress than expected with the change in business model. In the third quarter, the cloud services business grew by 38 percent to 3.29 billion euros, up 25 percent at constant currency. Sales increased by 15 percent to 7.84 billion euros, adjusted for currency effects by five percent. Both key figures are above the expectations of the analysts.
With the realignment, SAP has “reached an important turning point,” emphasized CEO Christian Klein when the quarterly results were published on Tuesday. The cloud is now the most important source of revenue. The business has also become more resilient due to the recurring revenue from the fees.
However, the high investments and the change in the business model continue to weigh on profits. The operating result fell from the beginning of August to the end of September by one percent to 1.24 billion euros, excluding currency effects by eight percent. Adjusted earnings per share fell by 36 percent to EUR 1.12.
In all key figures, SAP benefited from significant exchange rate effects: The USA is the most important market for business software – the conversion of the currently strong dollar into euros is therefore advantageous for the German group.
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The result was positively received on the financial market. After the start of trading on Tuesday, the share rose by more than 3.5 percent to around 95 euros. In view of the macroeconomic problems, the growth in sales and the improvement in the cloud margin are positive, judged Knut Woller, an analyst at Baader Bank. Especially since SAP is valued low compared to previous recessions.
Economic uncertainty as a selling point
In difficult times, companies review their IT budgets – but this hasn’t harmed SAP in recent months. “Our strong result shows the relevance of our strategy in these turbulent times,” said Klein.
The group helps customers deal with pressing problems, from automating business processes and stabilizing the supply chain to dealing with new sustainability rules.
But the business has changed: In many companies, cloud services are now booked with monthly fees in order to convert high one-off investments into lower running costs, explained the SAP boss.
On the one hand, this can be seen from the key figures for the cloud business, which were above market expectations. This applies to sales with 3.29 billion euros as well as for the order backlog, measured in the current cloud backlog, with 11.27 billion euros, both of which increased by 38 percent.
>> Also read: 30 percent loss in value since the beginning of the year: SAP falls behind its biggest rivals
On the other hand, the change in customer behavior can be seen in the software business, which has shrunk significantly. The sale of licenses only brought in 406 million euros, a drop of 38 percent and less than analysts had expected.
According to CFO Luka Mucic, business with software sales is only growing in the public sector – in all other sectors the cloud is preferred. In the medium term, however, this is positive for the transformation of SAP.
Protracted withdrawal from Russia
However, the change in business model announced two years ago is expensive. SAP invests in the harmonization of the IT infrastructure for the cloud, at the expense of profitability. Only for the coming year does the management envisage significant improvements in both sales and profits.
The trend is at least positive: In the cloud business, SAP was able to increase the adjusted gross margin for the third quarter in a row, this time by 2.8 percent to 69.8 percent. Due to the growing number of customers for products such as S/4 Hana Cloud, Qualtrics and Success Factors, the software manufacturer is achieving economies of scale.
According to the company, the withdrawal from Russia and Belarus is proving to be more difficult than expected. In April, under the impact of the war and pressure from the public, SAP management announced that the deal would be completed. But that might take a while.
CFO Luka Mucic made responsible for this in a conference call on Tuesday, legal requirements that exist for customers and employees. The company does not currently have its sights set on a new point in time when activities in Russia should be completely ended.
>> Also read: SAP annoys customers with price increases for cloud services
The lawyer said that no new contracts were signed and the cloud data center in Moscow was closed. However, maintenance contracts with companies that are not affected by the sanctions will be fulfilled. One reason might be that local employees can be held liable for breaches of contract.
According to the manager, Walldorfer currently employs around 600 people in Russia, originally there were 1250. By the end of the year there should still be around 100 employees. “Giving the (business) to third parties is difficult and currently not feasible,” said Mucic.
Share under pressure for months
In view of the rising interest rates and the uncertain economic outlook, technology providers have been under pressure on the stock market for several months, including SAP. The shares of the German software manufacturer even slipped below the 80 euro mark for a short time this year. The price has recovered somewhat in the past few weeks, and the trend continued on Tuesday.
Recently, a report by JP Morgan created new demand for SAP shares. Analyst Toby Ogg assumes that the macroeconomic difficulties are already too heavily priced into the price and that the market is also not correctly assessing the change in the business model. He upgraded the software manufacturer to “overweight” and raised the price target by ten to 115 euros.
More: How SAP wants to build a cloud for the federal government.