Despite growth, questions remain over whether SAP can get customers off-prem fast enough to appease investors

€500m cloud investments drag on profit

SAP's operating profit has fallen 45 per cent year-on-year in the fourth calendar quarter of 2021 to €1.47bn as cloud investments drag on profitability.

Despite boasting 17 per cent growth in cloud revenue to £9.4bn, the full-year results also show the pain involved as one of the world's largest software vendors attempts to transition to a new business model.

On a call with investors, CEO Christian Klein said: "These are very strong results during a challenging time for most businesses. They demonstrate the confidence our customers have in SAP and in the unique value we offer in helping them address an unprecedented set of challenges. We are optimistic about the year ahead and we are well on track to achieving our 2025 ambitions."

He pointed out that the company still serves a "massive on-premise installed base of more than 30,000 ERP customers" compared with "nearly 5,000 S/4HANA cloud customers" – those adopting both the last in-memory ERP platform and the cloud delivery model.

It seems like an impressive turnaround. In October 2020, SAP's shares took a massive 25 per cent hit as the company adjusted investor guidance to buy itself time to execute a "new strategy" of shifting on-prem software licence customers to the cloud and investing heavily in cloud R&D. But those investments are unsurprisingly weighing down the German software vendor's profitability.

Speaking to investors, CFO Luka Mucic said: "As we had stated already late in 2020, we are going through a major overhaul of our cloud delivery infrastructure. We are migrating all of our remaining customers who are still on legacy infrastructures across various solutions on this harmonised cloud infrastructure. And that results in a cost across 2021 and 2022 of a mid-triple-digit million-euro figure.

"At the outset of the program in the first half-year, the spend portion that related to 2021 was more spend in R&D to prepare our solutions for some of the migration aspects and since the second half of the year, it essentially was hitting the cloud margins."

Bear in mind that cloud revenue is supposed to be the long-term saviour for SAP. Investors, rather than customers, want to see a rapid shift to the cloud so the application vendor is seen as being on par with cloud-only providers such as Salesforce, Workday or ServiceNow.

In October 2020, Mucic said that in the long term it would be "increasing customer lifetime revenue" with the subscription model and not only providing software and support services, but also the IT infrastructure and operational services in many cases. "We are effectively expanding our share of the wallet," Mucic said.

But one analyst on the most recent investor call questioned whether the transition was going as planned as there "seems to have been less substitution from [on-prem] maintenance to cloud despite the cloud strength."

Mucic said support revenue remains "extremely resilient" as there was "no real churn away from SAP."

While the plan to lift, shift, and transform customers onto the cloud, launched last year as RISE with SAP, was "extremely healthy", it needs to ramp up to see a shift from on-prem support to cloud revenue.

"That might change over time as more of those big, large RISE contracts are then going through [and] the support revenues are declining," he said. For 2025, SAP wanted to have €22bn in cloud revenues leaving €8.5bn in support revenues down from around €11.5bn, Mucic said.

Full-year software licences and support revenue for SAP in 2021 was £14.7bn, falling at 4 per cent year-on-year. Of that, software licences revenue was €3.25bn, down 11 per cent year-over-year.

Assuming support continues to fall at about the same rate, it would only fall to €9.8bn in the four years from 2021 to 2025, short of Mucic's target. It might appear already to be lagging behind SAP's ambition.

SAP is a huge, €27.8bn revenue business with thousands of customers loyal to its ERP platform. But it is walking a high wire. On the one side is the peril of shifting on-prem customers too quickly and leaving behind lucrative software licence and support deals, on the other is moving too slowly and failing to appease investors demanding a cloud-only SaaS style company.

In the meantime, it is making a significant investment in products and cloud infrastructure to give customers somewhere to move to. For the moment it seems steady on its feet, but it wouldn't take much of a wobble to slip up.

Look again at its 30,000 on-prem ERP customers compared with 5,000 S/4HANA cloud customers. Its annual S/4HANA cloud revenue is just €1.1bn, 4 per cent of its total revenue. Clearly it has a long way to go before it can step off the wire onto solid ground. ®

Narrower topics

Other stories you might like

  • Experts: AI should be recognized as inventors in patent law
    Plus: Police release deepfake of murdered teen in cold case, and more

    In-brief Governments around the world should pass intellectual property laws that grant rights to AI systems, two academics at the University of New South Wales in Australia argued.

    Alexandra George, and Toby Walsh, professors of law and AI, respectively, believe failing to recognize machines as inventors could have long-lasting impacts on economies and societies. 

    "If courts and governments decide that AI-made inventions cannot be patented, the implications could be huge," they wrote in a comment article published in Nature. "Funders and businesses would be less incentivized to pursue useful research using AI inventors when a return on their investment could be limited. Society could miss out on the development of worthwhile and life-saving inventions."

    Continue reading
  • Declassified and released: More secret files on US govt's emergency doomsday powers
    Nuke incoming? Quick break out the plans for rationing, censorship, property seizures, and more

    More papers describing the orders and messages the US President can issue in the event of apocalyptic crises, such as a devastating nuclear attack, have been declassified and released for all to see.

    These government files are part of a larger collection of records that discuss the nature, reach, and use of secret Presidential Emergency Action Documents: these are executive orders, announcements, and statements to Congress that are all ready to sign and send out as soon as a doomsday scenario occurs. PEADs are supposed to give America's commander-in-chief immediate extraordinary powers to overcome extraordinary events.

    PEADs have never been declassified or revealed before. They remain hush-hush, and their exact details are not publicly known.

    Continue reading
  • Stolen university credentials up for sale by Russian crooks, FBI warns
    Forget dark-web souks, thousands of these are already being traded on public bazaars

    Russian crooks are selling network credentials and virtual private network access for a "multitude" of US universities and colleges on criminal marketplaces, according to the FBI.

    According to a warning issued on Thursday, these stolen credentials sell for thousands of dollars on both dark web and public internet forums, and could lead to subsequent cyberattacks against individual employees or the schools themselves.

    "The exposure of usernames and passwords can lead to brute force credential stuffing computer network attacks, whereby attackers attempt logins across various internet sites or exploit them for subsequent cyber attacks as criminal actors take advantage of users recycling the same credentials across multiple accounts, internet sites, and services," the Feds' alert [PDF] said.

    Continue reading

Biting the hand that feeds IT © 1998–2022