SAP cloud swells its topline, but profits slide

Cloud migration good for margins, CEO says

SAP booked revenue of €8.04 billion ($8.58 billion) in the first calendar quarter of 2024, up eight percent on the same period of 2023.

Around €3.93 billion ($4.2 billion) of this was cloud revenue, which was up 24 percent year-on-year, in line with the investors' estimates and the global ERP giant's plans to drag an intransigent on-premises user base to its preferred infrastructure.

The company reported an operating loss of €787 million ($840 million) owing to its share-based compensation scheme, which from this year is being reported as part of expenses. Chief Financial Officer Dominik Asam said of the move in December that for SAP to include "share-based compensation in our adjusted earnings may be interpreted as a disadvantage in comparison with some of our peers... But we believe recognizing share-based compensation as a genuine expense of running a business is long overdue."

SAP said that operating profit would have been about €1.5 billion for the quarter without the charge, lower than investor expectations. Still, its shares rose yesterday following the announcement.

In addition to the hike in cloud revenues, the company also highlighted a steep increase in promised cloud deals, or backlog. On an investor call, execs revealed higher margins were part of the motivation for the company's more aggressive push to move customers to the cloud since the beginning of 2001.

CEO Christian Klein responded to an analyst's questions about declining service revenue for on-prem systems, including the ECC software; support will end in 2027 for this.

"What is very important with regard to our services business, what we are focusing [on] is more on the high-margin services like… [the] RISE [with SAP] deal. [Customers] need to connect the process, the system and the data layer to drive this holistic transformation," Klein said.

RISE with SAP was introduced in early 2021 as a lift-shift-and-transform arrangement in partnership with cloud providers, global consultancies, and SIs. It promised an "intelligent enterprise with S/4HANA cloud."

In January this year, SAP introduced a time-limited 50 percent discount package to encourage users to adopt its RISE with SAP and the related GROW with SAP, aimed at midmarket companies.

But on the recent Q1 earnings call, Klein explained the discount would not affect margins in the longer term.

"We are not only incentivizing S/4HANA finance… we are incentivizing Cloud ERP. They are now also incentivized to migrate, which just makes a ton of sense, because you actually have a one-time migration fund, but then you actually have a building recurring revenue stream," he said.

Meanwhile, the volume of users who migrate to the cloud keeps costs down for SAP, allowing the company to achieve higher margins with economies of scale.

"The customers are now at 20 percent to 30 percent of the [S/4HANA cloud] migration done. Of course, the more workloads you are putting... on the infrastructure, the more economies of scale you are getting. We are very happy with the progress we are seeing on margin, especially profits in the private cloud. I'm very confident also about a further gross margin expansion… not only this year but also in the years to come," the CEO said. ®

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