SAP beats forecasts, but weaker margins beat down stock price

SAP SE today reported fiscal fourth-quarter earnings and revenue that beat analysts’ expectations thanks to growing momentum in its cloud business.

However, investors sent the stock down nearly 6% in early trading on forecasts of a decline in operating profits and margins as well as forecasts of a weaker free cash flow in 2022.

Earnings of $2.07 per share beat consensus estimates of $1.80. Revenue rose 5.8% year-over-year, to $8.9 billion, beating the consensus of $8.73 billion.

For all of 2022, SAP expects to bring in $12.88 billion to $13.2 billion in cloud revenue, up 23% to 26% in constant currency. Cloud and software revenues are forecast to be between $27.88 and $28.43 billion, up 4% to 6%. However, operating profit is forecast to be flat to down at between $8.7 billion and $9.5 billion, compared with 2021’s $9.2 billion.

The share of total revenue classified as “more predictable” — an important indicator of business stability — is expected to reach approximately 78%, up from 75% last year. SAP said the company is on track to grow that figure to 85% by 2025.

Cloud backlog builds

The current cloud backlog grew faster than anticipated in the quarter, the company said. “We have seen four quarters of rapid acceleration in our cloud backlog and we expect continuing acceleration,” said Chief Executive Christian Klein.

That backlog now stands at $10.54 billion grew 26% in constant currency terms, while cloud revenue surged 19% to $10.5 billion. “We are well on track to achieving our 2025 ambitions” of $40 billion in total revenue and $25 billion of cloud revenue, Klein said.

“Increased demand for cloud enterprise applications has contributed to the vendor’s continued success,” said Trevor White, research manager at Nucleus Research. “While slower than others to embrace the cloud, SAP has now committed to the cloud’s future, providing a clear and modern roadmap for enterprise clients. Nucleus expects that demand for full-suite, cloud-based solutions will further solidify SAP’s market position as organizations continue to adapt to changes in the overall work landscape.”

The fundamentals of SAP’s business continue to look strong, with the average duration of cloud contracts standing at 3.9 years. Contradicting some competitors’ claims that they’re stealing customers from the enterprise resource planning giant, Klein countered, “There is close to no churn away from SAP.”

White said there’s a risk of a drop off as SAP moves legacy customers to its cloud infrastructure. But he noted, “While Oracle has made a recent point to highlight the number of large customers moving from SAP ERP to Oracle, Google’s parent company Alphabet has announced that it is moving its internal financial operations from Oracle to SAP.”

Executives credited much of the growth in the cloud business to Rise with SAP, a program launched last year that assists customers with their broad cloud migration efforts. SAP said the program has signed on more than 1,300 customers since launch and 650 in the fourth quarter alone. The number of Rise deals doubled from quarter to quarter and the volume of contracts greater than $5 million tripled. “Clearly, Rise is a blockbuster success,” Klein said.

Another closely watched measure performance — the next-generation S/4 HANA enterprise resource planning suite — added 1,300 customers in the quarter, up 18% year-over-year. About 70% of all S/4 HANA customers are now in production and half of the customer signed in the fourth quarter were net new.

Software license revenue declined 17% over the previous year to $1.63 billion, reflecting customers’ ongoing migrations to the cloud. Executives indicated they would be happy to see that number fall even faster. “Our massive installed on-premises base of more than 30,000 customers is a tremendous opportunity,” Klein said.

The lower operating margins were the result of a “major overhaul of our cloud delivery infrastructure, which resulted in a mid-three-digit million figure,” Klein said. SAP also took a charge for accelerated depletion of legacy infrastructure. “I expect in 2022 we will see noticeable efficiency gains which suggest we will remain at a stable cloud margin,” the CEO said.

Photo: SAP