- Summary:
- SAP CEO Christian Klein remains convinced that the firm has the right direction of travel.
SAP turned in third-quarter profit of $1.66 billion on revenues of $8.07 billion, but amid pressures across the product board, it was cloud revenue growth of 20% year-on-year that stood out. CEO Christian Klein argued:
It's clear that our approach with customers is resonating. They are facing unprecedented pressure from a combination of factors: the pandemic, supply chain disruptions, the changing workplace and, of course, climate change. A year ago, we introduced our new strategy, which directly supports our customers in addressing these challenges…We are seeing excellent progress in the cloud and strong growth across our line of business applications. Our cloud revenue growth accelerated sequentially by 3% points to 20%, higher than most of our large competitors. This is the second consecutive quarter of increase in growth, and we expect this to continue in Q4.
He added:
For the first time, our overall cloud ERP business spanning our line of business applications exceeded €6 billion of annual revenue runway. As we extend our RISE offering to include modular ERP and new industry solutions, we expect our overall cloud ERP business to continue to grow well.
But services revenue was down 6% year-on-year to €0.93 billion which the firm attributed to the November 2020 divestiture of SAP Digital Interconnect. There was also continuing caution voiced by CFO Luka Mucic:
We are very confident that the revenue growth and the backlog growth in S/4HANA will continue well into next year. And this will, of course, from an ever-increasing base then more and more add to the growth of the overarching business. So from that perspective, yes, we are confident that our cloud business will continue to accelerate not only in Q4, but also going into 2022.
In terms of the expectations from an OpEx and profit perspective, I think we were very clear when we communicated our new strategy and our associated mid-term ambitions that in 2021 and in 2022, we expect flat to slight declines in profits. This is what we are guiding for now in 2021, and I would say, we have so far executed extremely well against this commitment. Our current guidance is for flat to minus 2% in growth. My expectation for 2022 remains also unchanged that we will also, in 2022, see flat to slight declines in profits, and we will invest properly to continue to fuel our innovation.
Rising up
RISE with SAP saw deals closed with more than 300 customers in the third quarter, including with the likes of Asda, Cirque du Soleil, Philips Domestic Appliances Netherlands, HCL, Röhm, Etihad Water and Electricity, Tate & Lyle Americas, Ingram Micro, and Sky Italia. Klein commented:
At the heart of our approach is RISE with SAP, our offering for business transformation in the cloud, which offers three key benefits. First, it helps customers develop, adopt and automate new business models thereby becoming intelligent enterprises; second, with our business network, the largest B2B network in the world, we help our customers create more resilient supply chains by connecting them with a vast community of suppliers and manufacturers; third, we are uniquely positioned to help our customers improve their green line as no one is better placed than SAP to help companies put in place the most energy-efficient business processes.
North of 500 S/4HANA customers were added in the quarter, taking total adoption to more than 17,500 customers, up 16% year over year, of which more than 11,400 are live. In the third quarter, approximately 60% of the additional S/4HANA customers were net new. Klein said:
In Q3, S/4HANA cloud backlog grew by an impressive 58%, up from 48% growth in Q2 and building a strong foundation for future cloud revenue. In Q3, our S/4HANA cloud revenue grew by 46%, up from 39% in Q2. At the same time, we are winning market share with more than 50% of S/4HANA cloud revenue coming from new customers.
Other key customer wins across SAP's solutions portfolio included Continental, Adidas, Bayer, Robert Bosch, US Department of Defense, Siemens Energy, University of Florida, VMware, The Football Association, FAW-Volkswagen Automotive, and People's Insurance Company of China (PICC).
Overall, Klein emphasized his conviction that SAP remains on track:
We remain extremely confident because with RISE, this is now the way we go and not only to do a technical migration; we do a business transformation. And then, of course, our installed base is huge and there is high demand. Large companies are also now joining the movement. And when you also look at our total order and when you look at software plus cloud, it's fair to say that this was one of the highest growth rates ever as we see in the cloud, especially with large enterprises, these are long contracts. The contract lifetime value is extremely good, extremely high. So from my perspective, also looking now at the quarters ahead, I mean there is no reason not to be optimistic.
My take
Steady enough as she goes, but hardly the stellar quarter that many enthused about following the quarterly numbers release. Klein is right to point to increasing number of ‘big ticket’ deals with recognized logos, working on the principle that winning over more and more customers leads to yet more yielding to momentum - or that’s the theory at least. Keeping the markets on side while that develops is the challenge for now.
Image credit - SAP
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