SAP leadership announced fourth-quarter and full-year financial results, with CEO Christian Klein declaring the company has reached a “tipping point” in its cloud transformation amid a return to positive operating growth of 2%.
Assessing the fourth-quarter performance, SAP leadership reported €8.44 billion in total revenue (up 6%) and €3.39 billion in cloud revenue (up 30%) amid “continued strong cloud momentum and a return to operating profit growth,” with Klein expressing confidence in the company’s ability to deliver accelerating topline and double-digit non-IFRS operating profit growth in 2023.
The full year saw €30.8 billion in total revenue (up 11%) and €12.5 billion in cloud revenue (up 33%), with S/4HANA Cloud revenue accelerating across Q4 (up 101%) and an overall annual increase of 91%, to more than €2 billion, with an additional backlog of €3.2 billion (up 86%). At year end, the current cloud backlog exceeded €12 billion, up 27%. SAP noted this figure was negatively impacted by approximately €62 million as the company winds down existing cloud engagements in Russia and Belarus.
Smaller-than-expected contributions to revenue from Sapphire Ventures, the SAP venture-capital unit that invests in technology opportunities, contributed to a 62% decrease in IFRS earnings per share, mainly due to market conditions. SAP also noted that its effective tax rates increased in 2022, given changes in tax-exempt income related to that unit.
“I believe we will look back at 2022 as one of the most important years in our history,” said Klein. “It is now over two years since we launched our strategy for transformation. We kept our promise and delivered despite the combined impact of three factors; our exit from Russia, our divestiture of Litmos, and the macroeconomic volatility facing the world.”
RISE with SAP, Supply Chain Resiliency, and Sustainability
Klein discussed several fronts on which SAP is, according to him, in a “stronger, more relevant” position than ever: RISE with SAP, ongoing efforts to emphasize supply chain resiliency, and a focus on embedding sustainability across business operations.
“More than only a shift of our technology to the cloud, it is a true business transformation offering,” he said of RISE with SAP. “We enable companies to transform their existing business models and drive simplification and automation of their core business processes to offset inflation pressure.”
Regarding supply chain resiliency, Klein added: “Supply chains are disrupted and need to be diversified as a result of the pandemic, geopolitical tensions and shifting business dynamics. We are helping our customers to build more resilient supply chains by connecting the suppliers and providers from the raw material provider to the manufacturer. SAP's business network facilitated over $4.9 trillion of global commerce and €730 million of B2B transactions in Q4 alone.”
And in addressing the “green letter” that SAP delivers to every industry and customer it serves, Klein stressed the importance of measuring ESG based on actual, not average data, enabled through SAP products. “With Scope 3 emission tracking across value chains via our network, we will give our customers the ability to act by embedding sustainability into every business process and every company decision,” he said.
The Path Ahead
Ahead in 2023, SAP will explore a potential sale of its stake in Qualtrics and undergo a targeted restructuring to focus its operations on strategic growth areas and accelerated cloud transformation. Around 2.5% of SAP employees worldwide will be impacted by the restructuring, with most of the approximately 3000 job cuts occurring outside of the SAP headquarters in Waldorf, Germany. “While we know these changes are necessary, it is never easy to make decisions that affect our colleagues in this way,” said Klein.
“SAP is more resilient than ever,” he added. “We end[ed] 2022 with continued strong cloud momentum and a return to operating profit growth in the fourth quarter, marking an important inflection point. Heading into 2023, this gives us great confidence in delivering on our promise of accelerating top line and double-digit non-IFRS operating profit growth. As we enter the next chapter of SAP, I want to thank Luka for his great partnership on this journey.”
Luka Mucic, CFO, SAP, announced his departure from the company last spring; he will officially step down from his roles at SAP in March, with Dominik Asam taking over as CFO on March 7. "In my 37th and final earnings for SAP, I am proud that the SAP team is announcing excellent results and continued cloud momentum,” Mucic said. “We are on track to deliver our growth and profitability commitments for 2023. I am extremely confident in the continued success of SAP’s most exciting transformation in its history. Thank you to the wonderful SAP family that I have been part of for 27 years.”
Expert Analysts’ Insights
In the SAP analyst community, the Q4 and full-year financial results were positively received, though some expressed skepticism in Wall Street’s ability to accurately analyze the performance of SAP enterprise software.
Joshua Greenbaum, Principal at Enterprise Applications Consulting, emphasized growth in cloud revenue and strong numbers in all major markets as indicators of “a good quarter in a good year, in a particular tough market.” Amid market volatility and the headwinds SAP faced in walking away from Russia, “it was a major accomplishment for SAP to be able to pull this off,” Greenbaum said.
“Overall, what we saw for the quarter and the year was very strong,” he added. “Clearly, the shift to the cloud is working, and that’s very positive. Interestingly enough, the main reason for the drop in profit had to do with the Sapphire Ventures subsidiary, not the core business. It’s an interesting problem because, in Q2 of last year, Sapphire Ventures contributed almost €1 billion of €2.2 billion.”
Greenbaum also addressed SAP customer’s ongoing shifts to S/4HANA. “The other point of tension that came up on the call was the shift of some very large companies to S/4HANA,” he said. That’s a major target of SAP, and that momentum is continuing.”
Still, he added, “The reality is still not sinking in as strongly as it should, which is that most of these large companies can’t move to S/4HANA in the next year and a half. SAP and its investors will have to be satisfied with these hybrid models. That mix-and-match is going to go on for a while.” Greenbaum noted that he sees this as a positive outcome from a customer standpoint, allowing customers to determine which parts of their businesses can benefit from S/4HANA and adopt it accordingly.
Greenbaum expressed confidence in response to the announced restructuring for SAP in 2023. “In the last fiscal year, SAP grew its employment base by 4%,” he noted. “To say they’ll lay off 2.5%, that’s below even a normal attrition rate for a company of its size.”
Fabio Di Capua, Gartner VP and Analyst, Tech Product Manager, noted that “the overall SAP Q4 report showed positive financial numbers, with improved operating margin and services unit revenues returning to pre-pandemic levels.”
However, Di Capua added that the report did not disclose any S/4HANA or RISE with SAP sales numbers, only S/4HANA Cloud revenues and backlog. “The report showed a 50% net-new customer rate, down from 60% in previous quarters, indicating a small improvement in customer migration from SAP Business Suite,” he said.
SAP leadership affirmed it will not extend the maintenance timeline for older ERP models, which Di Capua noted “may be concerning” for the Gartner-estimated 15,000 existing SAP customers that need to acquire and implement S/4HANA before 2027 to 2030. “These customers, along with some new ones, still prefer a perpetual license engagement over a subscription model and contribute to roughly 45% of SAP's total revenues,” he said.