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SAP Announces Q1 2022 Results With Continued Cloud Momentum

Cloud revenue growth further accelerates, up 31% and up 25% at constant currencies
Current cloud backlog approaches €10bn, up 28% and up 23% at constant currencies
SAP S/4HANA cloud revenue significantly increases, up 78% and up 71% at constant currencies. SAP S/4HANA current cloud backlog expands even faster, up 86% and up 79% at constant currencies
SAP reaffirms 2022 outlook for revenue, non-IFRS operating profit and free cash flow

SAP SE announced its financial results for the first quarter ended March 31, 2022. Christian Klein, CEO “Customers powered another quarter of strong cloud growth as they turned to us for solutions to make their businesses more sustainable, their supply chains more resilient, and their enterprises more future-proof. Our signature ERP offering SAP S/4HANA grew at record levels demonstrating the confidence customers place in us to support their business transformations.”

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Luka Mucic, CFO: “We are off to a solid start to the year and our outlook remains strong. Despite the current macroeconomic environment, cloud revenue growth accelerated further, fueling total revenue growth. Current cloud backlog grew at a healthy rate and continues to support our confidence in our long-term plans and outlook for the year.”

Impact of War in Ukraine

In the first quarter, SAP’s business was impacted by the war in Ukraine. At the beginning of March, SAP stopped all new sales in Russia and Belarus. In addition, SAP started to shut down its cloud operations and intends to stop the support and maintenance of its on-premise products in Russia. Current cloud backlog was lowered by approximately €60 million due to the termination of existing cloud engagements, and operating profit by approximately €70 million due to reduced on-premise revenues, accelerated depreciation of data center assets and capitalized sales commissions.

For the fiscal year, we expect a total negative revenue impact of approximately €300 million from lack of new business and discontinuation of existing business, in particular software and support and services. For non-IFRS operating profit we expect an impact of approximately €350 million from the revenue gaps mentioned above and other expense items.

In addition to the above, the company expects to incur restructuring expenses of approximately €80-100 million for the fiscal year which will not affect non-IFRS results.

Despite these headwinds, the cloud performance allows SAP to reaffirm its cloud revenue, cloud and software revenue as well as non-IFRS operating profit and free cash flow outlook. The reiteration of the non-IFRS operating profit outlook reflects the benefits of a continued strong cloud revenue growth, operational discipline and portfolio streamlining measures.

Other impacts due to this rapidly evolving situation are currently unknown and could potentially subject our business to materially adverse consequences should the situation escalate beyond its current scope.

Financial Highlights

Current cloud backlog was up 28% to €9.73 billion and up 23% at constant currencies. The war in Ukraine reduced current cloud backlog growth at constant currencies by 0.8 percentage points.

Supported by double-digit growth across the solution portfolio, cloud revenue growth continued to accelerate for the fourth consecutive quarter and was up 31% to €2.82 billion, up 25% at constant currencies.

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Amidst continuing investments into our next generation cloud delivery program our cloud gross margin was up 1.0 percentage points year over year to 68.2% (IFRS) and up 0.5 percentage points year over year to 70.0% (non-IFRS). Revenue growth, alongside cloud gross margin expansion, drove strong cloud gross profit growth of 33% (IFRS), 32% (non-IFRS) and 26% (non-IFRS at constant currencies).

IFRS operating profit increased 10% to €1.05 billion, primarily driven by lower restructuring expenses. Non-IFRS operating profit decreased 4% to €1.68 billion and decreased 7% at constant currencies. This decrease against a very strong prior year comparable was mainly driven by expenses related to the war in Ukraine, as well as accelerated investments into research & development and sales & marketing to capture current and future growth opportunities.

IFRS earnings per share (basic and diluted) decreased 29% to €0.63 and non-IFRS earnings per share (basic) decreased 28% to €1.00. The year over year decline of earnings per share reflects a contribution to financial income by Sapphire Ventures that was lower than over the same period last year based on current market conditions.

Free cash flow was down 24% to €2.16 billion, mainly attributable to the development of profitability in the quarter and impacts from working capital due to SAP’s continuous move to the cloud, and lower software licenses sales in the fourth quarter 2021. The ongoing business transformation provides more balance of cash inflows throughout the year, and we are reiterating our full year free cash flow outlook.

On January 13, SAP announced a new share repurchase program to support the transition of SAP’s share-based compensation programs to equity settlement. By March 31, SAP had repurchased 5,680,250 shares at an average price of €102.26 with a purchased value of approximately €581 million.

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Business Highlights

More than 500 customers chose SAP S/4HANA in the quarter, taking total adoption to more than 19,300 customers, up 18% year over year, of which more than 13,900 are live. In the first quarter, more than 60% of the additional SAP S/4HANA customers were net new.

In the first quarter, customers around the globe chose “RISE with SAP” including Accenture, Canon Production Printing, Citizen Watch Company, Daimler Truck AG, Grupo Estrella Blanca, Exide Industries Limited, NEC Corporation, Ooredoo Group, Qinqin Food, Rising Auto, TELUS, Tramontina, and Wipro Limited. Key customer wins across SAP’s solution portfolio included: Air France-KLM, FEMSA, Heineken, L’Oréal, Merck KGaA, MLP, Nippon Telephone and Telegraph Corporation, NHS Shared Business Services, PetSmart, Pick n Pay, Salling Group, Schaeffler, and Swellfun. Further, PT United Tractors, Schwarz Produktion and Vodafone New Zealand all went live on SAP solutions in the first quarter.

Microsoft announced it would become the first public cloud provider to adopt “RISE with SAP” and SAP S/4HANA to transform its own SAP ERP deployment. Adopting these solutions will enable Microsoft to deploy new technologies faster and establish best practices that benefit our joint customers.

SAP’s cloud revenue performance for the quarter was excellent across all regions. The United States and Germany had an outstanding cloud revenue performance while Japan, China, Brazil, Canada, Switzerland, France, and the UK were particularly strong.

SAP proposed a dividend of €2.45 per share for fiscal year 2021 representing a year-over-year increase of approximately 32%. This amount includes a special dividend of €0.50 to celebrate SAP’s 50th anniversary. The dividend is subject to shareholder approval at the upcoming AGM scheduled for May 18, 2022.

On March 9, SAP announced that it had completed the acquisition of a majority stake of Taulia, a leading provider of working capital management solutions. Taulia further expands SAP’s Business Network and strengthens SAP’s solutions for the CFO office by providing working capital management cloud solutions.

On March 22, SAP and global strategic consultancy BCG announced a partnership to help companies transform their business models, become sustainable enterprises, and gain the data transparency they need to embed sustainability into their core business. The partnership combines SAP’s strength as the leading enterprise software company with BCG’s proven expertise in advising clients on their sustainability transformation strategies. The SAP and BCG sustainability transformation offering is in pilot phase, with an expected broader launch in the third quarter of 2022.

On March 28, SAP announced that the SAP Signavio brand will represent our portfolio of Business Process Management solutions. SAP also announced general availability of the SAP Signavio Journey to Process Analytics. The new offering correlates experience data from Qualtrics user surveys with operational data from underlying IT systems, giving companies the ability to understand how best to optimize their end-to-end business processes for both operational excellence and customer experience.

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[To share your insights with us, please write to sghosh@martechseries.com]

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