SAP cloud sales jump, fueling a rise in revenue

Fueled by strong sales of cloud-based ERP software that more than offset a decline in revenue from on-premises applications, SAP revenue jumped in the third quarter compared to the year-earlier period, according to company’s quarterly financial report, released Tuesday.

Total revenue for the quarter ending Sept. 30 was €7.84 billion (US$7.72 billion), up 15, or 5% in constant currency terms, which exclude the effect of currency fluctuations.

SAP’s cloud and software revenue for the quarter rose 14% to €6.71 billion. Cloud revenue alone rose 38% to €3.28 billion. Revenue for the company’s S/4HANA cloud-based ERP offering, in particular, nearly doubled, rising 98% to €546 million.

That’s good news for SAP, since the company has been pushing customers to migrate from its legacy Business Suite 7, which is usually run on-premises, ever since S/4HANA was launched in 2015. Selling cloud software and services is good business for SAP and other software providers, since, among other things, cloud subscriptions provide a more predictable revenue stream than renewals of licenses for on-premises applications.  

Despite the jump in revenue, SAP posted a 1% dip in operating profit to €1.239 billion due largely to rising costs in areas including research and development, sales and marketing, and the need for more outlay on the maintenance of the company’s cloud services. Licenses for on-premises software declined 38% to €406 million, reflecting customer migration to cloud-based software.

Unsurprisingly, the Germany-based software giant was most eager to talk about its success in the cloud.

“The trust in SAP is reflected in our accelerating cloud momentum,” said CEO Christian Klein in the company’s earnings press release. “It’s clear that our transformation has reached an important inflection point, paving the way for continued growth in the future.”

Despite the negative news on operating profit, investors greeted SAP’s results warmly, with the company’s share price rising $5.69—or 6.25%—to $96.70 in mid-afternoon trading in the US.  

Like much of the tech sector, SAP is facing headwinds caused by the ripple effects of Russia’s invasion of Ukraine, as well as a bearish economic climate. Hence, the positive news on the company’s cloud business appears to have been enough to inspire confidence in SAP’s overall outlook.

SAP has made major headway on its transition from a license-maintenance-based business to a usage-based, cloud-first company, due in part to a long string of acquisitions in the past decade in addition to the introduction of S/4HANA, which brings the company’s ERP platform to the public cloud of the customer’s choice.

However, the company has a long way to go. Just 12% of current and intended SAP ERP users in the US and Europe responding to a recent survey by digital transformation services provider LeanIX have completed the transition to S/4HANA. Another 12% said they have postponed the start of their move to S/4HANA, and 74% of enterprises that were polled are just at the evaluation and planning phase of their ERP migration.