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SAP earnings reveal cloud as largest revenue stream

SAP reported strong cloud revenue for Q2 2022, driven by increased adoption of Rise with SAP. But it faces a challenging Q3 due to inflationary pressures and the Ukraine war.

SAP earnings for the second quarter of 2022 show strong cloud growth. The ERP vendor reported an increase of 34% for cloud revenue, which is now the company's largest revenue stream.

SAP's current cloud backlog, which represents expected cloud revenue for the upcoming year, also rose 34% and now exceeds €10 billion, while the current cloud backlog for S/4HANA was up 100%, to €2 billion.

The war in Ukraine and subsequent withdrawal of operations in Russia had an effect on SAP's profits. The cloud backlog was lower by about €64 million due to the termination of existing cloud engagements, and profits were affected by restructuring expenses of about €120 million, mostly incurred by severance payments to employees in Russia and Belarus.

SAP estimates that the war in Ukraine will cost the company €300 million for the year.

Chistian Klein, CEO, SAPChristian Klein

SAP's total revenue as well as its cloud revenue exceeded market expectations amidst a "challenging political and macroeconomic environment," said SAP CEO Christian Klein in an earnings call to investors and analysts on Thursday.

"Customers are turning to us now more than ever to help them address their most pressing concerns -- business model transformations, process automation, supply chain resilience and sustainable operations," Klein said. "We see demand for SAP technology continuing to increase, with an increased focus on transforming and automating mission critical business processes and the core functions of an enterprise."

SAP reported that SAP S/4HANA gained more than 610 new customers in Q2, bringing the total number of S/4HANA customers to more than 20,000, a year-over-year increase of more than 15%. More than 14,500 of the S/4HANA customers are live, and more than 60% are net-new customers.

SAP does not break out how many customers are S/4HANA Cloud versus S/4HANA on-premises or hybrid cloud deployments, although Klein said that there are now 6,000 S/4HANA customers "in the cloud."

Rise with SAP momentum continues

The increase in S/4HANA customers is attributable to the "continued strong adoption of Rise with SAP," Klein said, referring to the company's initiative to drive customers' business model transformation centered on S/4HANA Cloud.

"Rise has become the preferred choice for our customers as they move to the cloud," he said. "Rise helps customers with the hardest part of their transition, redesigning how their companies run."

Customers that selected Rise with SAP in Q2 include ABB Information Systems, Bridgestone Australia, Mitsubishi Materials Corp., Moderna and Pitney Bowes. Additionally, customers such as GlobalFoundries, HeidelbergCement and Malaysia Airlines, combined their Rise with SAP contracts with other SAP products.

Klein acknowledged that SAP is facing a challenging economic environment as it heads into the second half of 2022, including the continuing war in Ukraine and global inflationary pressures. This may require SAP to increase prices to offset the projected cost increases, he said.

"We are just in the planning for that, and we will release new pricing in the upcoming weeks and months," Klein said. "But definitely we will -- and have to -- react to this inflationary pressure."

Cloud bookings don't mean cloud deployments

The SAP earnings performance for Q2 was solid and reflects the overall trend of cloud modernization for ERP vendors, said Liz Herbert, vice president and principal analyst at Forrester Research.

Liz Herbert, vice president and principal analyst, ForresterLiz Herbert

"In general, we are seeing a wave of ERP modernization to the cloud across most of the ERP industry, not just SAP," Herbert said. "Many of the clients we're working with that are moving to any next-generation ERP product -- including SAP -- are looking at cloud, so there definitely is cloud momentum."

However, the increase in cloud bookings alone does not necessarily mean that there is a corresponding increase in S/4HANA deployments, she said, because it can take a long time to do the conversion, upgrade and rollout.

"The cloud increase does not mean they have customers using it, and even some of some of their reference customers are only partially deployed on S/4HANA or in the cloud," Herbert said. "Even though they continually name real references and have a continuous stream of cloud references and Rise references, those journeys take quite a bit of time in most cases."

The SAP Q2 earnings were strong, particularly considering the state of the global economy and the prospects for a recession, said Joshua Greenbaum, principal of Enterprise Applications Consulting.

SAP has been bolstered by some big ERP industry trends, like a movement by companies from spending in Capex to Opex and sustainability investments, he said.

"[The SAP earnings for Q2] is backward-looking, to a certain extent, but some of the big stories they're telling -- particularly Capex to Opex and environmental compliance -- are in their favor, recession or not," Greenbaum said. "That will drive sales."

The strong revenue performance for S/4HANA was not a surprise, as Greenbaum noted that he has seen increasing demand for the platform.

Cross-sell opportunities

Rise with SAP is also creating cross-sell opportunities for other SAP cloud products, he said.

There are cost pressures in running huge data centers, so just being a cloud provider is becoming a lot more expensive in the next year
Joshua GreenbaumPrincipal, Enterprise Applications Consulting

"If SAP can get customers to understand the value of implementing S/4HANA plus SuccessFactors or any of these other cloud properties and make good on that, financially that's huge," Greenbaum said. "One of the problems that the industry suffers from is a tendency to make it all about a single product -- say, a service-centric ERP -- but only a bonehead company today implements just ERP to handle its service business, so just a single product sale without any ancillary cross-sale is a lost opportunity."

However, the third quarter of 2022 will be one to watch, given the increasing recessionary pressures, he said. SAP, like other IT vendors, will likely need to raise prices to offset cost increases affected by current events, including the current heat wave.

"Oracle and Google Cloud have both had to shut down some of the facilities in the U.K. and on the U.S. east coast, because they can't keep them cool enough," Greenbaum said. "There are cost pressures in running huge data centers, so just being a cloud provider is becoming a lot more expensive in the next year."

Jim O'Donnell is a TechTarget senior news writer who covers ERP and other enterprise applications for SearchSAP and SearchERP.

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