SAP Q3 2020 results: revenue down 4%, cloud silver lining hailed

SAP’s third quarter 2020 results stated a 4% year-on-year reduction in revenue, with an 11% increase in cloud revenue lightening the gloom

SAP has reported third-quarter 2020 results, indicating a 4% decrease in revenue to €6.535bn, compared with the same time last year. The supplier is drawing attention to its cloud revenue, which has increased by 11%, to €1.984bn, as a silver lining.

The Covid-19 public health pandemic crisis was cited in the company’s business update, accompanying the results, as the villain of the piece.

“In the Covid-19 crisis, customers realise the strong need to transform and automate operations and adapt to new business models. SAP’s expertise in running the world’s most mission critical business processes combined with innovative solutions like commerce, supply chain and Qualtrics are extremely relevant for customers to increase their resiliency,” said SAP.

“Nevertheless, SAP’s customers, particularly those in hard-hit industries, continue to be affected by the economic consequences of the Covid-19 pandemic. Lockdowns have been re-introduced in some regions, recovery is uneven and companies are facing more business uncertainty.

“Consequently, there is greater scrutiny of larger projects. Transactional revenue continues to be affected, especially in SAP Concur where business travel-related revenues have yet to see a meaningful recovery.”

Christian Klein, SAP CEO, said in a statement that positions the supplier as aspirationally cloud first: “Covid-19 has created an inflection point for our customers. The move to the cloud combined with a true business transformation has become a must for enterprises, to gain resiliency and position them to emerge stronger out of the crisis.

“Together with our customers and partners we will co-innovate and reinvent how businesses run in a digital world. SAP will accelerate growth in the cloud to more than €22bn in 2025 and expand the share of more predictable revenue to approximately 85%.”

Luka Mucic, SAP chief financial office, said: “Our expedited move to the cloud will ensure we continue our path as a cloud growth company while we remain focused on cost efficiency. These actions and our resilient business model position us well to meet our new ambition targets as uncertainty recedes.”

SAP’s flagship ERP system S/4 Hana has, according to the results statement, attracted 500 customers in the quarter, up to 15,100. It stated this represents a 20% year-over-year (YoY) increase. The increase is in line with the run rate of 500 new customers, disclosed in its second-quarter 2020 results. Lenovo, Æon, Shanghai Land (Group), and Spanish natural gas and electrical energy utilities company Naturgy are said to have chosen S/4 Hana in the quarter.

Nevertheless, the 4% drop in revenue, comparing this year’s third quarter with 2019’s has attracted criticism from financial markets watchers. In the US, CNBC’s Jim Cramer slammed the supplier’s “dismal outlook”, and drew attention to the “management turmoil” that he said has existed at SAP since the departure of Bill McDermott in late 2019.

Fom London, the Financial Times’s Lex column bluntly stated: “SAP needs a better cloud-based product serving more of its own large customer base … coronavirus has prompted SAP’s clients, typically large or medium-sized companies, to switch to cloud services faster. That means SAP must invest more, even as revenues are slowing.”

SAP’s flagship enterprise resource planning (ERP) system, S/4 Hana is still largely delivered on-premise. Its cloud revenues stem largely from its acquired properties, Success Factors, Ariba, Concur, Fieldglass, and Qualtrics. The latter it acquired for a pricey $8bn in 2018, and is in the process of part divesting.

SAP updated its mid-term ambitions in the results statement to take account of the anticipated continuing impact of the pandemic, which it expects will “push out the achievement of key metrics such as non-IFRS cloud revenue, total revenue, and operating profit, by one to two years”.

For 2020, it expects €27.2 to 27.8bn total revenue, as against the previous expectation of €27.8 to 28.5bn, and it expects cloud revenue of €8.0 to 8.2bn cloud revenue, previously €8.3 to 8.7bn.

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