SAP says its software portfolio is “more relevant than ever” as it reported rapid growth in cloud revenue today as part of its quarterly results. But the company’s transition from traditional licensing to a cloud-based consumer model isn’t going smoothly, with reduced revenue from its legacy products – and the impact of the war in Ukraine – hitting its profit margins. .
The German company reported overall revenue for the second quarter of 2022 of 7.5 billion euros, up 13% year-on-year. But its operating profit was 673 million euros, down 32% from 984 million euros in the second quarter of 2021. SAP blamed the drop on costs associated with the war in Ukraine and to its withdrawal from Russia and Belarus and adjusted its annual forecast accordingly.
The news was not well received by financial markets and SAP’s share price, which has been falling since the start of the year, fell again this morning.
SAP Results: Is It Now a Cloud Business?
Historically an on-premise enterprise resource planning (ERP) software provider, SAP has made the transition to cloud-based services in recent years, where it tries to compete with traditional rivals like Oracle, as well as cloud-native companies such as Tableau and large-scale public cloud providers – Amazon’s AWS, Microsoft Azure and Google Cloud.
It’s had some success moving customers to the cloud and winning new business, and its results show cloud revenue grew 34% year-over-year in the second quarter, to 3.06 billion. . “As our second quarter results demonstrate, SAP’s portfolio is more relevant than ever,” said Christian Klein, CEO of SAP. “Our transition to the cloud is ahead of schedule and we exceeded high-level expectations.”
But the results show that SAP’s traditional software sales and support business is still generating more revenue, bringing in 3.4 billion euros in the second quarter. The company reports a backlog of cloud-related payments worth more than €10 billion.
SAP is working with other vendors to make its cloud proposition more attractive and this week announced an agreement with French company Thales to launch a security service to provide enhanced protection for sensitive data stored in the cloud by customers. SAP. The partnership will also allow security teams to manage encryption keys in public clouds from a central portal, while meeting compliance and regulatory requirements.
SAP and Russia: the war in Ukraine hits rock bottom
SAP was one of the latest technology companies to pull out of Russia following the war in Ukraine. In May, Ukraine’s digital transformation minister Mykhailo Fedorov criticized its slow exit compared to other companies. “SAP continues to work in Russia and pay taxes to help fund the Russian military,” Fedorov said in an interview with Politics. “A lot of banks and banking businesses are based on SAP.”
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The company has now closed its operations in Russia and Belarus, but the decision has come at a high cost. “Operating profit was also impacted by restructuring expenses of around 120 million euros incurred due to severance payments made to employees in Russia and Belarus and further asset impairments,” said the society.
For the full year, SAP says it expects revenue to be €350 million lower than previously forecast due to the conflict, adding: “Further impacts due to this rapidly evolving situation are currently unknown and could potentially subject our business to materially adverse consequences if the situation escalates beyond its current scope.