Business

Continued strong cloud demand, especially in January and February, helped SAP overcome COVID-19 challenges in the first quarter (ended March 31), according to company executives.

Total company revenue grew 7% from a year ago to 6.5 billion euros, with cloud revenue jumping 29%, using International Financial Reporting Standards (IFRS), to 2.01 billion euros, the company said April 21. SAP also swung to an 811 million euros profit (0.68 euros per share).

Cloud revenue surpassed 2 billion euros “for the first time in a single quarter,” CFO Luka Mucic pointed out on an earnings call. “This growth reflects the success of our strong backlog,” he told analysts, adding: “This strong cloud revenue growth together with our ever resilient software support revenue stream helped us to overcome the shortfall in software licenses revenue” during the quarter.

That shortfall in license revenue was caused at least partially by the COVID-19 pandemic, according to Mucic and SAP CEO Christian Klein.

“As the spread of COVID-19 intensified, we saw a meaningful amount of new business postponed and purchase decisions put on hold for the time being, especially in our upfront licenses business,” Klein said. However, he pointed out that “software licenses, which unsurprisingly were most affected, only accounted for around 15 percent of revenue in 2019.” Although, “at minus 31 percent, the impact was significant, we have no reason to believe we have lost a lot of business but assume most of it as well is just being pushed out,” he said, adding: “I have no doubt that revenue will ultimately come to SAP.”

Cloud gross margin grew 5.3 percentage points in Q1 to 66.4% (IFRS), the company said.

Behind that “impressive growth of our overall cloud gross margin, we reached 69 percent” in overall gross margin in Q1, “up 3 percentage points year-over-year,” Mucic said, calling that improvement “a meaningful step in achieving our long-term margin ambitions.” The “strongest contribution” in margin “came from the gross margin of our public cloud or other SaaS/PaaS offerings,” where SAP saw a “significant expansion of 6 percentage points year-over-year and reached 70 percent,” he said.

Mucic predicted that, “as we move forward, we will also continue to see benefits from all our cloud assets as they start to scale and increase their efficiency on a common cloud platform.”

The company expects cloud revenue to “continue with rapid growth in 2020, backed by the 25 percent expansion of the current cloud backlog,” Klein told analysts. “We saw around 500 customers go live on S/4HANA in Q1, underscoring our partners and our own remote service delivery capabilities,” he said.

SAP expects it will be able to “emerge” from the COVID-19 crisis “even stronger… by remaining focused on our customer and their success in delivering the intelligent enterprise,” Klein said, explaining: “Companies need intelligence to deal with disrupted supply chains, restricted travel and the new ways of working. In short, only an intelligent enterprise can deal with uncertainty and rapid change. Digital transformation is no longer an option. It is essential. We are perfectly positioned to guide our customers through this journey.”