by Robert Holland, VP Research and Publishing, SAPinsider
This week, after an initial internal review, SAP announced their preliminary financial results for the first quarter of 2020. While an early release of financial results is not all that unusual for SAP (it last occurred in October 2019) this only happens when the results are exceptional in some way – as was the case in this instance.
The highlights of the announcement were an increase in IFRS cloud revenue by 29%, an increase in total revenue by 7%, and an increase in IFRS operating profit by more than 100%. However, SAP also saw a 31% drop in software license revenue and have updated their 2020 outlook in order to reflect what they believe the impact of COVID-19 will be on their business.
In a statement which was part of the announcement, CFO Luka Mucic noted that SAP’s focus on building more predictable revenue, defined as the total of non-IFRS cloud revenue and non-IFRS software support revenue, was a big part of these results, something he also emphasized during the announcement of the FY2019 results in January. Mucic also stated that: “Combined with an even more prudent expense management and a continued focus on innovation we will weather the COVID-19 crisis and emerge stronger than before.”
SAP’s co-CEOs Jennifer Morgan and Christian Klein included a statement in the announcement that spoke to SAP’s engagement with and support of their employees, customers, and communities, and made note of understanding and acting on sentiment. They said: “Our customers will continue to rely on us to listen and engage with their employees in new ways, manage their supply chains, and connect with their customers in a virtual world where sentiment will become a leading indicator.”
Impact on Business in the First Quarter
As might be expected from an organization for which the largest portion of their revenue is based on sales in EMEA, Latin America, and North America, business for the first two months of 2020 was healthy for SAP. However, as the impact of the pandemic intensified in March, SAP reported that they saw a significant amount of new business being postponed. This was reflected in the 31% decrease in year over year software license revenue.
While SAP indicated that they remain committed to their long-term strategy, like many businesses impacted by the changed global business environment they have adopted a virtual sales and remote implementation strategy and have slowed hiring and reduced discretionary spending. They also expect to see a reduction in costs due to decreased travel and event virtualization – though SAP did note a €36 million cost due to the cancellation of SAPPHIRE NOW and other customer events like Ariba Live.
Despite the significant drop in year over year software license revenue from the first quarter of 2019, SAP saw an increase of 29% in cloud revenue year over year to €2.01 billion (IFRS). This provided a growth in overall cloud and software revenue by 7% from the same quarter last year to €5.40 billion (IFRS). Total revenue was also up by 7% year over year to €6.52 billion (IFRS). What is very important for SAP is that the share of more predictable revenue grew by 4% to approximately 76% of total revenue in the first quarter.
Since SAP saw a reduction in restructuring costs in 2020, the first quarter was able to show a significant increase in IFRS operating profit during the first quarter. The lower impact in these restructuring costs as well as the reduction in share-based compensation expenses meant that SAP’s operating profit increased by over 100% year over year to €1.21 billion (IFRS), or by €1.48 billion (non-IFRS). However, even though operating profit increased significantly, operating margin decreased by 20.7% year over year to 18.5% (IFRS).
Given the significant impact made by the COVID-19 crisis on SAP’s performance in March, SAP is adjusting their outlook for 2020. Their expectation is that they will see a continued deterioration in performance through the second quarter before “gradually improving in the third and fourth quarter as economies reopen and population lockdowns end.”
We can translate SAP’s expectations for 2020 revenue as follows:
- Non-IFRS cloud revenue will be in the range of €8.3 to €8.7 billion (previously that range was €8.7 to €9.0 billion)
- Non-IFRS cloud and software revenue will be in the range of €23.4 to €24.0 billion (previously €24.7 to €25.1 billion)
- Non-IFRS total revenue will be in the range of €27.8 to €28.5 billion (previously €29.2 to €29.7 billion)
- Non-IFRS operating profit is expected to be in the range of €8.1 to €8.7 billion instead of €8.9 to €9.3 billion at constant currencies, a decrease of between 1% and 6%.
On a more positive note, SAP expects that the share of more predictable revenue will now be expected to reach approximately 72% for the full year, an increase over the original expectation of 70%. SAP also confirmed their 2023 goals as published in their 2019 Integrated Report.
SAP will provide more details on April 21 when they will provide further details on their first quarter and projected performance for the full 2020 financial year.
What Does This Mean for the SAPinsider Community?
Like most organizations, SAP’s first quarter performance was impacted by the COVID-19 crisis and that impact will only grow as the year progresses. Here are steps that you can take that will help your organization:
- Take time to fully explore the capabilities of the solutions you already have. The SAP products and solutions that you are currently running likely have features that you are either underutilizing or could be leveraging better. For example, this probably doesn’t mean customizations to the core application, but would include building additional SAP Fiori apps. As organizations globally are looking to minimize expenses, investigate additional or under-utilized features and capabilities in your existing technologies to see what can be better leveraged, automated, optimized, or configured to use remotely.
- Understand how others within your industry are coping with the crisis. Every organization is being impacted in some way by the COVID-19 crisis and it is important to understand what other companies in your industry are doing, what technologies they are looking at, and what contingencies they are making. Leverage SAP and opportunities like SAPinsider’s virtual events to gain that perspective.
- Continue to explore the cloud. Even if you are not currently exploring cloud-based technologies and solutions, the cloud presents the potential to expand your organization’s capabilities with minimal investment, or simply to support a more distributed and virtual workforce. Trials of cloud-based solutions can be very low cost and may allow urgently needed capabilities to be added in a reduced timeframe.
- Leverage free product trials and opportunities. In addition to the free or low cost trials available for applications in the public cloud, SAP also offers free trials of many solutions as well. See what opportunities exist to test and see how some of these solutions may fit your business needs without impacting your bottom line.
Following this guidance should help the SAPinsider Community make appropriate decisions around their 2020 plans and the impact of the COVID-19 crisis.
Robert Holland, Vice President of Research & Publishing, SAPinsider, can be reached at firstname.lastname@example.org.