Strong sales of cloud services and even stronger sales of a next-generation business software suite lifted German software giant SAP SE’s second-quarter earnings released early this morning.

“We have never been better positioned,” SAP Chief Executive Bill McDermott (pictured) said on this morning’s conference call, and if that’s usually a boilerplate quote, the enterprise resource planning software company’s numbers would tend to bear him out.

Buoyed by 33 percent growth in cloud revenue and 70 percent growth of its S/4Hana business suite, SAP reported a 9 percent sales increase over the same quarter a year ago. But although sales topped analysts’ estimates, profits narrowly missed expectations. SAP said profits were pressured by restructuring and share-based compensation expenses and don’t indicate a slowdown in its business. The company slightly raised its 2017 financial outlook and announced a share buyback program totaling $578 million.

Investors more or less shrugged in early trading. SAP’s shares on the NYSE were up a fraction of 1 percent in the late morning.

In a bullish earnings call, SAP executives underlined the stability of the company’s core businesses while projecting confidence about new markets. The cloud business now makes up almost 50 percent of new-order entry, indicating that cloud revenues will continue to grow as a percentage of revenue. Average contract duration increased to 3.6 years, another strong stability metric.

SAP also maintained its 63 percent share of predictable revenue, an important indicator of financial stability that comprises cloud subscriptions and support revenue. The company is on track to grow predictable revenue to between 70 percent and 75 percent of total revenue by 2020, McDermott said.

Cloud and S/4Hana continue to power SAP’s growth as a 29 percent increase in subscriptions and support revenue to $1.07 billion exceeded internal goals, said Chief Financial Officer Luka Mucic. S/4Hana had a strong quarter, with 500 new customers to reach a total installed base of 6,300. Thirty percent of those sales were to net new customers. However, SAP said it has only scratched the surface of S4/Hana’s potential. “We are at only 15 to 20 percent penetration for the opportunities that are out there,” McDermott said.

Overseas strong, Americas weakens

Overseas performance in subscription and support revenue was particularly strong, with Europe/Middle East/Africa sales up 48 percent and Asia/Pacific sales up 52 percent. In the Americas, however, growth was more modest at 20 percent, a result that was partially impacted by the departure of key executive Steve Singh for the CEO role at Docker Inc.

Analysts expressed concern about narrowing margins and slowing North American growth, but SAP executives dismissed the results as a blip. “The pipeline for the cloud is fantastic,” McDermott said. “The 30 percent cloud growth rate is ever-intact. The business looks really, really, really strong.”

Every SAP customer is undergoing some kind of digital transformation in a market McDermott characterized as “a fight for survival.” That is driving S4/Hana sales, which in turn pulls the cloud along. “When customers choose S4/Hana, a lot of times it’s part of a line-of-business transformation, and they attach cloud decisions to those larger transformations,” he said. “I think you’ll see substantially accelerated cloud growth in Q3 and Q4 in the U.S.”

Executives explained a 2.2 percent decline in cloud subscription gross margins on “revenue mix shift effects within different cloud models and ongoing investments,” including construction of a new data center in Singapore. Overall margins were also affected by with the addition of 7,000 new full-time equivalent employees, a 9 percent increase over the previous year. Those were big investments, and SAP now plans to reap the benefits, McDermott said. The company has no further plans to expand its workforce this year.

The overall message from executives on conference call is that SAP is a well-oiled machine that is outpacing the market in every aspect of its business. “We continue to lead the business software industry with the trifecta of strong software sales, fast growth in the cloud and operating income expansion,” McDermott said, noting that growth has been entirely organic, as the company has made no major acquisitions in the past two years. “This is a sustainable growth company for the ages,” he added.

The company didn’t break out sales of Leonardo, a newly announced collection of artificial intelligence, machine learning and big data technologies underscored by the internet of things, but executives made it clear that the product is strategic. “In one or two years, Leonardo will be equally important to our financial success as S4/Hana,” Mucic said.

SAP also said it achieved an internal goal of 25 percent female representation in its management ranks and has set a new goal of 30 percent by 2022. “It’s a goal I expect to surpass handily,” McDermott said.

Image: SAP