SAP SE toasted analyst expectations for both revenue and earnings on 48% growth in cloud revenue in the first quarter and raised its 2019 profit outlook, sending shares up more than 12% today. 

The software giant’s net profit jumped 25%, to 1.08 billion euros ($1.21 billion), over the same quarter last year. Revenues rose 16.3% to 6.12 billion euros ($6.85 billion), easily beating consensus estimates of 5.94 billion euros. SAP said predictable revenue — primarily cloud subscriptions and maintenance fees — edged up a percentage point to reach 72% of total sales in the quarter.

Saying its business is firing on all cylinders, SAP confidently raised its full-year profit forecast to between 8.8 billion and 9.1 billion euros ($9.85 billion to $10.19 billion) from the previous range of 8.5 billion to 9.0 billion euros.

Overall cloud revenues topped 1.5 billion euros ($1.68 billion) for the first time in a single quarter, showing “continuing momentum in the S/4 HANA transition and in cloud software adoption,” said George Lawrie, a principal analyst at Forrester Research Inc. S/4 HANA is the company’s flagship business management software suite. SAP said it now counts 10,900 S/4 HANA customers, up from 10,500 last quarter.

“We really couldn’t be prouder of these results,” said SAP Chief Executive Bill McDermott (pictured, with Chief Financial Officer Luka Mucic). “We have an incredibly strong core business with a market-leading retention rate. We have years and years of runway for continued growth.”

Profits now come first

In line with that optimism, McDermott signaled a shift in strategy by saying the company would put profit margins ahead of growth for the next several years. Just six months ago, the executive had asserted that the company would not let margins guide its strategy.

McDermott said the change was driven in part by a survey of shareholders that showed 60% want to see better margins. “We’re going to run a profitability machine,” he said. “We expect we will be able to deliver significant margin expansion across both our core and cloud businesses.” McDermott said growth will be mostly organic going forward with occasional “tuck-in” acquisitions to fill product-line gaps.

Specifically, SAP has set a target of a 1% improvement in operating profit margins each year between now and 2023. Having completed a major restructuring initiated early this year, the company is in position to streamline its business, McDermott said. “This is not about cost reduction,” he said. “This is about doing things better, smarter and faster.”

Forrester’s Lawrie said the decision to restructure during a period of growth was a wise one. “SAP can see the success of investments to contain costs so that they do not grow at the same rate as revenues,” he said. “We noted an improvement in free cash flow that suggests that investments in cloud deployments and new recurring revenue models are bearing fruit.”

Regional results were strong across the board. Cloud revenue in both Europe and the Americas was up 39% on a constant currency basis with impressive 51% growth in the Asia/Pacific region. “This bodes well for SAP to entrench its success in China, where some leading companies have in the past decided to write their own software rather than acquire packaged applications,” Lawrie said.

The strength of the company’s software license business continues to defy gravity, with license sales up 1% in constant currency from a year ago and total license and support revenue growth of 3%. “The pipeline for core software is outstanding; the maintenance base of SAP is Fort Knox,” McDermott said. “There’s no reason to believe we can’t maintain that steady state.”

The resilience of the software license business, said Lawrie, “suggests continued success in winning new customers and in extending the application footprint with existing customers.”

Photo: SAP