Software giant SAP SE today beat lowered expectations on both revenue and profit in the second quarter, citing unexpectedly strong new customer activity despite customer caution during the pandemic.

Revenues of $7.9 billion beat consensus estimates of $7.85 billion. Cloud revenue grew 18%, to $2.39 billion. Software license revenue slipped 18%, to $910 million, but was still stronger than expected.

“There’s a huge acceleration in the move to the cloud,” said Chief Executive Christian Klein (pictured). “CIOs are actually afraid of the resilience of running their own data centers.”

Operating profit rose 8%, to $2.3 billion, and profit per share rose 8%, to $1.37, against consensus estimates $1.34. Operating margins grew five percentage points to 29.1%, reflecting what the company said is a balanced approach to growth and profitability. In early trading on the New York Stock Exchange, SAP shares rose more than 3%.

SAP reaffirmed the lowered full-year estimates it announced in April, when it forecast revenue of between $30.16 billion and $30.92 billion, reflecting an anticipated decline of $350 million in full-year subscription revenues and $100 million in maintenance revenue. However, the company raised free cash flow expectations for 2020 to $4.7 billion from its previous estimate of $4.1 billion, citing lower than anticipated capital spending, “a slower pace of hiring than in usual circumstances and reduced discretionary spend in addition to natural savings.”

“I thought after Q1 that SAP looked overly optimistic about how things were going to bounce back and I’m happy to have been proven wrong,” said Andrew MacMillen, an analyst at Nucleus Research Inc. “They’re showing that business as usual can resume more quickly than a lot of people expected.”

No corks popping

That said, SAP executives were cautious to say that the company isn’t yet shifting into overdrive. “This is not the time to frolic or break out the champagne; there is still substantial uncertainty in the system,” said Chief Financial Officer Luka Mucic. He said the risk of a second round of coronavirus-related lockdowns as well as the heavy reliance of enterprise software companies on fourth-quarter deals create uncertainty. “There is no guarantee of success in the second half,” he said.

Customer activity was unexpectedly strong during the quarter, particularly in Asia, said Klein said. More than 17,000 new and existing customers moved into production in the quarter with “go-lives happening in weeks rather than months,” he said.

SAP added 500 deployments of its flagship S4/HANA enterprise resource planning system in the quarter, 40% of which were by new customers. There are now 14,600 S4/HANA customers, up more than 20% from this time last year.

Cloud backlog grew 21%, to $7.8 billion, with especially high demand in digital supply chain, e-commerce and Qualtrics, the customer experience management business unit that the company said Sunday it would partially spin off in an initial public offering. Its revenue jumped 32%.

Cloud revenue growth came in at the low end of revised estimates the company put forth in April. Growth was hurt by lower pay-as-you-go volume brought about by the pandemic.

Outside the ERP realm, SAP’s other lines of business performed as might be expected given the economic climate. Revenues for the Concur travel expense management product line fell 4% as business travel all but stopped and services revenue declined 6% amid recessionary pressures.

SAP doesn’t break out financial performance for its Ariba e-commerce and Fieldglass workforce management platforms but said Fieldglass added 760,000 new external workers during the second quarter and Klein called the performance of its e-commerce platform “a blowout.”

Klein said the company will announce “new options for moving to the cloud beyond ERP” in the second half of the year. Nucleus Research’s MacMillen said he expects they will include focused cloud migration offerings for customers in SAP’s ancillary businesses such as customer relationship management and supply chain management.

“Those are huge value drivers for customers and part of what makes SAP so important to them,” he said. Until now SAP has been almost solely focused on moving its ERP customers to the cloud, but “there has to come a time when the rest of the world like Spyglass, Ariba and Concur get a little TLC,” McMillen said.

Photo: SAP