SAP SE’s fiscal first-quarter earnings fell short of analysts’ expectations today but revenue growth came in stronger than expected.

Earnings per share of $1.08 fell below consensus estimates of $1.22. Revenues rose 11.5% over the same period last year, to $7.63 billion, beating Wall Street’s expectations of $7.41 billion.

Executives blamed the profit shortfall on a lower-than-expected contribution to income from SAP’s venture capital arm. A 24% decline in free cash flow was attributed to the “development of profitability” in the quarter, working capital impacts from the company’s ongoing move to the cloud and lower software license sales.

“We always said profit performance would be challenging in the first half of the year compared to a strong first half last year,” said Chief Executive Christian Klein (pictured). He said the profit picture will improve in the second half of the year as the bulk of a restructuring charge is taken.

Investors seemed unfazed by the earnings miss. SAP stock fell about 1% in early trading amid a broader market selloff.

Guidance maintained

Despite the earnings surprise, the company reiterated its full-year guidance, saying it expects cloud revenue of between $12.45 and $12.77 billion, up 26% in constant currencies from $10.15 billion last year. Total cloud and software revenue is expected to be between $26.9 billion and $27.5 billion, up 4% to 6% from last year. The share of “more predictable revenue,” which SAP defines as the total of cloud revenue and software support revenue, is expected to reach about 78%, up from 75% last year.

SAP said its cloud business continues to gain momentum and its Rise with SAP campaign, which offers customers a package of software and business transformation services, had a strong first year. “We see over 80% of Rise customers adopting our platform,” Klein said. “Rise drives strong cost and upsell opportunities,” with a conversion ratio is 2.5:1, meaning that a Rise with SAP sale drives an additional 250% in revenue.

The current cloud backlog stands at nearly $10 billion and cloud revenue growth accelerated for the fourth straight quarter to 25%. The cloud backlog grew 23% and the backlog of revenue attributable to sales of the S/4HANA enterprise resource planning package grew a record 79%, driven in large part by Rise with SAP, executives said.

There are now more than 5,300 customers using S/4 HANA in the cloud and the company’s win rate versus competitors was 64% in the quarter, Klein said. “Overall, the sets us up well for ongoing growth throughout the rest of 2022,” he said.

S/4HANA resistance

However, the total S/4HANA customer base grew less than 3%, to 19,300 customers, following a nearly 8% jump between the third and fourth quarters of last year. Forrester Research Inc. Principal Analyst Liz Herbert said customers are continuing to drag their feet on migrating to S/4HANA from their current ERP. “Customers who work with Forrester continue to question whether there is value in moving to S/4HANA now,” she said. “Some have only finished implementing their last ERP recently, so it feels too soon.”

Herbert said she is fielding “a lot of questions about who else is out there,” in the ERP vendor landscape and clients are asking if there are any disruptive shifts on the horizon. “Some of our clients feel SAP has not moved quickly enough to offer a user-friendly, cloud-native solution versus the broader enterprise software market,” she said.

Nevertheless, Herbert said SAP’s core business remains sound despite competitive pressure in some of its ancillary markets. “While some categories like human capital management and sourcing technology are becoming saturated in cloud/software-as-a-service deployment, we still see strong growth in core ERP and supply chain systems, both of which are big areas for SAP,” she said.

Photo: SAP