SAP SE shares jumped in early trading today as the enterprise resource planning giant reported earnings and revenue that beat analyst expectations.

The German software company adjusted its full-year guidance down to reflect the pending divestiture of its Qualtrics International Inc. subsidiary but said cloud revenue should be up between 23% and 26% at constant currency rates.

Earnings of $1.39 per share beat consensus estimates of $1.21. Revenue of $8.18 billion came in ahead of the consensus estimate of $8.02 billion.

Cloud revenue grew 24% in constant currency terms, up 1% sequentially over the previous quarter. Platform-as-a-service revenue was up a particularly strong 45%. Cloud revenue totaled $3.49 billion, which was slightly short of analysts’ estimates of $3.55 billion. Sales of the company’s cloud-based next-generation S/4HANA ERP suite grew 75% at constant currencies and the current cloud backlog of 25% was up 1%. Cloud revenue performance was strong across all regions led by Brazil, Germany and India, the company said.

Investors seemed relatively pleased, as SAP’s shares were rising almost 6% in early trading today.

Leaning into the journey

The company credited Rise with SAP, a high-touch cloud migration offering it calls “business transformation-as-a-service,” with continuing to drive cloud growth. “All customers are moving to a cloud-based architecture,” Scott Russell, head of customer success, said on a call with analysts. ”Most other companies focus on outcomes. We lean into the journey.”

Analysts were particularly heartened by the cloud’s gross profit of $2.5 billion, which rose 27%. Operating profit rose 12%. In updating its 2023 full-year outlook, SAP reaffirmed its expectations for revenues and profits from continuing operations including “anticipated acceleration of topline and operating profit growth.”

“It was a very good Q1 with strong demand across our portfolio,” Chief Executive Christian Klein said on a call with analysts.

Software license revenue fell to just $276 million in the quarter, down 13% and indicative of SAP’s aggressive campaign to move its customers to cloud-based services. Klein left little doubt that the company is sticking to its plan to end standard maintenance of its on-premises software by the end of 2027.

Forrester’s Herbert says SAP can’t let its legacy on-premises business continue to hold it back. Photo: Forrester Research

“There will be no extension of this timeline because, in the end, we want to use our R&D investments in the most effective way,” he said. “We want to deploy those in the cloud where customers get the most out of it.”

Klein’s statement about refusing the extend the support deadline for SAP’s ERP Central Component on-premises – something the vendor has already done once – was significant, said Liz Herbert, a principal analyst at Forrester Research Inc. “Part of being a leading cloud supplier is that everyone needs to be on the same version,” she said. “It’s hard to offer everything people need when you have one foot in and one foot out,” of the data center.

Herbert said some SAP customers have expressed reservations to her that S/4HANA has the deep industry-specific functionality of ECC but said the ERP giant can’t afford to drag out its transition any longer. “They’re already behind Oracle in the move to the cloud and it’s a risk to hold back too much,” she said. “They’re trying to embrace all these new innovations and it’s hard to do that if you have a lot of ties to the old world.”

With Qualtrics due to be taken private in a $12.5 billion deal, SAP updated its 2023 outlook to cloud revenue of between $15.4 billion and $15.8 billion, with an operating profit of between $9.4 billion and $9.7 billion. The revenue figure is $1.4 billion lower than earlier estimates that included Qualtrics, while the profit estimate shrank by $220 million.

Photo: SAP