SAP is picking up the pace in the cloud business – but earnings are under pressure

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Europe’s largest software manufacturer SAP is starting the new year with high growth ambitions – but the profits from day-to-day business have to take a back seat for the time being. In 2022, the group is only aiming for a largely stable operating result at the upper end of the forecast range, which could also fall by up to five percent. Analysts had calculated more.

On the other hand, SAP boss Christian Klein is surprisingly ambitious when it comes to cloud software, which has been declared a future business. In the final quarter of last year, the Walldorf-based group also managed a final sprint, as preliminary figures showed late Thursday evening.

“More and more companies are turning to SAP to help them reposition themselves, build stable supply chains, and become sustainable businesses on their journey to the cloud,” said Klein. The manager wants to significantly boost the cloud business in the coming years so as not to be left behind by the competition in the market for business software. Subscription software over the Internet is considered the future of the industry and is already standard in many areas.

Klein is aiming for a currency-adjusted increase in sales of 23 to 26 percent for cloud software in the new year – faster growth than last year, when cloud revenue increased by around a sixth to 9.42 billion euros. Overall, management expects total product sales to grow 4 to 6 percent.

However, the operating result is more leisurely. Analysts had more on the slip than the now estimated 7.8 to 8.25 billion euros in earnings before interest and taxes adjusted for special effects. Last year, the operating result had shrunk by one percent to 8.23 ​​billion euros. Klein had promised meager fare anyway for the results for 2021 and 2022 because he does not want to miss the growth opportunities in the market and the group is investing a lot of money for this. Total SAP revenue increased 2 percent year-on-year to €27.8 billion in 2021.

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With strong growth, SAP is to maintain the dominance of applications for corporate management in the cloud division, and by 2025 a jump in sales to more than 22 billion euros is to be achieved. But the competition, including the US tech groups Oracle and Salesforce, is increasingly hot on the heels of SAP. At the beginning of last year, SAP boss Klein launched a new product bundle called “Rise” in order to get customers to switch to the cloud faster with simpler means. In the evening he spoke of a “huge success” of the offer.

Accelerating cloud businesses requires investments in technology, products and advertising. In addition, the cloud products are initially not as profitable as expensive software packages in a one-off license sale, but should gradually pay off over the term and higher customer loyalty – because the cloud software is either paid for as a subscription or through usage fees.

The bottom line is that net profit in 2021 rose by 2 percent to 5.38 billion euros. True, SAP had to spend a lot more money on stock-based employee compensation. However, the group’s venture capital subsidiary, Sapphire Ventures, benefited from the good performance of its investments throughout the year.

SAP now wants to buy back shares worth up to one billion euros this year. The purchased securities are to be used for future awards from a share-based payment program, it said. “By balancing our share-based payments for new awards from 2022 primarily with shares instead of cash payments, we want to further strengthen the equity culture in our workforce and ensure that the interests of our employees are closely aligned with the interests of our shareholders,” said Chief Financial Officer Luka Mucic.


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