SAP Faces Revenue Drop as Cloud Growth Slows

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Shares of German business-software company SAP plummeted in morning trading today following disappointing cloud revenue growth for the second quarter. As a result, SAP has revised its cloud revenue projection for the year.

As of 0725 GMT, SAP’s shares were down 5.2% at EUR119.88.

Based in Walldorf, Germany, SAP reported that total revenue reached 7.55 billion euros ($8.40 billion) for the second quarter, up from EUR7.21 billion in the same period last year. However, cloud revenue only increased by 19% to EUR3.32 billion, while software-licenses revenue saw a significant drop of 26% to EUR316 million.

SAP’s shift from software-licenses sales to subscription-based cloud services is aimed at establishing a more profitable and predictable revenue model based on recurring income. Although the company experienced strong growth in its cloud business across all regions during the quarter, with “outstanding” results in Germany, Brazil, and India, the slower cloud revenue growth has prompted concerns.

Operating profit rose to EUR2.06 billion from EUR1.68 billion, with SAP’s closely watched operating margin increasing to 27.2% from 23.3%.

Industry analysts had expected total revenue of EUR7.60 billion and cloud revenue of EUR3.40 billion, with operating profit at EUR1.93 billion and an operating margin of 25.6%, according to an analysis based on internal estimations provided by the company.

SAP will need to carefully reassess its cloud revenue strategy going forward to meet market expectations and sustain steady growth.

SAP Updates Financial Guidance for 2023

SAP, a leading European software company, has revised its financial figures for 2023. The company follows two sets of numbers in presenting its performance, one based on the International Financial Reporting Standards (IFRS) and the other excluding certain expenses.

The IFRS-based figures aim to provide a global reporting standard, but analysts and investors typically focus on SAP’s non-IFRS numbers. These numbers exclude share-based compensation, restructuring expenses, and acquisition-related charges.

SAP now expects its non-IFRS operating profit at constant currencies for 2023 to be between EUR8.65 billion and EUR8.95 billion. This is an increase from the previous estimate of EUR8.6 billion to EUR8.9 billion.

However, there has been a downward revision in the cloud revenue guidance. The company now anticipates its cloud revenue, at constant currencies, to range between EUR14 billion and EUR14.2 billion. This is lower than the previously expected range of EUR14 billion to EUR14.4 billion.

The adjustment in cloud revenue guidance comes shortly after SAP updated its 2025 targets. This development may leave investors puzzled, as noted by Jefferies analysts in a recent report. Despite management’s optimism during the quarter, it is unlikely that investors will be understanding of the downgrade in revenue guidance.

It will be interesting to see how this adjustment affects SAP’s future performance and market sentiment.

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