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Cloud revenue grows but Ukraine conflict hits profits

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SAP says its software portfolio is “more relevant than ever” as it reported fast-growing cloud revenues as part of its quarterly results today. But the company’s transition away from traditional licensing to a cloud-based consumption model is not going entirely smoothly, with a reduction in income from its legacy products – and the impact of the war in Ukraine – hitting its profit margins.

SAP’s headquarters in Walldorf, Germany. The company is growing cloud revenue but saw profits dip in Q2. (Photo courtesy of SAP)

The German company reported overall revenue for the second quarter of 2022 of €7.5bn, up 13% year-on-year. But its operating profit was €673m, down 32% on the €984m it made in Q2 2021. SAP blamed costs associated with the war in Ukraine and its withdrawal from Russia and Belarus for the dip and has adjusted its annual forecast accordingly.

The news was not received well by the financial markets, and SAP’s share price, which has been falling since the turn of the year, fell again this morning.

SAP results: is it now a cloud company?

Historically a provider of on-premises enterprise resource planning (ERP) software, SAP has been making the move to cloud-based services in recent years, where it is trying to compete with traditional rivals like Oracle, as well as cloud-native companies such as Tableau and the hyperscale public cloud providers – Amazon’s AWS, Microsoft Azure and Google Cloud.

It is seeing some success in moving customers to the cloud and winning new business, and its results show cloud revenue was up 34% year-on-year in Q2, to €3.06bn. “As our Q2 results demonstrate, SAP’s portfolio is more relevant than ever,” SAP CEO Christian Klein said. “Our transition to the cloud is ahead of schedule and we have exceeded top-line expectations.”

But the results show that SAP’s traditional software sales and support business still generates more revenue, bringing in €3.4bn in Q2. The company points to a backlog of cloud-related payments to come in worth over €10bn.

SAP is working with other vendors to make its cloud proposition more attractive, and this week announced a deal with French company Thales to launch a security service to offer enhanced protection for sensitive data stored in the cloud by SAP customers. The partnership will also enable security teams to manage encryption keys across public clouds from one central portal, while meeting compliance and regulatory requirements.

SAP and Russia: war in Ukraine hits bottom line

SAP was one of the last tech companies to withdraw from Russia in the wake of the war in Ukraine. In May, Ukraine’s minister for digital transformation, Mykhailo Fedorov, criticised the slow pace of its exit compared to other businesses. “SAP are… still continuing to work in Russia and to pay taxes to help finance the Russian army,” Fedorov said in an interview with Politico. “A lot of banks and banking activities are based on SAP.”

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The company has now shut down its business in Russia and in Belarus, but the move has come at a considerable cost. “Operating profit was additionally affected by restructuring expenses of approximately €120m incurred due to severance payments to employees in Russia and Belarus and further impairments of assets,” the company said.

For the full year, SAP says it expects its revenue to be €350m lower than previously forecast because of the conflict, adding: “Other impacts due to this rapidly evolving situation are currently unknown and could potentially subject our business to materially adverse consequences should the situation escalate beyond its current scope.”

Read more: Microsoft launches new ‘sovereign cloud’ package for public sector

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