SAP’s Likely Q4 Profit Dip Belies Strong Cloud Business

important point

  • SAP’s cloud revenue, which accounts for 40% of its business, extended post-pandemic recovery.
  • The company’s quarterly cloud revenue nearly doubled from pre-pandemic.
  • Growth initiatives, lower financial contributions from licensing and its venture capital unit may have reduced the company’s fourth quarter earnings.

SAP SE (SAP), a leading global provider of business software, extended its cloud services segment’s post-pandemic recovery in the fourth quarter, outpacing rival Microsoft’s (MSFT) growth. , and the impact of venture capital businesses.

Germany-based SAP, which trades in Germany and the United States, saw its cloud revenue fall by 33% during the quarter as its net profit fell nearly 40% to $872 million, or $1.36 per person. % increase to $3.5 billion, almost double Microsoft’s 18% growth. Visible Alpha estimates that total revenue will increase 6% to $8.5 billion

SAP Key Statistics
Q4 2022 (East) Q4 2021 Q4 2020
Adjusted EPS $1.36 $1.86 $1.69
Earnings $8.5 billion $8 billion $7.5 billion
Cloud revenue growth 33% 28% 7%

SAP’s growth in cloud computing revenue represents an outlier in an increasingly challenging global economic environment for leading providers of such services. While quarter-over-quarter growth may slow from 38% last quarter, cloud revenues still account for 40% of SAP’s overall business, and growth is expected to exceed 28% for the fourth straight quarter. increase.

Meanwhile, Microsoft has warned that cloud growth is coming to a slowdown, and the news had a negative impact on the US stock market today. At the same time, SAP’s projected fourth-quarter cloud revenue will be 84% higher than the $1.9 billion in revenue recorded in the last pre-pandemic fourth quarter of 2019.

SAP’s share price surged 13% year-to-date and surged 27% in the fourth quarter, recovering some of its 21% loss over the course of 2022. % for Q4 and 2022 respectively.

cost of growth

Not content with its existing cloud business, however, SAP has focused on expanding its growth opportunities. The expansion increased the company’s third-quarter R&D and sales/marketing costs by 21% and 22%, respectively, and depressed its operating margin. These charges may have increased again in the fourth quarter, albeit to a lesser extent.

The biggest hit to the company’s bottom line will likely come from falling revenues from both software licensing and Sapphire Ventures, its venture capital arm that invests in technology opportunities. The company also said the effective tax rate increased in 2022, primarily due to changes in tax-exempt income related to its units.

Visible Alpha expects the company to post a non-operating loss of $132 million in the fourth quarter. The likely decline in overall net income reflects $626 million of unfavorable development.

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