SAP lowers outlook despite Q1 revenue rise

Cloud revenue jumped 24%

German business software maker SAP has reported better-than-expected first-quarter revenue, up 10% year-on-year to €7.44 billion, driven by cloud growth.

However, the company has lowered its outlook for the year due to the divestment of its Qualtrics unit.

Revenue for the cloud business rose 24% to €3.18 billion, beating the analysts' average estimate of €3.22 billion.

Additionally, SAP's cloud revenue for the S/4HANA platform grew 77%, to €716 million.

Cloud gross profit jumped 28% to €2.24 billion.

Services revenue rose 12%, €1.08 billion. However, software license revenue fell 13% to €276 million.

SAP said its operating profit fell 45% to €803 million by the end of March.

"The decrease is mainly driven by the increase in share-based compensation, which reflects the increase in share price over the first quarter as compared to last year's decline over the same period," the company noted in its earnings report.

In Q1 of 2023, the company's post-tax profit fell 19% to €509 million, compared to €632 million in the same quarter last year.

"We have entered a powerful new phase in our strategic transformation with topline and bottom-line results clearly demonstrating the tipping point we passed in the fourth quarter 2022," said CEO Christian Klein.

"Our cloud momentum continues at a fast pace which is contributing to our strong revenue and double-digit non-IFRS operating profit growth this quarter."

IFRS refers to the International Financial Reporting Standards, a principles-based approach to reporting that is different from GAAP's legal framework. As a rule, we do not report non-IFRS or non-GAAP figures on Computing unless the company doesn't provide a figure aligned to those standards (as in SAP's expected profit, below).

Dominik Asam, CFO, SAP, noted: "We have accelerated topline growth and have already achieved double-digit non-IFRS operating profit growth in Q1. Our results set solid groundwork for our full year outlook, thereby pivoting back to profitable growth in 2023. Saying what we do, and doing what we say, will continue to be of great importance to us."

SAP is currently restructuring to focus on technology by selling assets and cutting jobs not related to faster-growing businesses. The company announced in January that it planned to cut 3,000 jobs this year and sell its remaining stake in Qualtrics for approximately $7.7bn.

The restructuring is expected to cost between €250 million and €300 million, with most of it recognised in the first quarter.

A group of investors, including the Canada Pension Plan Investment Board and Silver Lake, is in the process of acquiring Qualtrics, in a deal valuing the business at $12.5 billion. Although the sale has not yet been completed, SAP has stopped including the business's contributions in its results.

SAP has slightly adjusted its outlook due to the Qualtrics divestment. The firm has lowered its outlook for the year, with an expected non-IFRS operating profit range of €8.6-€8.9 billion: €200 million less than previously forecast. The cloud revenue forecast is also lower, expected to be between €14 billion and €14.4 billion, a fall of €1.3 billion.

SAP's cloud computing revenue growth contrasts with a broader slowdown in big tech cloud sales, which has affected rivals such as Microsoft, Alphabet, and Amazon in the last earnings cycle. SAP shares have performed well, rising 36% in the last year compared to 18% for the S&P 500 Information Technology Index.

SAP also noted in its earnings report that its business could be affected if the situation in the Ukraine worsens "beyond its current scope."