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SAP earnings driven by strong cloud growth in Q1

SAP cloud revenue was up and S/4HANA added new customers, leading to a strong Q1 2019 earnings report. Cloud revenue for SAP rose in all regions, with especially strong growth in China and Japan.

SAP reported strong growth in cloud revenue and an increase in SAP S/4HANA adoption in financial results for the first quarter of 2019. SAP reported revenue of $6.8 billion in Q1 2019, an increase of 6.5% on a year-over-year basis.

The SAP earnings report highlights three business and technology segments: Applications, Technology, and Services (AT&S), which includes SAP S/4HANA, SAP Leonardo, SAP Cloud Platform and SAP Data Hub; the SAP Business Network (BN), which includes the cloud companies Ariba, Fieldglass, SuccessFactors and Concur; and Customer and Experience Management (CXM), which includes SAP C/4HANA and Qualtrics.

Revenue for AT&S rose 12% in Q1, about $5.5 billion. The SAP earnings report points to a 30% year-over-year increase in S/4HANA customers that now number 10,900. BN revenue was up 25% to about $825 million year-over-year. CXM revenue rose 100% to about $340 million.

Cloud revenue growth was strong around the world, particularly in the Asia-Pacific Japan, or APJ region, according to the SAP earnings report. International Financial Reporting Standards (IFRS) cloud revenue rose in APJ by 55%, the Americas by 45% and Europe by 42% in Q1.

SAP reported an IFRS operating loss of about $150 million or 136 million euros from the expected cost of the company's recent restructuring. The layoffs of more than 4,000 employees carry an upfront charge of about $988 million or 886 million euros, according to the SAP earnings report.

SAP cloud growth in Asia shows strength

George Lawrie, vice president and principal analyst at Forrester Research, called the growth of SAP S/4HANA customers and the reported first quarter cloud revenue as the two most notable highlights of the SAP earnings call.

"This shows continuing momentum in the S/4 HANA transition and in cloud software adoption," Lawrie said. "We were interested to see software license revenue up 4%, suggesting continued success in winning new customers and in extending the application footprint in existing customers."

The cloud revenue growth in APJ was also worth noting, as it outpaced both the Americas and EMEA, according to Lawrie.

"China and South Korea had a strong quarter," he said. "This bodes well for SAP to entrench its success in China, where some leading companies have in the past decided to write their own software rather than acquire packaged applications."

The reported IFRS operating loss as a result of the SAP restructuring charges shows that the company has acknowledged its need to retrain developers to keep pace with its transition to new technologies and cloud-deployed applications.

 "The improvement in free cash flow suggests that the investments in cloud deployments and new recurring revenue models are bearing fruit," Lawrie said. "The ambitious target of non-IFRS cloud gross margin of 75% by 2023 suggests that SAP can see the success of investments to contain costs so that they do not grow at the same rate as revenues. We suspect this may relate to an increased proportion [of] public cloud deployments in [the] future."

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What does the Q1 2019 SAP earnings report tell you about the health and technology direction of the company?
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