SAP’s cloud sales jump, driving revenue growth

Driven by strong cloud sales ERP software that more than offset a decline in revenue from on-premise applications, SAP’s revenue jumped in the third quarter compared to the same period last year, according to the company’s quarterly financial report released on Tuesday..

Total revenue for the quarter ended Sept. 30 was 7.84 billion euros ($7.72 billion), up 15, or 5%, in constant currency, excluding currency fluctuations.

SAP’s cloud and software revenue rose 14% to €6.71 billion in the quarter. Cloud revenue alone grew by 38% to €3.28 billion. Income for the company S/4HANA in particular, cloud ERP offerings almost doubled, increasing by 98% to €546 million.

This is good news for SAP, as the company has been pushing customers to migrate from its legacy Business Suite 7, which typically runs on-premise, since the launch of S/4HANA in 2015. Selling cloud software and services is good business for SAP and other software vendors because, among other things, cloud subscriptions provide a more predictable revenue stream than renewing on-premise application licenses.

Despite the sharp increase in revenue, SAP’s operating profit fell 1% to 1.239 billion euros, mainly due to higher costs in areas such as research and development, sales and marketing, as well as the need for additional costs to maintain the company’s cloud services. On-premises software licenses down 38% to 406 million euros, reflecting customers’ migration to cloud-based software.

Unsurprisingly, the German software giant has been the most eager to talk about its success in the cloud.

“Confidence in SAP is reflected in the acceleration of cloud growth,” CEO Christian Klein said in the company’s earnings press release. “It is clear that our transformation has reached an important inflection point, paving the way for continued growth in the future.”

Despite the negative news on operating profit, investors warmly greeted SAP’s results, with the company’s shares up $5.69, or 6.25%, to $96.70 in U.S. trading in the afternoon.

Like much of the technology sector, SAP is facing difficulties caused by the immediate consequences of Russia’s invasion of Ukraine, as well as a bearish economic climate. So the positive news about the company’s cloud business seems to have been enough to inspire confidence in SAP’s overall prospects.

SAP has made major strides in transitioning from a license maintenance-based business to a usage-based, cloud-focused company, thanks in part to a long string of acquisitions over the past decade in addition to the introduction of S/4HANA, which is moving the company’s ERP platform to a public cloud of the customer’s choice.

However, the company has a long way to go. Only 12% of current and prospective SAP ERP users in the US and Europe answered a a recent survey by digital transformation service provider LeanIX has completed the transition to S/4HANA. Another 12% said they have delayed the start of the migration to S/4HANA, and 74% of the surveyed enterprises are only in the phase of evaluating and planning their migration to ERP.