Financial Performance

SAP Sales Jump 7% on Cloud Business Surge

Cloud subscriptions and support revenue rose 39% in Q3 but SAP is experiencing some customer resistance to its shift to the cloud.
Matthew HellerOctober 18, 2018

SAP’s cloud business fueled a 7% jump in quarterly revenue but its shares fell amid concerns over whether its shift to the cloud will crimp profitability.

For the third quarter, the enterprise software giant on Thursday said new cloud bookings increased 36% year-over-year while cloud subscriptions and support revenue surged 39% to 1.3 billion euros ($1.49 billion). Overall revenue rose to 5 billion euros ($5.73 billion) from 4.6 billion euros ($5.27 billion).

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As a component of total revenue, cloud subscriptions, support revenue, and software support revenue increased 3% to 68%.

SAP on Thursday also raised its 2018 growth forecast for cloud revenues to a range of 36.5% to 39% from 34% to 38% previously.

Bill McDermott, SAP

“SAP is the fastest growing cloud company at scale in the enterprise software applications industry,” CEO Bill McDermott said. “Our growth drivers are firing on all cylinders, especially SAP C/4HANA and SAP S/4HANA as foundations of the intelligent enterprise.”

But the company’s shares fell 3.5% in early trading as traders expressed some disappointment about margins.

SAP’s “bullish outlook contrasts with resistance among some SAP customers to move core processes from on-site data centers to remote servers,” Reuters said, noting that in a survey this week, only 10% of respondents in SAP’s home market of Germany said they were willing to make that change.

SAP has pledged to raise operating margins to more than 30%, but in the third quarter, non-IFRS margins, at constant currencies, grew by 10 basis points to 29.4%.

According to Reuters, the transition to the cloud “entails a trade-off for SAP: Growth in the subscription-driven cloud business helped boost the share of predictable revenues … But it needs to achieve scale to deliver on the promise of an expansion in operating margins to over 30% as the cloud business tends to dilute the impact of the mature, but highly profitable, license business.”

McDermott said the cloud was “where the customer wants us to go” while also highlighting SAP’s push into customer relationship management with its recently announced C/4HANA software suite.