As anticipated, software giant SAP reported a remarkable second quarter earnings yesterday driven by robust growth in its cloud business. The company added roughly 600 customers due to the improved adoption of its S/4HANA platform, which drove its overall top-line growth. However, the revenue mix shift between cloud and on-premise business continued to weigh on its gross margin, despite improved performance from individual segments. Backed by the strong momentum gained from its cloud business and the acquisition of Callidus, SAP has raised its 2018 outlook as well as 2020 cloud ambition. Accordingly, we expect SAP’s cloud business to continue to drive its value in the long term.
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Key Highlights of Q2 Results
- As mentioned earlier, SAP managed to add over 600 customers due to the fast adoption of its cloud platform S/4HANA, taking the total customer number to 8,900. New cloud bookings grew by 29% y-o-y, building on a strong performance in the same quarter of last year. As a result, SAP’s cloud subscription and support revenue grew by almost 40% on a y-o-y basis (constant currency basis).
- SAP’s software business had a tough quarter compared to the year ago quarter due to the shift from on-premise to cloud. However, the continuous momentum from the new S/4HANA platform, and its Digital Supply Chain solution, more than offset the negative impact of its software business in the quarter.
- Support revenue grew around 7% y-o-y due to strong renewals and lower sales allowances, indicating the stickiness of the company’s support services with its customers.
- Similar to the last quarter, SAP’s gross margins dropped to 81.2% y-o-y due to the shift in the company’s revenue mix between cloud and on-premise business, despite improved performance from individual segments.
- Backed by the strong performance of its high growth cloud solutions, SAP now expects its 2018 cloud subscriptions and support revenue to be in the range of €5.05 to €5.20 billion, up from the previous guidance of €4.95 to €5.15 billion at constant currencies.
- The company has also revised the full year revenue guidance range from €24.97 to €25.30 billion, higher from the previous guidance of €24.80 to €25.30 billion at constant currencies.
- Further, SAP forecasts its 2020 cloud subscriptions and support revenue to be in the range of €8.2 to €8.7 billion, versus its previous target of €8.0 to €8.5 billion. Accordingly, the company expects its 2020 revenue and operating profit to be in the range of €28 to €29 billion and €8.5 to €9.0 billion, respectively.
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