SAP's cloud revenues swell 45% – just don't ask about the gaping €136m hole in profits

Qualtrics slurp and restructure aren't making any money yet

SAP's cloud biz is ballooning, but aggressive restructuring efforts and charges related to the recent $8bn buy of Qualtrics have resulted in an operating loss of €136m for Q1 of its fiscal 2019.

Total revenue for the three months ended 31 March stood at €6.09bn, up 16 per cent year-on-year.

The German enterprise software heavyweight reached a little more than €1.5bn in quarterly cloud revenue, up 45 per cent. Traditional software licenses brought in €650m, and traditional support netted €2.838m – up 6 per cent in aggregate. Services were responsible for a tad over €1bn, up 15 per cent.

CEO Bill McDermott pointed to "rapid growth in the cloud and a rock-solid core", adding: "We are focused on leading a best-run SAP so we can drive significant margin expansion in the quarters ahead."

Cutting costs will help with this ambition.

SAP owes its fortunes to enterprise applications like ERP software and databases, and more recently CRM; the company is aiming to eat into Salesforce market share with the recently launched C/4HANA.

But for its next stage of life, SAP said it needs to freshen up skills and is hiring more staff for a cloudy world. In January, SAP embarked on a restructuring drive, which includes axing 4,400 jobs, though it has claimed that recruitment plans mean total headcount will not fall overall.

According to German paper Handelsblatt, employees working in areas including machine learning and analytics were exempt from the purge. The firm's US and Germany payroll are expected to be hit the hardest.

SAP had said it planned to spend between €800m and €950m on restructuring, warning that most of the impact will be recognised in Q1 2019. The figure actually came in at €866m. The reorg is expected to bring in savings of €750m to €850m each year from 2020.

The "restructuring" has seen some senior heads exit the company, including cloud president Robert Enslin, who split early this month after 27 years at SAP.

Last week, Google confirmed that Enslin had joined its cloud division as president of global customer operations. Google, like AWS, is trying to bring in more old-world tech heads to attract enterprise customers.

SAP slices its entire business into three segments, and each have both a traditional software component and a cloud services component.

Which makes most of the money at SAP? The Applications, Technology & Services segment was responsible for €4.99bn in quarterly revenue, up 9 per cent – with €719m derived from cloud services, itself up 37 per cent.

This category includes the flagship S/4HANA EPR software, available either on-premises or in the cloud, which, according to SAP, now has more than 10,900 customers, up 30 per cent year-on-year.

Revenue in the Business Network segment – which includes commerce applications like Ariba, Concur and Fieldglass – was up 25 per cent to €740m year-on-year, with €626m down to cloud, up 22 per cent.

The Customer and Experience Management segment reported revenue of €305m, growing more than 100 per cent over the same quarter in 2018, with €236m from cloud services. This category includes C/4HANA and now Qualtrics. Even after a serious hike in revenue, this recently established product segment lost €11m in a quarter.

The expense of restructuring and higher acquisition-related charges and share-based compensation due to the Qualtrics purchase resulted in an operating loss €136m versus an operating profit of €1.025bn.

Despite the somewhat mixed results, shares in SAP rallied 6 per cent to an all-time high: the primary reason, according to Reuters, is that US activist investor Elliott Management Corporation revealed a €1.2bn (£1.04bn) stake in the business, and said it supported McDermott and his ruthless job cuts new management efficiency drive.

Elliott, established by billionaire Paul Singer, has a long history of interfering with the running of technology companies. Back in 2014, it famously lobbied for EMC to spin off VMware.

The Elliott stake in SAP is equivalent to around 1 per cent of total shares issued – but where the hedge fund goes, the money usually follows.

"The company's shares were clearly undervalued in relation to its revenue growth, and today's announcement lays the foundation for substantial realisation of value," said Elliott partner Jesse Cohn and portfolio manager Jason Genrich.

"Elliott sees the potential for the company to achieve earnings per share of €8.50 in 2023." ®

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