SAP Reports Strong Q1 Sales Growth, But Slimmer Profits

SAP more than doubled its cloud subscription and service revenue in its first quarter, helping to boost the software company's overall sales growth to an impressive 22 percent.

The Walldorf, Germany-based company also reported strong growth in its business network segment and early signs of customer adoption of the recently introduced SAP Business Suite 4 SAP HANA (S/4HANA) line of ERP applications.

But a 30 percent increase in operating expenses, including significant growth in employee headcount, took its toll on the company's operating margin and cut its bottom-line earnings by 23 percent.

[Related: SAP Launches New Predictive Analytics, Data Visualization Apps With Eye On SMB Customers]

"SAP S/4HANA saw robust early traction and is catalyzing momentum across SAP," CEO Bill McDermott said in a statement. "We are a strong growth company, with every region growing in double digits in cloud and software revenue this quarter."

For the first quarter of fiscal 2015 ended March 31, SAP reported total revenue of just less than 4.5 billion euros ($4.81 billion), up 22 percent from 3.70 billion euros ($3.96 billion) in the same period last year.

SAP is juggling multiple product transitions with the move to cloud computing the most significant. Once focused on developing on-premise business software, the company has been transforming itself to become a provider of cloud-based applications. Some of that has come through such acquisitions as the 2012 buyout of SuccessFactors, a developer of cloud-based human capital management applications, and in-house development of new cloud software.

SAP reported that revenue from cloud subscriptions and support in the first quarter grew 129 percent to 503 million euros ($537.5 million) from 219 million euros ($234.1 million) in the first quarter of fiscal 2014.

Software developers making the jump to cloud computing often find that sales growth of cloud services comes at the expense of on-premise product sales. But revenue from SAP's traditional software licenses and support grew 16 percent in the first quarter to 3.15 billion euros ($3.37 billion) from 2.72 billion euros ($2.91 billion) in last year's first quarter.

Revenue generated by the recently formed SAP Business Segment totaled 368 million euros ($393.7 million), up 207 percent year over year. The segment incorporates software from several SAP acquisitions: Ariba, Concur and Fieldglass -- all in the business-to-business procurement and vendor management area.

SAP said customer adoption of HANA, the company's in-memory compute engine that's become a platform for the vendor's product development efforts, has almost doubled from one year ago to more than 6,400 businesses.

In February SAP debuted S/4HANA, the next generation of the company's core ERP application suite that's designed to eventually replace the current flagship SAP Business Suite product line. While the new software has only been available for a short time, the company said 370 customers have acquired it.

SAP's annual Sapphire Now conference is set for early May and stepped-up information about S/4HANA, including customer training and partner opportunities, is likely to be a big theme of the show, said Akhilesh Tiwari, the global head of the SAP practice at Tata Consultancy Services, a leading SAP partner. In an interview Tiwari also said that SAP's move to the cloud is generating more demand for Tata Consultancy Services' business process management services.

While SAP reported strong sales growth, a whopping 30 percent increase in the company's operating expenses took a toll on profit margins. For the first quarter total operating expenses were 3.86 billion euros ($4.13 billion) compared to 2.98 billion euros ($3.18 billion) one year ago.

Those increased expenses included a 12 percent increase in SAP's total employee headcount to 74,551. That's despite SAP's announcement last month that it plans to eliminate 2,250 jobs this year as part of its shift to cloud computing. At the time SAP said it expected to create an equal number of new jobs in its growth areas.

PUBLISHED APRIL 21, 2015