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SAP's operating profit has fallen 45 per cent year-on-year in the fourth calendar quarter of 2021 to 1.47bn as cloud investments drag on profitability.

Despite boasting 17 per cent growth in cloud revenue to 9.4bn, the full-year results also show the pain involved as one of the world's largest software vendors attempts to transition to a new business model.

On a call with investors, CEO Christian Klein said: "These are very strong results during a challenging time for most businesses. They demonstrate the confidence our customers have in SAP and in the unique value we offer in helping them address an unprecedented set of challenges. We are optimistic about the year ahead and we are well on track to achieving our 2025 ambitions."

He pointed out that the company still serves a "massive on-premise installed base of more than 30,000 ERP customers" compared with "nearly 5,000 S/4HANA cloud customers" those adopting both the last in-memory ERP platform and the cloud delivery model.

It seems like an impressive turnaround. In October 2020, SAP's shares took a massive 25 per cent hit as the company adjusted investor guidance to buy itself time to execute a "new strategy" of shifting on-prem software licence customers to the cloud and investing heavily in cloud R&D. But those investments are unsurprisingly weighing down the German software vendor's profitability.

Speaking to investors, CFO Luka Mucic said: "As we had stated already late in 2020, we are going through a major overhaul of our cloud delivery infrastructure. We are migrating all of our remaining customers who are still on legacy infrastructures across various solutions on this harmonised cloud infrastructure. And that results in a cost across 2021 and 2022 of a mid-triple-digit million-euro figure.

"At the outset of the program in the first half-year, the spend portion that related to 2021 was more spend in R&D to prepare our solutions for some of the migration aspects and since the second half of the year, it essentially was hitting the cloud margins."

Bear in mind that cloud revenue is supposed to be the long-term saviour for SAP. Investors, rather than customers, want to see a rapid shift to the cloud so the application vendor is seen as being on par with cloud-only providers such as Salesforce, Workday or ServiceNow.

In October 2020, Mucic said that in the long term it would be "increasing customer lifetime revenue" with the subscription model and not only providing software and support services, but also the IT infrastructure and operational services in many cases. "We are effectively expanding our share of the wallet," Mucic said.

But one analyst on the most recent investor call questioned whether the transition was going as planned as there "seems to have been less substitution from [on-prem] maintenance to cloud despite the cloud strength."

Mucic said support revenue remains "extremely resilient" as there was "no real churn away from SAP."

While the plan to lift, shift, and transform customers onto the cloud, launched last year as RISE with SAP, was "extremely healthy", it needs to ramp up to see a shift from on-prem support to cloud revenue.

"That might change over time as more of those big, large RISE contracts are then going through [and] the support revenues are declining," he said. For 2025, SAP wanted to have 22bn in cloud revenues leaving 8.5bn in support revenues down from around 11.5bn, Mucic said.

Full-year software licences and support revenue for SAP in 2021 was 14.7bn, falling at 4 per cent year-on-year. Of that, software licences revenue was 3.25bn, down 11 per cent year-over-year.

Assuming support continues to fall at about the same rate, it would only fall to 9.8bn in the four years from 2021 to 2025, short of Mucic's target. It might appear already to be lagging behind SAP's ambition.

SAP is a huge, 27.8bn revenue business with thousands of customers loyal to its ERP platform. But it is walking a high wire. On the one side is the peril of shifting on-prem customers too quickly and leaving behind lucrative software licence and support deals, on the other is moving too slowly and failing to appease investors demanding a cloud-only SaaS style company.

In the meantime, it is making a significant investment in products and cloud infrastructure to give customers somewhere to move to. For the moment it seems steady on its feet, but it wouldn't take much of a wobble to slip up.

Look again at its 30,000 on-prem ERP customers compared with 5,000 S/4HANA cloud customers. Its annual S/4HANA cloud revenue is just 1.1bn, 4 per cent of its total revenue. Clearly it has a long way to go before it can step off the wire onto solid ground.

More:
Despite growth, questions remain over whether SAP can get customers off-prem fast enough to appease investors - The Register