SAP's Expected Q4 Profit Decline Belies Sturdy Growth in Cloud Revenue

SAP SE (SAP), a leading global provider of business software, probably extended a post-pandemic recovery in its cloud services segment in the fourth quarter, outpacing rival Microsoft's (MSFT) growth, even as profit slid amid increasing spending, reduced licensing revenue, and the impact of venture capital operations.

SAP, based in Germany and traded there and in the U.S., is expected to say cloud revenue increased 33% during the quarter to $3.5 billion, almost double Microsoft's 18% growth, as net income dropped about 40% to $872 million, or $1.36 per share, according to estimates from Visible Alpha. Total revenue likely rose 6% to $8.5 billion,

SAP's growth in cloud computing sales is an outlier in an increasingly challenging global economic environment for leading providers of such services. While quarterly growth likely decelerated from 38% in the previous period, cloud revenue still accounts for 40% of SAP's overall business, and growth is expected to surpass 28% for the fourth straight quarter.

Microsoft, meantime, warned of decelerating cloud growth ahead, news that rippled negatively through U.S. stock markets today. At the same time, SAP's anticipated fourth-quarter cloud revenue would surpass by 84% the $1.9 billion in sales it recorded in the fourth quarter of 2019, the last quarter prior to the pandemic.

SAP's shares, up 13% year-to-date, surged 27% in the fourth quarter, recovering some of the losses that still pushed them down 21% for all of 2022. The broader S&P 500 Information Technology index gained 4% and lost 29%, respectively, in the fourth quarter and 2022.

Costs of Growth

Unsatisfied with its existing cloud business, though, SAP has focused on expanding its growth opportunities. That expansion increased the company's research/development and sales/marketing costs 21% and 22%, respectively, in the third quarter, narrowing its operating profit margin. Those expenses likely increased again in the fourth quarter, albeit to a lesser degree.

The biggest hit to the company's earnings likely came from reduced revenue from both software licenses and Sapphire Ventures, its venture-capital unit that invests in technology opportunities. The firm also has said its effective tax rates increased in 2022, mainly from changes in tax-exempt income related to that unit.

Visible Alpha foresees the company posting a non-operating loss of $132 million in the fourth quarter, compared with non-operating income of $494 million the same period a year ago. The likely decline in overall net income in large part reflects that detrimental $626 million swing.