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SAP Reports Strong Q1 Cloud Growth, But Red Ink On The Bottom Line

Restructuring costs and expenses associated with the $4.8 billion acquisition of Qualtrics lead to a loss in the first quarter of 2019

SAP reported healthy gains in cloud and traditional software license revenue in the first quarter, but the company took a hit to the bottom line because of restructuring costs and expenses related to its recent Qualtrics acquisition.

The first quarter "is a continuation of SAP's profitable growth story," CEO Bill McDermott said during the company's earnings call Wednesday. "We are a rarity in the enterprise application business with a strong core fastest-growing cloud at scale and enterprise software and impressive operating profit growth driven by expanding cloud gross margins.

For the quarter ended March 31, SAP reported total revenue of 6.09 billion euros (U.S. $6.82 billion), up 16 percent from 5.26 billion euros (U.S. $5.89 billion) in the first quarter of 2018. But the company reported an after-tax loss of 108 million euros (U.S. $120.8 million) compared to the 708 million euros (U.S. $792.2 million) profit one year earlier.

[Related: SAP Taps Partner Organization COO Fahrbach As Its New Channel Chief]

Part of the loss is attributed to the 886 million euros cost of a company-wide restructuring plan announced in January that was expected to result in the loss of 4,400 jobs. Employment in Q1, nevertheless, was 98,659 compared to 91,120 one year before.

SAP said that "higher acquisition-related charges and share-based compensation primarily due to the Qualtrics acquisition" contributed to the loss. SAP acquired Qualtrics, a developer of experience management applications, in January for $4.8 billion.

Sales of cloud services reached 1.56 billion euros (U.S. $1.74 billion) during the quarter, up 45 percent (48 percent on a non-IFRS basis) from 1.07 billion euros (U.S. $1.20 billion) one year earlier.

"Cloud revenue exceeded 1.5 billion euros for the first time in a quarter that was up 48 percent," McDermott said, according to a transcript of the earnings call on the Seeking Alpha website. "This is a validation that SAP is the fastest growing business software company at scale in the cloud."

McDermott went on to say that SAP's cloud revenue is growing faster than such rivals as Salesforce.com and Workday.

Perhaps more surprisingly, revenue from traditional software licenses and related support, which declined in the first two quarters in 2018, was up 6 percent in the latest quarter to 3.49 billion euros (U.S. $3.90 billion) from 3.28 billion euros (U.S. $3.66 billion) one year ago.

SAP said customer implementations of the S/4HANA application suite has reached more than 10,900, up 30 percent year over year. And in the first quarter more than 40 percent of the additional S/4HANA customers were net-new customers.

For all of 2019, SAP is forecasting that cloud revenue will be in the range of 6.7 to 7.0 billion euros (U.S. $7.47 billion to $7.80 billion), up between 33 and 39 percent from 2018. Combined cloud and software revenue will be in the range of 22.4 to 22.7 billion euros (U.S. $24.97 billion to $25.30 billion), up between 8.5 and 10 percent from 2018.

"We have an incredibly strong core business with a market-leading retention rate in our support business, demonstrating tremendous customer loyalty," the CEO said. "We have a high-growth cloud portfolio powered by some of the best M&A in the enterprise software industry.

"We're perfectly positioned to capitalize on major secular trends such as the move to the cloud, digital transformation, 'Industry 4.0' and business process automation driven by AI and ML," McDermott continued. "Together, these trends contribute to a total addressable market of over 350 billion euros growing in double-digits."

The quarterly results come less than two weeks before SAP's humongous Sapphire customer and partner conference in Orlando that starts May 6.

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