Quickie: SAP Q1 revenue up but so are costs related to Russia and Ukraine
Last week, Sandvik and Mensch und Maschine said that the effects of the war in Ukraine hadn’t really amounted to much as of March 30 — makes sense, since that was the first month of conflict, with sanctions just put into place. SAP’s earnings release on Friday painted a different picture. You can go here to see the results in their entirety; this post is about the financial impact of exiting business in Russia.
SAP announced that Q1 cloud and total revenue were both up 7% — better than expected — but that shutting down cloud operations and support in Russia led to a €70 million decrease in profits and lowered the cloud backlog by €60 million because the company terminated existing cloud engagements. That sounds like a lot, and objectively it is, but it’s less than 1% of SAP’s total cloud backlog.
SAP stopped all new sales in Russia and Belarus at the beginning of March, meaning that Q1 still included 2 months’ worth of revenue that will not be repeated until business there resumes. The company also announced that it has started to shut down its cloud operations and plans to stop the support and maintenance of its on-premise solutions in Russia.
For 2022, assuming nothing changes, the company expects to see revenue decrease by about €300 million, leading to a €350 million dip in the bottom line. Why so much? And why is the profit hit bigger than the revenue hit? CFO Luka Mucic explained it this way:
When we decided to discontinue our cloud data center operations [serving Russian customers], we had to actually accelerate the amortization of our data center assets because the useful life is obviously much shorter than originally anticipated and we needed to recognize this as an expense [in Q1].
In Q2, we will have a similar impact, but at a larger scale [because we will] accelerate amortization of sales commissions. We capitalize and then amortize our sales commissions for past sales over a period of time, depending on the business model. And given that we are also now looking at discontinuing our direct support and maintenance operations in Russia, we will also have to adjust here the useful life of the contracts, and therefore, also the capitalization and amortization period of sales commissions.
I know that sounds like accounting babble, but exiting Russian operations like this, all of a sudden and with no buyers for these abandoned assets will be an accounting nightmare. We can expect similar statements from other companies as they report earnings.
Anyway, in spite of all of this, SAP still reiterated its prior guidance for 2022, with cloud revenue growth expected to accelerate to 23% to 26% in constant currencies and cloud and software revenue to grow at 4% to 6%.
This week, we’ll hear from Cadence, Dassault Systemes, PTC, AspenTech, Nemetschek, Hexagon, and Addnode (the company snapping up VARs). Let’s see what they have to say.