SAP lead­er­ship announced first-quar­ter finan­cial results for 2023, with CEO Chris­t­ian Klein declar­ing on April 21 that the com­pa­ny has ​“entered a pow­er­ful new phase” in its Cloud trans­for­ma­tion amid accel­er­at­ed topline growth and dou­ble-dig­it non-IFRS oper­at­ing prof­it growth.

Assess­ing the first-quar­ter per­for­mance, SAP lead­er­ship report­ed €7.44 bil­lion in total rev­enue (up 10%) and €3.18 bil­lion in Cloud rev­enue (up 24%). Accord­ing to Klein, ​“cloud momen­tum con­tin­ues at a fast pace” and fur­ther demon­strates a ​“tip­ping point” in the company’s over­all cloud trans­for­ma­tion passed in the fourth quar­ter of 2022. 

Also fea­tured in results for the quar­ter, end­ed March 31: cloud and soft­ware rev­enue was at €6.36 bil­lion (up 10%); cur­rent Cloud back­log was at €11.15 bil­lion (up 25%), dri­ven by strong adop­tion of RISE with SAP; and recent SAP S/4HANA Cloud back­log was at €3.4 bil­lion (up 78%). Mean­while, SAP S/4HANA Cloud rev­enue was at €716 mil­lion (up 77%). Both IFRS and non-IFRS Cloud gross prof­its were up 28%, fuel­ing dou­ble-dig­it non-IFRS oper­at­ing prof­it growth. IFRS oper­at­ing prof­it was down 45%, with non-IFRS oper­at­ing prof­it up 12%. 

The company’s com­bined SaaS and PaaS port­fo­lio grew by 25%, with the SaaS cloud rev­enue up 22% and PaaS cloud rev­enue up 45%; this cloud momen­tum was attrib­uted pri­mar­i­ly to con­sis­tent con­tri­bu­tions from SAP S/4HANA Cloud and SAP Busi­ness Tech­nol­o­gy Plat­form (BTP).

“Our inno­v­a­tive port­fo­lio is at the heart of our con­tin­ued growth,” said Klein. ​“In 2023, we are con­tin­u­ing to exe­cute on our focused growth strat­e­gy, with S/4HANA and BTP at the core.”

The Year Ahead

Dur­ing the finan­cial report call on April 21, SAP lead­er­ship dis­cussed the adjust­ed SAP out­look for 2023, which marks Cloud rev­enue and Cloud and soft­ware rev­enue down by €1.3 bil­lion, not­ing as well that SAP oper­at­ing prof­it will be €0.2 bil­lion less than fore­cast and free cash flow less by €0.1 billion. 

SAP announced in March that it would divest its stake in Qualtrics amid a renewed focus on its Cloud busi­ness, cur­rent­ly the company’s main dri­ver of rev­enue growth. All num­bers pro­vid­ed on the call were based on con­tin­u­ing oper­a­tions, exclud­ing con­tri­bu­tions from Qualtrics. 

Addi­tion­al­ly, SAP is pro­ceed­ing with the tar­get­ed restruc­tur­ing announced last year, which is expect­ed to impact around 3,000 employ­ees; Q1 results indi­cate that SAP now employs a work­force of 105,132. Lat­er in the call, Klein affirmed that SAP expects dou­ble-dig­it rev­enue growth in 2024, despite chal­lenges posed by the cur­rent macro­eco­nom­ic downturn.

Klein empha­sized new offer­ings from SAP, men­tion­ing GROW with SAP (a native ERP solu­tion for mid­mar­ket cus­tomers) and SAP Data­s­phere (which will allow cus­tomers to col­lect and fed­er­ate busi­ness data across their entire land­scape) as well as efforts to embed AI across the company’s port­fo­lio, which will be fur­ther detailed at SAP Sap­phire & ASUG Annu­al Con­fer­ence Orlando.

Klein added that RISE with SAP ​“has become the pre­ferred choice to our cus­tomers trans­form­ing their busi­ness­es in the cloud,” high­light­ing it along­side SAP S/4HANA Cloud, pub­lic edi­tion, as a strong­ly adopt­ed solu­tion in the first quar­ter. ​“Our offer­ings pro­vide a path­way to solve many of the fun­da­men­tal chal­lenges that com­pa­nies are fac­ing today,” he said. ​“This is behind the strong cus­tomer momen­tum we saw in Q1.”

Dominik Asam, the new­ly appoint­ed CFO for SAP, added: ​“The year is off to a good start. I am excit­ed to have joined an orga­ni­za­tion which is deliv­er­ing and stay­ing on the right track. We have accel­er­at­ed topline growth and have already achieved dou­ble-dig­it non-IFRS oper­at­ing prof­it growth in Q1. Our results set sol­id ground­work for our full-year out­look, there­by piv­ot­ing back to prof­itable growth in 2023. Say­ing what we do, and doing what we say, will con­tin­ue to be of great impor­tance to us.”

Expert Ana­lysts Offer Mea­sured Q1 Response

In the SAP ana­lyst com­mu­ni­ty, the Q1 finan­cial results were received pos­i­tive­ly, even as ques­tions remain on cus­tomer suc­cess and expe­ri­ence, AI, and SAP cus­tomers’ dig­i­tal trans­for­ma­tion journeys. 

Joshua Green­baum, Prin­ci­pal at Enter­prise Appli­ca­tions Con­sult­ing, not­ed that SAP quar­ter­ly calls tend to focus on report­ing its suc­cess in sell­ing Cloud-based solu­tions to both the installed base and net-new customers. 

“The news was def­i­nite­ly good for SAP share­hold­ers,” Green­baum said, stat­ing that ​“the con­tin­ued suc­cess of RISE with SAP as a sales-led effort to dri­ve cloud sales was evi­dent in the uptick in Cloud sales” and adding that ​“SAP gar­nered a 22% increase in SaaS and a 45% increase in PaaS sales, the lat­ter a reflec­tion of the increased empha­sis on BTP as an key­stone prod­uct for SAP’s Cloud growth.”

Green­baum con­tin­ued, how­ev­er that, ​“as impres­sive as these num­bers are, it would help the user com­mu­ni­ty more if SAP also report­ed on actu­al cus­tomer suc­cess instead of sales suc­cess and held itself account­able for improv­ing cus­tomer suc­cess instead of just sales success.”

In response to Klein’s indi­ca­tion that ​“built for busi­ness” AI offer­ings might debut at SAP Sap­phire & ASUG Annu­al Con­fer­ence Orlan­do, Green­baum expressed curios­i­ty in see­ing how SAP will ful­fill such goals amid Big Tech’s increas­ing­ly com­pet­i­tive race to dom­i­nate the gen­er­a­tive AI market.

“AI and ML came in eleventh in a list of tech­nol­o­gy pri­or­i­ties for ASUG mem­bers in the recent ASUG 2023 Pulse of the SAP Cus­tomer sur­vey, well behind oth­er pri­or­i­ties such as inte­gra­tion to non-SAP sys­tems, mov­ing to S/4HANA, and stan­dard­iz­ing busi­ness process­es,” Green­baum point­ed out. 

“SAP feels a lot of pres­sure to fol­low the indus­try hype cycle on AI,” he added. ​“Hope­ful­ly, it will con­tin­ue to err on the side of prac­ti­cal solu­tions that solve real busi­ness prob­lems, as opposed to per­for­ma­tive ini­tia­tives that are more me-too than meaningful. “

Green­baum also high­light­ed Klein’s men­tion, dur­ing the finan­cial report­ing call, of the emerg­ing SAP strat­e­gy for cus­tomer expe­ri­ence (CX), which is intend­ed to focus on key indus­tries — util­i­ties and ener­gy, retail, con­sumer prod­ucts, and auto­mo­tive — and revive ​“what has been a mori­bund cat­e­go­ry for SAP in recent years,” he said. 

“While Chris­t­ian gave few details of the strat­e­gy, the mere men­tion of CX dur­ing the earn­ings call is an indi­ca­tion of the board’s sup­port for this strat­e­gy and its archi­tect, Ritu Bhar­ga­va,” he said.

Fabio Di Capua, Gart­ner VP and Ana­lyst, Tech Prod­uct Man­ag­er, not­ed ​“good results” in the over­all SAP Q1 2023 report, point­ing out how­ev­er that the report did not dis­close any SAP S/4HANA or RISE with SAP sales numbers. 

“Non-cloud soft­ware rev­enues are slow­ly declin­ing and now account for about 50% of SAP soft­ware rev­enues,” Di Capua added, refer­ring to total rev­enues exclud­ing ser­vices. This leaves ​“quite a gap to fill to be ​‘ful­ly in the cloud’ by 2025,” he said, though SAP expects to update its mid-term ambi­tion for 2025 as part of its finan­cial ana­lyst con­fer­ence at SAP Sapphire.

“The major­i­ty of the on-premis­es rev­enues are still with the thou­sands of SAP Busi­ness Suite cus­tomers that haven’t yet decid­ed on their migra­tion to SAP S/4HANA,” said Di Capua. 

While there was no direct ref­er­ence to these cus­tomers on the call, out­side of anoth­er reminder from SAP that there will be no exten­sion of the planned time­line, ​“many of these large orga­ni­za­tions pre­fer a per­pet­u­al license engage­ment over a sub­scrip­tion mod­el or RISE with SAP com­mer­cial offer­ing,” said Di Capua. ​“Time is tick­ing, and 2027 is quick­ly approach­ing for these cus­tomers. A poten­tial wave of imple­men­ta­tion and upgrades may be soon coming.”