ASUG reports quar­ter­ly on SAP’s finan­cial results; gain insights now into the com­pa­ny’s Q2 and Q3 2024 results.

SAP lead­er­ship announced first-quar­ter finan­cial results for 2024, with CEO Chris­t­ian Klein declar­ing the com­pa­ny is ​“off to a great start” for the year, dri­ven by cloud growth and an increase in oper­at­ing prof­it as cus­tomers plan their cloud migra­tions and seek to har­ness arti­fi­cial intel­li­gence (AI) func­tion­al­i­ties for business.

Assess­ing the first-quar­ter per­for­mance, SAP lead­er­ship report­ed €8 bil­lion in total rev­enue (up 9%) and €3.9 bil­lion in cloud rev­enue (up 25%), with cur­rent cloud back­log grow­ing by 28%, to €14.2 bil­lion. Oper­at­ing prof­it rose to €1.5 bil­lion, mark­ing a 19% year-over-year increase. 

Accord­ing to Klein, key growth dri­vers for SAP this quar­ter includ­ed cross-sell­ing across the cloud port­fo­lio via RISE with SAP, its ini­tia­tive to move large-enter­prise installed-base cus­tomers to the cloud; busi­ness AI inno­va­tions rolling out across its suite; and GROW with SAP, its cloud ERP imple­men­ta­tion ini­tia­tive for net-new cus­tomers in the midmarket.

“The strength of our cur­rent cloud back­log reach­ing a record growth rate is a tes­ta­ment to that momen­tum,” he added. ​“Our trans­for­ma­tion pro­gram is also well on track and will help us to cap­ture this growth and increase efficiency.”

Key take­aways from the April 22 earn­ings call, investor tele­con­fer­ence, and Wall Street’s reaction:

• SAP’s Q1 cloud momen­tum includ­ed a sub­stan­tial 25% rise in cloud rev­enue and a 28% increase in cur­rent cloud back­log, the fastest growth on record.
• SAP intro­duced a new dis­clo­sure in Cloud ERP Suite, which indi­cates how SAP is exe­cut­ing on mov­ing its installed on-premis­es base to the cloud, and report­ed 32% growth in this area, to €3.2 billion.
• GROW with SAP gained 100 new cus­tomers, with a 64% share of net-new cus­tomers in Q1.
• SAP report­ed IFRS cloud gross prof­it of €2.84 bil­lion (up 27%) and non-IFRS cloud gross prof­it of €2.85 bil­lion (up 28%), as well as an IFRS oper­at­ing loss of –€0.8 bil­lion, due to a €2.2 bil­lion restruc­tur­ing provision.
• Soft­ware license rev­enue decreased by 25%, reflect­ing the market’s shift to cloud solutions. 
• SAP report­ed non-IFRS oper­at­ing prof­it at €1.53 bil­lion (up 19%), even includ­ing high­er share-based com­pen­sa­tion result­ing from a strong share price increase.
• SAP reit­er­at­ed its 2024 out­look; Cloud rev­enue is expect­ed to increase 24 – 27% in 2024, giv­en its growth in 2023. The company’s 2024 out­look projects cloud rev­enue between €17 and 17.3 bil­lion and fur­ther growth in non-IFRS oper­at­ing profit.
• Fol­low­ing the pub­li­ca­tion of SAP’s finan­cial results, shares of SAP SE rose 2.7% in pre­mar­ket trad­ing last Tues­day; despite the first-quar­ter results miss­ing on both top and bot­tom lines, ana­lysts saw the results as rep­re­sent­ing a sol­id over­all update buoyed by con­tin­ued cloud growth.

Inside the Finan­cial Results

SAP is in the midst of an inter­nal restruc­tur­ing pro­gram that will affect around 8,000 SAP employ­ees, through a vol­un­tary buy­out pro­gram and a reskilling ini­tia­tive aimed at ensur­ing employ­ees can embrace busi­ness AI inno­va­tions. Even with this restruc­tur­ing, Klein said that he expects the company’s head­count to remain con­sis­tent with the close of 2023. 

“In the first quar­ter we suc­cess­ful­ly kicked off the imple­men­ta­tion of our trans­for­ma­tion pro­gram there­by allow­ing us to focus our invest­ments on the Busi­ness AI oppor­tu­ni­ty while decou­pling expense from rev­enue growth,” said Dominik Asam, SAP Chief Finan­cial Officer. 

Added Klein: ​“The pro­gram will help us to cap­ture growth and increase effi­cien­cy at the same time, among oth­er things, by push­ing the inter­nal use of AI. We expect a triple-dig­it-mil­lion amount in effi­cien­cies from embed­ding AI across all our processes.”

SAP has released more than 30 new AI sce­nar­ios across its cloud port­fo­lio, with more than 100 use cas­es in the pipeline. Joule, the company’s dig­i­tal copi­lot, will serve as the user expe­ri­ence front-end for busi­ness AI inno­va­tions, which will be embed­ded across the SAP cloud portfolio. 

Klein stressed the impor­tance of elim­i­nat­ing cus­tom code in core ERP sys­tems for SAP cus­tomers to migrate to SAP S/4HANA Cloud, pub­lic edi­tion. ​“As part of RISE and via the clean core jour­ney,” he said, ​“SAP and our ecosys­tem will help our cus­tomers to remove the ERP cus­tom code and instead devel­op inte­grat­ed ERP exten­sions on SAP Busi­ness Tech­nol­o­gy Plat­form (BTP).”

On the ana­lyst call, Klein also extolled the val­ue of GROW with SAP for small and mid­size enter­pris­es. ​“As SAP’s green­field cloud ERP offer­ing for net-new cus­tomers or new busi­ness units of large enter­pris­es, GROW deliv­ers go lives in weeks for every busi­ness mod­el in every indus­try in every coun­try,” he said. ​“With our ERP solu­tion, SME cus­tomers can grow and scale their busi­ness with­out migrat­ing to a new ERP. Ulti­mate­ly, RISE and GROW offer cus­tomers sim­i­lar advan­tages, inno­va­tion, mod­u­lar­i­ty, scal­a­bil­i­ty, and integration.”

“In our first quar­ter earn­ings results for 2024, we saw strong growth and cus­tomer adop­tion among Intel­li­gent Spend Man­age­ment, SAP Suc­cess­Fac­tors and Cloud ERP, dri­ven by RISE with SAP and GROW with SAP,” said Lloyd Adams, Pres­i­dent of SAP North Amer­i­ca, in an offi­cial statement.

“SAP’s cloud rev­enue per­for­mance was par­tic­u­lar­ly robust in the Amer­i­c­as region,” Adams stat­ed. ​“Orga­ni­za­tions like Churchill Downs (CDI) select­ed SAP S/4HANA Cloud Pub­lic Edi­tion to sup­port their finan­cial tech­nol­o­gy trans­for­ma­tion as CDI con­tin­ues to grow with­in the rac­ing, online wager­ing, and gam­ing enter­tain­ment indus­tries. In addi­tion, we con­tin­ue to see a num­ber of cus­tomers uti­liz­ing Joule, our gen­er­a­tive AI copi­lot that will trans­form their businesses.”

Addi­tion­al cus­tomers that pur­chased SAP solu­tions or went live on SAP solu­tions included:

• Suther­land select­ed SAP S/4HANA Cloud, pub­lic edi­tion, to fur­ther enhance its data-dri­ven deci­sion-mak­ing and unlock deep­er insights into client needs.
• PureTech Sci­en­tif­ic went live on SAP S/4HANA Cloud, pub­lic edi­tion. With the move to the cloud, PureTech Sci­en­tif­ic is focused on pur­su­ing growth oppor­tu­ni­ties in new mar­kets and exe­cut­ing new capa­bil­i­ties for customers.
• Clear­way Ener­gy Group, head­quar­tered in San Fran­cis­co, select­ed RISE with SAP, SAP S/4HANA Cloud, SAP Indus­try solu­tions for Util­i­ties, Dig­i­tal Sup­ply Chain, SAP Suc­cess­Fac­tors, SAP Busi­ness Tech­nol­o­gy Plat­form, SAP Ana­lyt­ics Cloud, SAP Intel­li­gent Spend and Busi­ness Net­work, and SAP Sig­navio for its transformation.
• Cana­di­an retail­er the ALDO Group has gone live with SAP Suc­cess­Fac­tors and now lever­ages SAP tech­nol­o­gy to man­age pay­rolls of employ­ees in Cana­da and the Unit­ed States. Through imple­men­ta­tion of a uni­fied HR and finance solu­tion across the com­pa­ny, the ALDO Group ben­e­fits from an aligned HR and IT mod­el and reduced oper­at­ing costs.

Expert Ana­lysts Offer Perspective 

​“It was clear­ly a strong quar­ter” for SAP, said Josh Green­baum, prin­ci­pal at Enter­prise Appli­ca­tions Con­sult­ing, par­tic­u­lar­ly in terms of con­tin­ued cloud growth. Behind the num­bers, though, remain ​“thou­sands of SAP cus­tomers who haven’t moved to upgrade either their SAP ERP Cen­tral Com­po­nent (ECC) or old­er SAP S/4HNA imple­men­ta­tions,” he added. ​“The imper­a­tive is real: many of these cus­tomers’ sys­tems — SAP ECC and SAP S/4HANA — will soon be out of support.” 

SAP is hold­ing to its announced 2027 dead­line for end of main­stream main­te­nance for SAP Busi­ness Suite 7, which includes SAP ECC, and Klein focused remarks to ana­lysts on the company’s busi­ness-AI, ​“in par­tic­u­lar express­ing the hope that AI will become an impor­tant rea­son for cus­tomers to migrate their lega­cy sys­tems,” accord­ing to Greenbaum. 

To do so effec­tive­ly, SAP must present strong evi­dence that its ​“net-new AI capa­bil­i­ties, based on gen­er­a­tive AI and Joule, are gen­er­at­ing mean­ing­ful rev­enue and mea­sur­able pro­duc­tiv­i­ty gains for cus­tomers,” Green­baum added. Exist­ing capa­bil­i­ties in appli­ca­tions such as SAP Inte­grat­ed Busi­ness Plan­ning (IBP), large­ly pow­ered by AI algo­rithms, ​“could by them­selves be ade­quate to jus­ti­fy deploy­ing these solu­tions along­side a mod­ern, upgrad­ed SAP S/4HANA,” he stat­ed, sug­gest­ing that SAP should empha­size those capa­bil­i­ties, which pre­ced­ed the cur­rent AI hype cycle, along­side new­er busi­ness AI capa­bil­i­ties with which it seeks to incen­tivize cus­tomers to accel­er­ate their SAP S/4HANA migra­tions and upgrades.

Jon Reed, inde­pen­dent ERP mar­ket ana­lyst and co-founder of Dig­i­nom­i­ca, called net-new cus­tomer acqui­si­tion via GROW a ​“bright spot” for SAP this quar­ter amid its efforts to move cus­tomers to SAP S/4HANA Cloud, pub­lic edi­tion, which he expects to accel­er­ate as SAP looks toward fur­ther announce­ments at SAP Sap­phire in June.

“SAP’s results indi­cate to me that the aggres­sive pur­suit of cloud and AI is pro­vid­ing a for­ward-think­ing view for the com­pa­ny that is ener­giz­ing inter­nal­ly and with share­hold­ers,” Reed said. ​“SAP will have to fol­low through on AI with some sub­stan­tial gains for cus­tomers in pro­duc­tiv­i­ty, but that is a good and wel­come chal­lenge for SAP. I think cus­tomers too are moti­vat­ed by AI to move to the cloud, just as Chris­t­ian Klein said in this earn­ings call.”

That’s in part because busi­ness AI will be pri­mar­i­ly acces­si­ble to cloud cus­tomers via RISE and GROW, Reed explained. ​“I believe in mak­ing at least some AI inno­va­tions avail­able to all cus­tomers, but I do believe SAP has some good rea­sons for the cloud/​business AI empha­sis, giv­en the economies of scale that can be achieved in SaaS prod­ucts like SAP Suc­cess­Fac­tors and SAP S/4HANA Cloud, pub­lic edi­tion,” he said.

Final­ly, Reed reflect­ed on the role ASUG can play in help­ing SAP cus­tomers plan their cloud migra­tions and con­sid­er imple­men­ta­tion of busi­ness-AI inno­va­tions. ​“As cus­tomers look to under­stand all aspects of a suc­cess­ful cloud move, includ­ing get­ting lead­er­ship buy-in, man­ag­ing change, and get­ting more specifics on adopt­ing RISE/GROW,” he said, ASUG can serve as ​“a valu­able resource” for edu­ca­tion, includ­ing at ASUG Annu­al Con­fer­ence in June 2024, where pow­er peer groups and cus­tomer pan­els will dive into all these issues and more.