SAP lead­er­ship announced sec­ond-quar­ter finan­cial results for 2023, with CEO Chris­t­ian Klein pre­dict­ing ​“sig­nif­i­cant oppor­tu­ni­ties ahead, in par­tic­u­lar through the trans­for­ma­tive pow­er of AI,” while stat­ing July 20 that the com­pa­ny had ​“anoth­er strong quarter.” 

Assess­ing the sec­ond-quar­ter per­for­mance, SAP lead­er­ship report­ed €7.55 bil­lion in total rev­enue (up 5%) and €3.3 bil­lion in Cloud rev­enue (up 19%), shy of medi­an esti­mates of €7.6 bil­lion and €3.4 bil­lion, respec­tive­ly. Sec­ond-quar­ter rev­enue growth was in line with mar­ket esti­mates, but over­all the finan­cials fell short of ana­lysts’ expectations.

SAP revised its rev­enue fore­cast for key cloud sales due to low­er-than-expect­ed trans­ac­tion­al rev­enues, with Klein cit­ing few­er pub­lic sec­tor cus­tomers in Q2 due to the cur­rent geopo­lit­i­cal land­scape, though he said ​“demand remains strong” for the sec­ond half of 2023. 

Also fea­tured in results for the quar­ter end­ed June 30: cloud and soft­ware rev­enue was at €6.505 bil­lion (up 5%); cur­rent Cloud back­log was at €11.54 bil­lion (up 21%), dri­ven by strong adop­tion of RISE with SAP; and recent SAP S/4HANA Cloud back­log was at €3.7 bil­lion (up 65%). 

Mean­while, SAP S/4HANA Cloud rev­enue was at €823 mil­lion (up 74%). Both Inter­na­tion­al Finan­cial Report­ing Stan­dards (IFRS) and non-IFRS Cloud gross prof­its were up 20%, sup­port­ed by com­ple­tion of SAP’s Next-Gen­er­a­tion Cloud Deliv­ery Pro­gram. IFRS oper­at­ing prof­it was up 28%, with non-IFRS oper­at­ing prof­it up 23%. 

The company’s com­bined SaaS and PaaS port­fo­lio grew by 20%, with the SaaS cloud rev­enue up 19% and PaaS cloud rev­enue up 47%. This cloud momen­tum was attrib­uted pri­mar­i­ly to increased cloud rev­enue, sup­port­ed by con­sis­tent con­tri­bu­tions from SAP S/4HANA Cloud and SAP Busi­ness Tech­nol­o­gy Plat­form (BTP).

For the full year, SAP low­ered its cloud rev­enue out­look to €14 billion-14.2 bil­lion (from €14 billion-14.4 bil­lion), and slight­ly shift­ed its fore­cast for its non-IFRS oper­at­ing prof­it to €8.65 billion‑8.95 bil­lion (from €8.6 billion‑8.9 bil­lion). Fol­low­ing Thursday’s release of the finan­cial results, which missed Wall Street esti­mates, SAP stock closed the day down 6.34%.

‘On the Right Trajectory’

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. 

Ear­ly in the sec­ond quar­ter, SAP com­plet­ed the migra­tion of its cloud cus­tomer base to its ​“state-of-the-art, har­mo­nized cloud infra­struc­ture,” accord­ing to the earn­ings report. More than 20,000 cus­tomers and half a mil­lion ten­ants (enti­ties used to sep­a­rate data of dif­fer­ent cus­tomers of a plat­form own­er from each oth­er) migrat­ed through the cloud deliv­ery pro­gram, ini­ti­at­ed at the begin­ning of 2021. 

“We are very pleased with our first half results,” Dominik Asam, CFO, said. ​“The rev­enue growth and increased prof­itabil­i­ty, com­bined with sus­tained growth of our cloud back­log, demon­strate the strength of our busi­ness mod­el. Q2 per­for­mance puts us on the right tra­jec­to­ry and allows us to raise our cloud and soft­ware rev­enue, as well as the oper­at­ing prof­it out­look for the year.” 

Else­where, Asam not­ed that SAP achieved net car­bon emis­sions of 0 kilo­tons, and affirmed that SAP is focused on reach­ing net zero emis­sions across its val­ue chain by 2030. 

“To get there, we’re estab­lish­ing a mul­ti­phase sup­ply chain engage­ment pro­gram with our sup­pli­ers to sig­nif­i­cant­ly reduce our upstream green­house gas emis­sions,” he said. ​“As a first step, we’re work­ing with our top 100 sup­pli­ers to ensure they report emis­sions at prod­uct lev­el and fol­low a net-zero plan, lever­ag­ing our own tech­nol­o­gy to do so.” 

SAP’s AI Roadmap for Pre­mi­um RISE and GROW

Build­ing on SAP’s July 18 announce­ment of strate­gic direct invest­ments in three gen­er­a­tive AI com­pa­nies (Aleph Alpha, Anthrop­ic, and Cohere), Klein dis­cussed SAP’s com­mit­ment to deliv­er ​“SAP Busi­ness AI that’s rel­e­vant, reli­able, and respon­si­ble” and states that he sees ​“sig­nif­i­cant pos­si­bil­i­ties for mar­ket expan­sion through these tech­nolo­gies and new pre­mi­um offerings.” 

On the earn­ings call, Klein called RISE with SAP the most pop­u­lar choice for SAP cus­tomers mov­ing to the cloud, and men­tioned GROW with SAP for mid­mar­ket cus­tomers. Klein announced plans to intro­duce pre­mi­um RISE and GROW offer­ings ​“with an uplift of 30%” in the fall, as part of its approach to SAP Busi­ness AI. Klein indi­cat­ed that this 30% pre­mi­um will accom­pa­ny all solu­tions with embed­ded gen­er­a­tive AI capa­bil­i­ties. Exist­ing or future RISE will have the option of select­ing a stan­dard RISE offer­ing or a pre­mi­um offer­ing with embed­ded gen­er­a­tive AI capabilities. 

Klein stat­ed that SAP does not plan to offer gen­er­a­tive AI, sus­tain­abil­i­ty, and oth­er dif­fer­en­ti­at­ing capa­bil­i­ties in on-premis­es edi­tions of its line-of-busi­ness prod­ucts, lim­it­ing these capa­bil­i­ties to cloud solu­tions. In a sig­nif­i­cant shift from pre­vi­ous SAP announce­ments, Klein’s com­ments revealed that SAP’s new inno­va­tions will only be avail­able in SAP S/4HANA Cloud, pub­lic edi­tion or SAP S/4HANA Cloud, pri­vate edi­tion through GROW with SAP or RISE with SAP.

“Part of dig­i­tal trans­for­ma­tion is to be able to dri­ve val­ue and ear­ly return on that invest­ment, and that’s where AI becomes an accel­er­a­tor,” Scott Rus­sell, Head of Cus­tomer Suc­cess at SAP, said. 

“If you’re a new cus­tomer, embed­ding AI into RISE or GROW with SAP, to accel­er­ate val­ue, is a rea­son to move for­ward quick­ly,” he added. ​“And for our large num­ber of cus­tomers that have already moved across, they have the abil­i­ty to not only have their exist­ing cloud trans­for­ma­tion but then have a pre­mi­um uplift. Ease of inno­va­tion adop­tion is one of the beau­ties of this program.” 

SAP antic­i­pates that gen­er­a­tive AI will trans­form its busi­ness and pledged to invest more than $1 bil­lion in AI-pow­ered tech­nol­o­gy star­tups through Sap­phire Ven­tures, its enter­prise cap­i­tal firm. In May, SAP and IBM announced IBM Wat­son technology will be embed­ded into a range of SAP solu­tions to pro­vide new AI-dri­ven insights and automation. 

“It’s clear that gen­er­a­tive AI will fun­da­men­tal­ly change the way busi­ness­es run,” Klein said. ​“In the busi­ness world, no one is bet­ter posi­tioned than SAP to empow­er busi­ness­es to take advan­tage of this trans­for­ma­tion­al moment.” 

Expert Ana­lyst Offers Per­spec­tive

In the SAP ana­lyst com­mu­ni­ty, Joshua Green­baum, Prin­ci­pal at Enter­prise Appli­ca­tions Con­sult­ing, point­ed to the ​“sig­nif­i­cant 74% year-to-year growth for SAP S/4HANA Cloud rev­enue” as one more pos­i­tive out­come of the sec­ond-quar­ter finan­cials, par­tic­u­lar­ly as S/4 growth in Q2 2022 was 84% high­er than in the pre­vi­ous year. ​“That’s a lot of con­tin­u­ous growth, which also indi­cates that demand is grow­ing con­sis­tent­ly as well,” he said.

For Green­baum, the Q2 finan­cial results pro­voked ques­tions about the SAP cloud port­fo­lio out­side of SAP S/4HANA, AI, and the cur­rent empha­sis on RISE and GROW. ​“Even though S/4HANA sales were up sig­nif­i­cant­ly, Con­cur and Field­glass — two oth­er very impor­tant SaaS prod­ucts — suf­fered from the prover­bial ​‘head­winds’ that Wall Street fears so much,” Green­baum said. 

SAP Busi­ness Net­work was also cit­ed in the ​“head­winds” cat­e­go­ry, though it remains a nascent, rel­a­tive­ly unknown offer­ing in the SAP port­fo­lio. Green­baum not­ed that oth­er SaaS prod­ucts, espe­cial­ly SAP Suc­cess­Fac­tors, were not dis­cussed dur­ing the earn­ings call. ​“Con­sid­er­ing that S/4HANA sales made up 25% of the total cloud rev­enue and grew at 74% year to year, the fact that the rest of the cloud port­fo­lio only grew at 19% year to year indi­cates that growth in the rest of the port­fo­lio was lag­ging,” he said. 

As Klein stat­ed on the earn­ings call that SAP inno­va­tions in ERP, sus­tain­abil­i­ty, AI, and oth­er domains will not be avail­able in any on-premis­es sys­tems, instead focus­ing on cur­rent cloud cus­tomers and those migrat­ing to the cloud through RISE and GROW, Green­baum ques­tioned whether this lat­est push for cus­tomers to move to SAP S/4HANA Cloud, pub­lic edi­tion would cre­ate con­fu­sion as to the sta­tus of on-premis­es SAP S/4HANA deploy­ments or hyper­scaler-host­ed imple­men­ta­tions out­side of RISE. Green­baum con­nect­ed this piv­ot to ​“SAP’s dif­fi­cul­ties keep­ing Wall Street hap­py by push­ing RISE and GROW.”

Final­ly, Green­baum respond­ed to Klein’s com­ments around AI, specif­i­cal­ly not­ing his dis­cus­sion of pre­mi­um RISE offer­ings and express­ing skep­ti­cism on this count. 

“The big news on the AI front,” he said, ​“is that SAP plans on charg­ing a 30% pre­mi­um for its gen­er­a­tive AI capa­bil­i­ties, some­thing that will be hard for cus­tomers to swal­low unless SAP does a bet­ter job prov­ing there’s mea­sur­able val­ue behind the hype of gen­er­a­tive AI. The jury is still out on that issue in the enterprise.”