SAP lead­er­ship announced third-quar­ter finan­cial results for 2023, with CEO Chris­t­ian Klein hold­ing up con­tin­ued cloud growth as ​“yet anoth­er proof point” that SAP has entered the ​“accel­er­a­tion phase” of its transformation.

Assess­ing the third-quar­ter per­for­mance, SAP lead­er­ship report­ed €7.74 bil­lion in total rev­enue (up 4%) and €3.47 bil­lion in Cloud rev­enue (up 16%), main­ly dri­ven by the growth of the company’s com­bined SaaS and PaaS port­fo­lio. The third quar­ter earn­ings beat esti­mates, though rev­enue slight­ly missed Wall Street tar­gets, but SAP stock rose as the com­pa­ny reaf­firmed its 2023 rev­enue fore­cast for key cloud sales. 

Fea­tured in results for the quar­ter, end­ed Sep­tem­ber 30: cloud and soft­ware rev­enue was at €6.68 bil­lion (up 4%); cur­rent Cloud back­log, refer­ring to future rev­enue SAP expects to rec­og­nize from con­tracts with cus­tomers, was at €12.27 bil­lion (up 19%); recent SAP S/4HANA Cloud back­log was at €4.2 bil­lion (up 58%); and SAP S/4HANA Cloud rev­enue was at €914 mil­lion (up 67%), dri­ven by the con­tin­ued momen­tum of the company’s RISE and GROW campaigns.

Both Inter­na­tion­al Finan­cial Report­ing Stan­dards (IFRS) and non-IFRS Cloud gross prof­its were up 21%, sup­port­ed by a sig­nif­i­cant increase in cloud gross mar­gins. IFRS oper­at­ing prof­it was up 11%, with non-IFRS oper­at­ing prof­it up 10%. The company’s com­bined SaaS and PaaS port­fo­lio grew by 19%. This momen­tum was attrib­uted pri­mar­i­ly due to increased cloud rev­enue, sup­port­ed by con­sis­tent con­tri­bu­tions from SAP S/4HANA Cloud and SAP BTP.

Key take­aways from the Oct. 18 earn­ings call, investor tele­con­fer­ence, and Wall Street’s reaction:

• SAP’s Q3 2023 finan­cial per­for­mance was dri­ven by strength in its cloud busi­ness, with cloud rev­enue grow­ing by 16% and cur­rent cloud back­log up 19%.
• On the earn­ings call, SAP exec­u­tives empha­sized the company’s for­ward motion on busi­ness AI inno­va­tions and progress in the adop­tion of SAP S/4HANA Cloud by large enter­prise cus­tomers.
• Despite strong cloud growth, SAP nar­row­ly missed its rev­enue goals, poten­tial­ly due to the decrease in soft­ware license rev­enue, but still beat expec­ta­tions, with US-trad­ed shares ris­ing 3% in extend­ed trad­ing after earn­ings were released.
• More than 22,000 live cus­tomers of SAP Busi­ness Tech­nol­o­gy Plat­form (BTP), described by lead­er­ship as the ​“foun­da­tion of SAP’s suc­cess sto­ry,” con­tributed to almost 50% of the company’s cloud rev­enue growth in its PaaS business.
• SAP reached 4,3000 RISE with SAP cus­tomers (11 quar­ters after the launch of RISE) and 440 GROW with SAP cus­tomers (three quar­ters after the launch of GROW); more than 80% of RISE and GROW cus­tomers use BTP to inte­grate and extend their cloud ERP port­fo­lio, accord­ing to Klein.
• SAP remains on track to achieve its 2025 ambi­tions.

Insights on Busi­ness AI, ​‘Pre­mi­um Plus’ RISE, and Con­ver­sion Programs

SAP lead­er­ship empha­sized its invest­ment in the busi­ness AI space as one area of on-going inno­va­tion, with Klein express­ing excite­ment about the val­ue of SAP build­ing its own foun­da­tion­al data mod­el and not­ing that SAP already has con­sent from ​“thou­sands of cus­tomers” to devel­op and train this data mod­el along with its AI use cases.

“For us, it’s key that we now infuse all our data in this neur­al net­work and that we have a knowl­edge graph which can then find the right data, depend­ing on the type of ana­lyt­i­cal ques­tion, task, or activ­i­ty the end user has,” Klein said, adding that SAP will also engage its part­ner net­works to lever­age their Large Lan­guage Mod­el (LLM) capa­bil­i­ties for Joule, its recent­ly announced vir­tu­al assis­tant.

“Let’s be clear: this is just the begin­ning,” Klein said. ​“Over time, busi­ness AI will have a rev­o­lu­tion­ary impact on the entire busi­ness land­scape, and SAP will be at the cen­ter of that.”

On the investor tele­con­fer­ence call, Klein referred to SAP’s new­ly announced ​“pre­mi­um plus” pack­age for RISE, which incor­po­rates sus­tain­abil­i­ty insights relat­ed to SAP’s ​“green ledger,” gen­er­a­tive AI capa­bil­i­ties avail­able through its Joule vir­tu­al assis­tant, and added capa­bil­i­ties for finance fore­cast­ing spend man­age­ment, and cash flow optimization.

The pre­mi­um plus pack­age bun­dles in var­i­ous in-demand ser­vices that would cost cus­tomers more to pur­chase indi­vid­u­al­ly, though its gen­er­a­tive AI capa­bil­i­ties will be priced via ​“AI units,” with a set amount of AI units includ­ed in the pack­age and addi­tion­al usage-based charges for cus­tomers seek­ing to lever­age more. Details on this strat­e­gy are said to be forth­com­ing. ​“It also sim­pli­fies how our cus­tomers con­sume AI with a new con­sump­tion-ori­ent­ed license mod­el,” Klein said.

“We’re also offer­ing AI embed­ded in our prod­ucts with a con­sump­tion-based pric­ing, so you don’t have to go for the pre­mi­um pack­age all at once,” he lat­er told investors. ​“You can also con­sume busi­ness AI as part of our solu­tions in a pure, con­sump­tion-based pric­ing mod­el. We’re giv­ing cus­tomers choice, which I feel is the right way to go.”

Klein also referred to a new con­ver­sion pro­gram for RISE, aimed at guid­ing more cus­tomers toward the cloud and allow­ing them to move at their own pace. ​“This pro­gram offers fur­ther com­mer­cial incen­tives to sup­port our cus­tomers on their trans­for­ma­tion jour­neys and accel­er­ate their move to SAP’s cloud ERP,” he said.

Fur­ther Results

Sup­port­ed by a few major trans­ac­tions, includ­ing the Sept. 7 announce­ment that SAP plans to acquire LeanIX—a leader in enter­prise archi­tec­ture man­age­ment soft­ware — next quar­ter, soft­ware licens­es rev­enue was at €335 mil­lion (down 17%).

SAP con­tin­ues to antic­i­pate over­all cloud rev­enue in the range of €14-€14.2 bil­lion for 2023, with cloud and soft­ware rev­enue between €27-€27.4 bil­lion, non-IFRS oper­at­ing prof­it in the range of €8.65-€8.95 bil­lion, and free cash flow esti­mat­ed to be €4.9 billion.

In the third quar­ter, SAP report­ed strong cloud rev­enue growth in APJ (up 14%) and EMEA (up 30%), with ​“sol­id” results in the Amer­i­c­as region (up 8%). Brazil, India, and Switzer­land also saw high cloud rev­enue growth, while Cana­da, Chi­na, France, Ger­many, Japan, and Switzer­land per­formed strong­ly as well.

“Our Q3 results are yet anoth­er proof point that we have entered the next phase of our trans­for­ma­tion,” Klein said in an offi­cial state­ment. ​“We accel­er­at­ed cloud growth across our port­fo­lio and sig­nif­i­cant­ly expand­ed our cloud gross mar­gins. Our strong focus on inno­va­tion, includ­ing our lat­est SAP Busi­ness AI capa­bil­i­ties, ensure SAP’s con­tin­ued resilien­cy in the face of tough macro­eco­nom­ic con­di­tions and increas­ing geopo­lit­i­cal tensions.”

Added Dominik Asam, Chief Finan­cial Offi­cer at SAP: ​“Our Q3 results demon­strate strong exe­cu­tion and the resilience of our busi­ness, includ­ing sus­tained cloud growth in spite of per­sist­ing macro head­winds. Also, we care­ful­ly bal­ance growth and prof­itabil­i­ty at all times. In com­bi­na­tion, this allows us to boost our bot­tom-line with the aim to achieve dou­ble-dig­it oper­at­ing prof­it growth this year.”

Expert Ana­lysts Offer Their Contributions 

In the SAP ana­lyst com­mu­ni­ty, Joshua Green­baum, Prin­ci­pal at Enter­prise Appli­ca­tions Con­sult­ing, called Q3 ​“a strong quar­ter” for SAP, not­ing that Wall Street appeared to agree with this assess­ment, with SAP stock ris­ing sig­nif­i­cant­ly in ear­ly trad­ing last week. 

Green­baum added that SAP stayed focused on results in the third-quar­ter earn­ings call and investor tele­con­fer­ence. ​“The focus on cus­tomer wins, and momen­tum around SAP Busi­ness Tech­nol­o­gy Plat­form and cloud in gen­er­al, spoke to a healthy quar­ter for SAP, its ecosys­tem part­ners, and cus­tomers,” he said. ​“Despite the com­plex­i­ty of the busi­ness world and the macro-eco­nom­ic cli­mate, the num­bers behind the quar­ter show that the trans­for­ma­tion SAP is sell­ing is res­onat­ing with customers.”

Green­baum called atten­tion to Klein’s descrip­tion of SAP Cloud Appli­ca­tion Life­cy­cle Man­age­ment (CALM), SAP Sig­navio, and LeanIX as a ​“unique busi­ness trans­for­ma­tion suite,” call­ing the trio ​“an impor­tant com­bi­na­tion of tools that can help cus­tomers dri­ve the kinds of busi­ness process and infra­struc­ture trans­for­ma­tion that they need.”

Added Green­baum: ​“While we’ve heard a lot about Sig­navio, CALM’s impor­tant role in dri­ving imple­men­ta­tion and post go-live suc­cess have been large­ly unher­ald­ed. These tools pro­vide a huge com­pet­i­tive advan­tage for SAP and its part­ners, hold­ing out the promise of improv­ing the ROI of cloud migra­tions, regard­less of whether RISE is the con­tract­ing régime or not.”

Green­baum final­ly not­ed the absence of SAP Suc­cess­Fac­tors and SAP Busi­ness Net­work from the earn­ings call, reflect­ing that ​“the oth­er line-of-busi­ness appli­ca­tions — SAP Con­cur, SAP Ari­ba, and SAP Field­glass — were most­ly men­tioned as cau­tion­ary exam­ples of lines of busi­ness more sen­si­tive to macro-eco­nom­ic trends than oth­ers.” Amid recent momen­tum for the SAP Suc­cess Con­nect and Spend Con­nect Live con­fer­ences, Green­baum implored SAP to ​“broad­en how it artic­u­lates its val­ue to the finan­cial mar­kets” beyond its focus on ERP, giv­en the com­plex and holis­tic nature of trans­for­ma­tion for its customers. 

Fabio Di Capua, VP Ana­lyst and Tech Prod­uct Man­ag­er at Gart­ner, mean­while, said the earn­ings report includ­ed pos­i­tive results for North Amer­i­can SAP cus­tomers despite the chal­leng­ing macro-eco­nom­ic envi­ron­ment, includ­ing good oper­at­ing prof­it, sup­port­ed by the resilience of the on-premis­es business.

Di Capua reflect­ed on SAP lead­er­ship dis­cussing a ​“com­mer­cial dis­ci­pline” with regard to on-premis­es licens­es going for­ward as more evi­dence of the company’s strate­gic cloud tra­jec­to­ry, not­ing that Gartner’s clients have also report­ed very lim­it­ed dis­counts on on-premis­es licens­es. On RISE and GROW updates, ​“SAP report­ed that there are now over 4,300 RISE and 440 GROW cus­tomers,” remarked Di Capua. ​“Unfor­tu­nate­ly, there was no indi­ca­tion of the split between net-new and exist­ing cus­tomers.” Gart­ner esti­mates that more than 23,000 cus­tomers have yet to buy SAP S/4HANA.

“This is a very hard pill to swal­low for the over 20,000 SAP S/4HANA clients that bought SAP S/4HANA before RISE was avail­able or that decid­ed to imple­ment it on-premis­es, on a hyper­scaler, or via pri­vate host­ing,” said Di Capua. ​“Mov­ing to RISE with SAP and a sub­scrip­tion mod­el will force these clients to adapt to SAP’s upgrade strategy.”

Gart­ner esti­mates that more than 70% of cur­rent SAP S/4HANA clients, run­ning up to the 2020 ver­sion, will be out of main­te­nance by the end of 2025, ​“tes­ti­fy­ing to a dis­tinct lack of will­ing­ness of clients to con­tin­u­ous­ly upgrade their core sys­tems,” said Di Capua. ​“The upgrade of the above-men­tioned 70% of SAP S/4HANA cus­tomers before end of 2025, in addi­tion to the migra­tion of lega­cy Busi­ness Suite cus­tomers before 2027, is cre­at­ing a big imbal­ance between sup­ply of resources and demand.” 

Di Capua said in response to the con­tin­u­ing dis­cus­sion around gen­er­a­tive AI pric­ing with­in the SAP suite that ​“this top­ic is still very unclear, and clients are also strug­gling to cre­ate a busi­ness case when the real cost struc­ture is not ful­ly transparent.”

Isaac Feld­berg is Con­tent Man­ag­er at ASUG.