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 regime 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.

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