SAP leadership announced fourth-quarter and full-year financial results for 2023, with CEO Christian Klein telling investors that “SAP has delivered” amid strong cloud growth and higher total revenue, meeting or exceeding its annual outlook in all key metrics.
Assessing the fourth-quarter performance, SAP leadership reported €8.468 billion in total revenue (up 5%) and €3.7 billion in cloud revenue (up 20%). “Q4 provided an exceptionally strong finish to 2023,” Klein said. The full year saw €31.21 billion in total revenue (up 6%) and €13.64 billion in cloud revenue (up 20%); current cloud backlog stands at €13.7 billion (up 25%), assessed by Klein as “an all-time high” for SAP.
As the German business software maker reinforces investments in business-related artificial intelligence, SAP also announced a €2 billion restructuring program impacting 8,000 positions across its organization in 2024; internal reskilling and voluntary buyout programs will account for most changes. SAP had about 108,000 full-time employees at the end of 2023. The company expects to maintain its current headcount levels by the end of 2024.
“SAP is opening the next chapter,” Klein said. “With the planned transformation program, we are intensifying the shift of investments to strategic growth areas, above all Business AI.”
Key takeaways from the Jan. 24 earnings call, investor teleconference, and Wall Street’s reaction:
- SAP’s Q4 cloud momentum included a 25% increase in current cloud backlog and a 20% rise in cloud revenue.
- More than 700 customers have signed up for GROW with SAP since its launch in March 2023.
- More than 50% of new RISE and GROW customers currently select the premium editions of these programs introduced in September 2023, according to Klein.
- SAP’s top 1,000 SAP customers reportedly used an average of four SAP solutions in 2023 (up from three in 2022), and the top 100 customers leverage an average of five solutions (an increase from four in 2022).
- 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.
- SAP announced plans to invest nearly €1 billion in AI use cases for customers.
- SAP updated its 2025 ambition, with a non-IFRS operating profit ambition of €10 billion, reflecting share-based compensation expenses of approximately €2 billion as well as an increase of €0.5 billion due to anticipated incremental efficiency gains from the restructuring program.
- Following the publication of SAP’s financial results, shares of SAP SE jumped more than 7%, to an all-time high.
Financial Results
For the fourth quarter, SAP reported a 25% increase in its current clock backlog (27% at constant currencies), totaling €13.7 billion, and a 20% increase in cloud revenue (or 25% at constant currencies), totaling €3.7 billion, driven primarily by growth of its combined SaaS and PaaS portfolio, up 22% (or 28% at constant currencies). Klein noted this was “higher growth than ever before” and evidence of SAP’s shift into the acceleration phase of its strategic cloud transformation. SAP S/4HANA Cloud revenue was up 55% at €1.03 billion (61% at constant currencies).
For the full year, SAP reported a 20% increase in cloud revenue to €13.7 billion (up 23% at constant currencies), along with a 37% increase in total cloud backlog to €44 billion (up 39% at constant currencies). SAP updated its 2024 and 2025 outlooks, as the company anticipates “strong growth in cloud revenue and non-IFRS operating profit,” according to Klein. Forecasting total cloud revenue of €17.3 billion for 2024 (up from €17 billion) and an implied growth rate of 25.5% (at constant currencies) by the fiscal year’s midpoint, SAP is now set up to deliver cloud revenue (non-IFRS) totaling €21.5 billion in 2025.
SAP reported operating profit of €9.05 billion (non-IFRS, at constant currencies) and cash flow of €5.08 billion, both exceeding its 2023 outlook for the fiscal year (as revised in October). Software licenses revenue was down 14% to €1.77 billion (down 12% at constant currencies), while cloud and software revenue increased by 6% to €26.93 billion (up 9% at constant currencies). Services revenue was up 4% to €4.28 billion (up 6% at constant currencies).
“We kept our promise and achieved double-digit non-IFRS operating profit growth, despite an adverse macro environment," said SAP Chief Financial Officer Dominik Asam, calling 2023 “a year of inflection” and vowing to further increase profitability in 2024. The company’s full quarterly and full-year statement can be accessed on SAP’s website.
Business AI
SAP’s ambitions to lead in business-related artificial intelligence took center stage during the earnings call.
“With significant business momentum, including in Q4, SAP is stronger and more relevant than ever as we enter the era of Business AI,” Klein said, citing the speed at which the tech industry is shifting to embrace AI as one motivation for the announced restructuring program.
“With these shifts, SAP has a clear new direction, with plans to spend approximately €1 billion “to develop power AI use cases for our customers,” Klein said. Partners will play a central part in this transformation, he added, specifically noting SAP’s efforts to bring generative-AI capabilities to its RISE with SAP program through a partnership with NVIDIA. Aligning resources to focus on AI, Klein declared, was indicative of his ambition to make SAP not only “the top enterprise application company” but “the no. 1 business AI company” as well.
Klein also touched on his time at the recent World Economic Forum in Davos, where he spoke at length with other world and business leaders about the potential of AI. “SAP will completely embed AI in our solutions,” he said. “We will make it readily available for end users and connect it with all business processes. This will tremendously boost the capabilities of our solutions. It will also fundamentally change how users interact with our systems.”
Analysis from Industry Experts
In the analyst community, SAP’s Q4 and full-year 2023 financial results were positively received as indicative of the company’s continued cloud momentum, though its recent AI emphasis was met with healthy skepticism.
According to Joshua Greenbaum, Principal at Enterprise Applications Consulting (EAC), “SAP clearly turned in a quarter that met Wall Street’s expectations, and the stock price soared to an all-time high, outpacing many of its peers.”
Greenbaum attributed the new stock price to SAP’s renewed focus on AI, as well as the restructuring around this focus, but expressed reservations about Klein’s vow to investors that SAP’s AI tools will “solve some of the hardest problems” its customers face. “This is an excellent aspiration, but it also potentially sets SAP customers up for disappointment,” he said.
“It’s a given that solving the ‘hardest problems’ using AI will take time, particularly when it comes to new functionality based on generative AI,” Greenbaum added. “I’m genuinely concerned that SAP and the customer base will direct too much attention toward nascent and future AI offerings this year, instead of focusing on solving the hard problems [Klein] mentioned by starting with the basics, such as data management and process integration, not to mention SAP S/4HANA migration.”
Fabio Di Capua, VP Analyst and Tech Product Manager at Gartner, said the results SAP presented show that the company is in solid financial condition. However, while SAP focused on its cloud and AI offerings during the earnings call, Di Capua pointed out that a significant portion of SAP revenue came from other streams.
“In 2023, SAP obtained about half of its revenues (excluding services) from software license and software support,” Di Capua said. “Still, a considerable amount of business is fueled by the more than 23,000 customers sticking on the legacy SAP ERP Central Component (ECC) system and 16,000 SAP S/4HANA clients that bought before 2021, when RISE with SAP was launched, according to Gartner estimates.”
Despite SAP’s focus on taking its customers to the cloud, the notion of “cloudification” remains “a very complex activity, clashing with clients that are not willing to regularly update their systems,” Di Capua said, further stating that legacy SAP ECC clients are “struggling to find the business case to migration.” Gartner estimates more than 70% of SAP S/4HANA customers will be out of mainstream maintenance by the end of next year. Di Capua predicted that “2024 may see further resilience” of SAP’s on-premises business, owing to SAP’s increase of maintenance costs and limited discounts on software.
The success of SAP’s sustainability efforts (including the debut of SAP Sustainability Data Exchange and GreenToken) along with the growth of its RISE and GROW programs were noted by analysts as highlights of the quarter. “Approximately 1000 customers have deployed SAP Cloud for Sustainable Enterprises, GROW was reported to have already signed up 700 customers, and RISE was touted as an important engine for net-new customer growth,” Greenbaum said.
SAP customers remain hesitant to dive into AI technology before fully understanding how it can be applied to their business operations, Di Capua added. “All the hype, investments, and expectations around generative AI is convincing many customers to just sit and wait to see the real impact of the technology, both on the software side and the implementation and support side.”