SAP leadership announced first-quarter financial results for 2023, with CEO Christian Klein declaring on April 21 that the company has “entered a powerful new phase” in its Cloud transformation amid accelerated topline growth and double-digit non-IFRS operating profit growth.
Assessing the first-quarter performance, SAP leadership reported €7.44 billion in total revenue (up 10%) and €3.18 billion in Cloud revenue (up 24%). According to Klein, “cloud momentum continues at a fast pace” and further demonstrates a “tipping point” in the company’s overall cloud transformation passed in the fourth quarter of 2022.
Also featured in results for the quarter, ended March 31: cloud and software revenue was at €6.36 billion (up 10%); current Cloud backlog was at €11.15 billion (up 25%), driven by strong adoption of RISE with SAP; and recent SAP S/4HANA Cloud backlog was at €3.4 billion (up 78%). Meanwhile, SAP S/4HANA Cloud revenue was at €716 million (up 77%). Both IFRS and non-IFRS Cloud gross profits were up 28%, fueling double-digit non-IFRS operating profit growth. IFRS operating profit was down 45%, with non-IFRS operating profit up 12%.
The company’s combined SaaS and PaaS portfolio grew by 25%, with the SaaS cloud revenue up 22% and PaaS cloud revenue up 45%; this cloud momentum was attributed primarily to consistent contributions from SAP S/4HANA Cloud and SAP Business Technology Platform (BTP).
“Our innovative portfolio is at the heart of our continued growth,” said Klein. “In 2023, we are continuing to execute on our focused growth strategy, with S/4HANA and BTP at the core.”
The Year Ahead
During the financial report call on April 21, SAP leadership discussed the adjusted SAP outlook for 2023, which marks Cloud revenue and Cloud and software revenue down by €1.3 billion, noting as well that SAP operating profit will be €0.2 billion less than forecast and free cash flow less by €0.1 billion.
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.
Additionally, SAP is proceeding with the targeted restructuring announced last year, which is expected to impact around 3,000 employees; Q1 results indicate that SAP now employs a workforce of 105,132. Later in the call, Klein affirmed that SAP expects double-digit revenue growth in 2024, despite challenges posed by the current macroeconomic downturn.
Klein emphasized new offerings from SAP, mentioning GROW with SAP (a native ERP solution for midmarket customers) and SAP Datasphere (which will allow customers to collect and federate business data across their entire landscape) as well as efforts to embed AI across the company’s portfolio, which will be further detailed at SAP Sapphire & ASUG Annual Conference Orlando.
Klein added that RISE with SAP “has become the preferred choice to our customers transforming their businesses in the cloud,” highlighting it alongside SAP S/4HANA Cloud, public edition, as a strongly adopted solution in the first quarter. “Our offerings provide a pathway to solve many of the fundamental challenges that companies are facing today,” he said. “This is behind the strong customer momentum we saw in Q1.”
Dominik Asam, the newly appointed CFO for SAP, added: “The year is off to a good start. I am excited to have joined an organization which is delivering and staying on the right track. We have accelerated topline growth and have already achieved double-digit non-IFRS operating profit growth in Q1. Our results set solid groundwork for our full-year outlook, thereby pivoting back to profitable growth in 2023. Saying what we do, and doing what we say, will continue to be of great importance to us.”
Expert Analysts Offer Measured Q1 Response
In the SAP analyst community, the Q1 financial results were received positively, even as questions remain on customer success and experience, AI, and SAP customers’ digital transformation journeys.
Joshua Greenbaum, Principal at Enterprise Applications Consulting, noted that SAP quarterly calls tend to focus on reporting its success in selling Cloud-based solutions to both the installed base and net-new customers.
“The news was definitely good for SAP shareholders,” Greenbaum said, stating that “the continued success of RISE with SAP as a sales-led effort to drive cloud sales was evident in the uptick in Cloud sales” and adding that “SAP garnered a 22% increase in SaaS and a 45% increase in PaaS sales, the latter a reflection of the increased emphasis on BTP as an keystone product for SAP’s Cloud growth.”
Greenbaum continued, however that, “as impressive as these numbers are, it would help the user community more if SAP also reported on actual customer success instead of sales success and held itself accountable for improving customer success instead of just sales success.”
In response to Klein’s indication that “built for business” AI offerings might debut at SAP Sapphire & ASUG Annual Conference Orlando, Greenbaum expressed curiosity in seeing how SAP will fulfill such goals amid Big Tech’s increasingly competitive race to dominate the generative AI market.
“AI and ML came in eleventh in a list of technology priorities for ASUG members in the recent ASUG 2023 Pulse of the SAP Customer survey, well behind other priorities such as integration to non-SAP systems, moving to S/4HANA, and standardizing business processes,” Greenbaum pointed out.
“SAP feels a lot of pressure to follow the industry hype cycle on AI,” he added. “Hopefully, it will continue to err on the side of practical solutions that solve real business problems, as opposed to performative initiatives that are more me-too than meaningful. “
Greenbaum also highlighted Klein’s mention, during the financial reporting call, of the emerging SAP strategy for customer experience (CX), which is intended to focus on key industries—utilities and energy, retail, consumer products, and automotive—and revive “what has been a moribund category for SAP in recent years,” he said.
“While Christian gave few details of the strategy, the mere mention of CX during the earnings call is an indication of the board’s support for this strategy and its architect, Ritu Bhargava,” he said.
Fabio Di Capua, Gartner VP and Analyst, Tech Product Manager, noted “good results” in the overall SAP Q1 2023 report, pointing out however that the report did not disclose any SAP S/4HANA or RISE with SAP sales numbers.
“Non-cloud software revenues are slowly declining and now account for about 50% of SAP software revenues,” Di Capua added, referring to total revenues excluding services. This leaves “quite a gap to fill to be ‘fully in the cloud’ by 2025,” he said, though SAP expects to update its mid-term ambition for 2025 as part of its financial analyst conference at SAP Sapphire.
“The majority of the on-premises revenues are still with the thousands of SAP Business Suite customers that haven’t yet decided on their migration to SAP S/4HANA,” said Di Capua.
While there was no direct reference to these customers on the call, outside of another reminder from SAP that there will be no extension of the planned timeline, “many of these large organizations prefer a perpetual license engagement over a subscription model or RISE with SAP commercial offering,” said Di Capua. “Time is ticking, and 2027 is quickly approaching for these customers. A potential wave of implementation and upgrades may be soon coming.”