ASUG reports quarterly on SAP's financial results; gain insights now into the company's Q2 and Q3 2024 results.
SAP leadership announced first-quarter financial results for 2024, with CEO Christian Klein declaring the company is “off to a great start” for the year, driven by cloud growth and an increase in operating profit as customers plan their cloud migrations and seek to harness artificial intelligence (AI) functionalities for business.
Assessing the first-quarter performance, SAP leadership reported €8 billion in total revenue (up 9%) and €3.9 billion in cloud revenue (up 25%), with current cloud backlog growing by 28%, to €14.2 billion. Operating profit rose to €1.5 billion, marking a 19% year-over-year increase.
According to Klein, key growth drivers for SAP this quarter included cross-selling across the cloud portfolio via RISE with SAP, its initiative to move large-enterprise installed-base customers to the cloud; business AI innovations rolling out across its suite; and GROW with SAP, its cloud ERP implementation initiative for net-new customers in the midmarket.
“The strength of our current cloud backlog reaching a record growth rate is a testament to that momentum,” he added. “Our transformation program is also well on track and will help us to capture this growth and increase efficiency.”
Key takeaways from the April 22 earnings call, investor teleconference, and Wall Street’s reaction:
- SAP’s Q1 cloud momentum included a substantial 25% rise in cloud revenue and a 28% increase in current cloud backlog, the fastest growth on record.
- SAP introduced a new disclosure in Cloud ERP Suite, which indicates how SAP is executing on moving its installed on-premises base to the cloud, and reported 32% growth in this area, to €3.2 billion.
- GROW with SAP gained 100 new customers, with a 64% share of net-new customers in Q1.
- SAP reported IFRS cloud gross profit of €2.84 billion (up 27%) and non-IFRS cloud gross profit of €2.85 billion (up 28%), as well as an IFRS operating loss of –€0.8 billion, due to a €2.2 billion restructuring provision.
- Software license revenue decreased by 25%, reflecting the market’s shift to cloud solutions.
- SAP reported non-IFRS operating profit at €1.53 billion (up 19%), even including higher share-based compensation resulting from a strong share price increase.
- SAP reiterated its 2024 outlook; 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.
- Following the publication of SAP’s financial results, shares of SAP SE rose 2.7% in premarket trading last Tuesday; despite the first-quarter results missing on both top and bottom lines, analysts saw the results as representing a solid overall update buoyed by continued cloud growth.
Inside the Financial Results
SAP is in the midst of an internal restructuring program that will affect around 8,000 SAP employees, through a voluntary buyout program and a reskilling initiative aimed at ensuring employees can embrace business AI innovations. Even with this restructuring, Klein said that he expects the company’s headcount to remain consistent with the close of 2023.
“In the first quarter we successfully kicked off the implementation of our transformation program thereby allowing us to focus our investments on the Business AI opportunity while decoupling expense from revenue growth,” said Dominik Asam, SAP Chief Financial Officer.
Added Klein: “The program will help us to capture growth and increase efficiency at the same time, among other things, by pushing the internal use of AI. We expect a triple-digit-million amount in efficiencies from embedding AI across all our processes.”
SAP has released more than 30 new AI scenarios across its cloud portfolio, with more than 100 use cases in the pipeline. Joule, the company’s digital copilot, will serve as the user experience front-end for business AI innovations, which will be embedded across the SAP cloud portfolio.
Klein stressed the importance of eliminating custom code in core ERP systems for SAP customers to migrate to SAP S/4HANA Cloud, public edition. “As part of RISE and via the clean core journey,” he said, “SAP and our ecosystem will help our customers to remove the ERP custom code and instead develop integrated ERP extensions on SAP Business Technology Platform (BTP).”
On the analyst call, Klein also extolled the value of GROW with SAP for small and midsize enterprises. "As SAP's greenfield cloud ERP offering for net-new customers or new business units of large enterprises, GROW delivers go lives in weeks for every business model in every industry in every country,” he said. “With our ERP solution, SME customers can grow and scale their business without migrating to a new ERP. Ultimately, RISE and GROW offer customers similar advantages, innovation, modularity, scalability, and integration.”
“In our first quarter earnings results for 2024, we saw strong growth and customer adoption among Intelligent Spend Management, SAP SuccessFactors and Cloud ERP, driven by RISE with SAP and GROW with SAP,” said Lloyd Adams, President of SAP North America, in an official statement.
“SAP’s cloud revenue performance was particularly robust in the Americas region,” Adams stated. “Organizations like Churchill Downs (CDI) selected SAP S/4HANA Cloud Public Edition to support their financial technology transformation as CDI continues to grow within the racing, online wagering, and gaming entertainment industries. In addition, we continue to see a number of customers utilizing Joule, our generative AI copilot that will transform their businesses.”
Additional customers that purchased SAP solutions or went live on SAP solutions included:
- Sutherland selected SAP S/4HANA Cloud, public edition, to further enhance its data-driven decision-making and unlock deeper insights into client needs.
- PureTech Scientific went live on SAP S/4HANA Cloud, public edition. With the move to the cloud, PureTech Scientific is focused on pursuing growth opportunities in new markets and executing new capabilities for customers.
- Clearway Energy Group, headquartered in San Francisco, selected RISE with SAP, SAP S/4HANA Cloud, SAP Industry solutions for Utilities, Digital Supply Chain, SAP SuccessFactors, SAP Business Technology Platform, SAP Analytics Cloud, SAP Intelligent Spend and Business Network, and SAP Signavio for its transformation.
- Canadian retailer the ALDO Group has gone live with SAP SuccessFactors and now leverages SAP technology to manage payrolls of employees in Canada and the United States. Through implementation of a unified HR and finance solution across the company, the ALDO Group benefits from an aligned HR and IT model and reduced operating costs.
Expert Analysts Offer Perspective
“It was clearly a strong quarter” for SAP, said Josh Greenbaum, principal at Enterprise Applications Consulting, particularly in terms of continued cloud growth. Behind the numbers, though, remain “thousands of SAP customers who haven’t moved to upgrade either their SAP ERP Central Component (ECC) or older SAP S/4HNA implementations,” he added. “The imperative is real: many of these customers’ systems—SAP ECC and SAP S/4HANA—will soon be out of support.”
SAP is holding to its announced 2027 deadline for end of mainstream maintenance for SAP Business Suite 7, which includes SAP ECC, and Klein focused remarks to analysts on the company’s business-AI, “in particular expressing the hope that AI will become an important reason for customers to migrate their legacy systems,” according to Greenbaum.
To do so effectively, SAP must present strong evidence that its “net-new AI capabilities, based on generative AI and Joule, are generating meaningful revenue and measurable productivity gains for customers,” Greenbaum added. Existing capabilities in applications such as SAP Integrated Business Planning (IBP), largely powered by AI algorithms, “could by themselves be adequate to justify deploying these solutions alongside a modern, upgraded SAP S/4HANA,” he stated, suggesting that SAP should emphasize those capabilities, which preceded the current AI hype cycle, alongside newer business AI capabilities with which it seeks to incentivize customers to accelerate their SAP S/4HANA migrations and upgrades.
Jon Reed, independent ERP market analyst and co-founder of Diginomica, called net-new customer acquisition via GROW a “bright spot” for SAP this quarter amid its efforts to move customers to SAP S/4HANA Cloud, public edition, which he expects to accelerate as SAP looks toward further announcements at SAP Sapphire in June.
“SAP’s results indicate to me that the aggressive pursuit of cloud and AI is providing a forward-thinking view for the company that is energizing internally and with shareholders,” Reed said. “SAP will have to follow through on AI with some substantial gains for customers in productivity, but that is a good and welcome challenge for SAP. I think customers too are motivated by AI to move to the cloud, just as Christian Klein said in this earnings call.”
That’s in part because business AI will be primarily accessible to cloud customers via RISE and GROW, Reed explained. “I believe in making at least some AI innovations available to all customers, but I do believe SAP has some good reasons for the cloud/business AI emphasis, given the economies of scale that can be achieved in SaaS products like SAP SuccessFactors and SAP S/4HANA Cloud, public edition,” he said.
Finally, Reed reflected on the role ASUG can play in helping SAP customers plan their cloud migrations and consider implementation of business-AI innovations. “As customers look to understand all aspects of a successful cloud move, including getting leadership buy-in, managing change, and getting more specifics on adopting RISE/GROW,” he said, ASUG can serve as “a valuable resource” for education, including at ASUG Annual Conference in June 2024, where power peer groups and customer panels will dive into all these issues and more.