ASUG reports quarterly on SAP's financial results; gain insights now into the company's Q1 and Q3 2024 results.
SAP announced second-quarter financial results for 2024 that surpassed Wall Street’s expectations, with CEO Christian Klein declaring that the company’s cloud business had been buoyed by increasing enterprise demand for artificial intelligence (AI).
Assessing the second-quarter performance, SAP leadership reported €8.29 billion (or U.S. $9 billion) in total revenue, up 10%, and €4.15 billion ($4.51 billion) in cloud revenue, up 25%, with current cloud backlog growing by 28%, to €14.8 billion ($16.07 billion). Operating profit rose to €1.9 billion ($2.06 billion), marking a 35% year-over-year increase.
Net revenue was down due to expenses associated with a company-wide restructuring program now expected to impact over 10,000 positions and conclude next year. Still, SAP reiterated its 2024 financial outlook and raised its 2025 operating profit ambition, citing the efficiencies to be gained through this program as one factor in this anticipated 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; its ability to embed AI in customers’ operating systems; and GROW with SAP, its cloud ERP implementation initiative for net-new customers in the midmarket.
“AI had a direct impact on our bookings,” Klein told financial analysts during a subsequent earnings call. “In the second quarter, almost 20% of all deals included premium AI use cases. And this is just the beginning. Customers have clear plans to expand their AI consumption on their RISE and GROW transformation journeys.”
Key takeaways from the July 22 earnings call, investor teleconference, and Wall Street’s reaction:
- SAP’s Q2 cloud momentum included a substantial 25% rise in cloud revenue, driven by a 33% increase in cloud ERP suite revenue, as well as a 28% increase in current cloud backlog, its fastest growth on record.
- SAP’s total revenue for the quarter was €8.2 billion (or approximately US $9 billion) and down, due to costs incurred through its company-wide restructuring program, which SAP now expects to impact up to 10,000 employees (up from its previously estimated 8,000).
- SAP increased its 2025 adjusted operating profit expectation to €10.2 billion (or $11.08 billion, up from €10 billion previously), citing anticipated efficiencies gained through its company-wide restructuring program.
- Joule, the company’s generative-AI copilot, is the “one front-end” for the SAP cloud software suite and has already become a “productivity engine” for 300 million customers using SAP cloud software, per Klein.
- For the second quarter, ended June 30, SAP reported adjusted earnings of €1.10 per share on revenue of €8.29 billion, compared with estimates for €1.09 on revenue of €8.26 billion.
- Following the publication of SAP’s financial results, shares of SAP SE rose around 7% in premarket trading last Tuesday, to an all-time high; analysts saw Q2 as a solid quarter for SAP, buoyed by increasing cloud ERP suite revenue and current cloud backlog growth.
Inside the Financial Results
SAP is currently focused on migrating its on-premises ERP customer base to the cloud via its modernized SAP S/4HANA suite, ahead of on-premises system support deadlines that begin taking effect next year.
To that end, the company recently unveiled migration incentives through its RISE and GROW programs and is also embedding generative AI capabilities within the analytics hub of SAP Business Technology Platform (BTP). In preparation for the more limited availability of partner resources and consultancies as demand increases for those services, SAP is also focused on reskilling technical experts across its own organization.
“More and more customers are moving to the cloud, and our portfolio is becoming ever more attractive, thanks to SAP's business AI capabilities,” Klein told investors on the July 22 earnings call, reflecting that SAP is viewed as a major AI player because of “how well we are positioned to embed AI in the operating systems of our customers.”
Specifically, Klein reported that SAP has seen “strong resonance” for business AI use cases in HR, finance, supply chain, and order management. “End users benefit from efficiency gains in content search and document management,” Klein said. “For example, Concur's embedded AI is already helping 150,000 users process hotel bills in real-time. Supplier and contract management are other areas where AI is making a significant impact.” Klein cited over 90 use cases for generative AI now “in co-innovation” with partners.
“In Q2, we also significantly increased our profitability,” he added. “We continued to execute on our transformation program with great discipline with rehiring only for the skill sets we need.”
SAP’s internal transformation program is expected to end next year and to impact more than 10,000 positions, an increase from the 8,000 reported in January; affected employees could either choose to be retrained with AI skills or take voluntary buy-out packages. “We continue to invest into our transformation to be the leader in business AI,” Klein also stated. “Given our progress and strong pipeline, we are confident to achieve accelerating topline growth through 2027.”
Klein reported that 60% of GROW with SAP customers in Q2 were net-new customers and that overall adoption had reached almost 1,500 customers. “RISE brings best-of-suite ERP to our installed base, enabling large enterprises to transform deeply,” Klein said. “GROW is the perfect choice for greenfield projects for net new customers and subsidiaries of large companies, always in the public cloud.”
SAP recently announced enhancements for RISE customers moving to SAP S/4HANA Cloud, private edition, via premium and premium-plus tiers that will provide access to AI capabilities via Joule as well as access to BTP, SAP Datasphere, and SAP Business Network capabilities, among other advancements.
Klein also touched upon announcements made at SAP Sapphire, reiterating that “one dedicated enterprise architect” will be allocated to each RISE customer. “The hiring machine is on,” said Klein. “We will further increase the coverage of our RISE customer base in the next month.
“We are not starting from zero; we already have enterprise architects in our SAP MaxAttention offering and Services team,” he added, in response to an analyst’s question regarding the availability of EAs for this initiative. “We are reskilling existing staff and hiring externally to meet the demand. Our academies are also doubling down on training for these roles.”
The RISE program will also rely on an integrated business transformation suite, including SAP Signavio for the process layer and SAP LeanIX for enterprise architecture, Klein said.
“Once the WalkMe acquisition is closed, we will also cover the end user and guide and enable them to get the best out of our solutions,” he added. “Together with NVIDIA, we also bring AI capabilities into our RISE journey via Joule for consultants and Joule for developers. With the latter, for example, users can generate, understand, and test modern ABAP cloud code and boost productivity in coding by up to 30%, so our customers benefit from a significant increase in time to value.”
ExxonMobil, Porsche Informatik, Border States, ProRail, and Blue Diamond Growers were among the prominent customers to adopt RISE with SAP this past quarter, while Wegmans and BMI Group Holdings went live on SAP S/4HANA Cloud in the second quarter.
Expert Analysts Offer Perspective
In the SAP analyst community, the Q2 2024 financial results were seen as strong, though questions remain around the limited availability of business AI to customers outside of those selecting RISE with SAP for cloud migrations, as well as SAP’s ability to provide enough enterprise architects to fulfill the promises made to RISE customers at SAP Sapphire.
Between increased cloud and software revenue and operating profits that beat analyst consensus expectations, SAP’s earnings “are hard to quibble with,” said Jon Reed, independent ERP market analyst and co-founder of Diginomica. And almost 20% of all deals in Q2 including premium AI capabilities augurs well for this still-expanding initiative.
“This is clearly a validation of SAP’s overall strategy,” Reed said. “Being able to keep the markets upbeat in the midst of macro-headwinds when Business AI is still rolling out to more customers is a pretty strong achievement on SAP’s part.”
Joshua Greenbaum, Principal at Enterprise Applications Consulting, called the numbers “undeniably good” and “further evidence that SAP remains a well-oiled sales machine,” particularly in terms of its improved messaging around how RISE can move customers’ migrations forward.
“The quarter’s RISE sales numbers clearly speak for themselves,” he said, though the emphasis placed on GROW with SAP (and by extension SAP S/4HANA Cloud, public edition) also struck him as indicative of SAP’s recent focus on building out its channel partner strategy to spur further customer growth.
“Klein was clear that the ability of SAP to make the best use of the public cloud’s SaaS consumption and implementation advantages is dependent on growing out a partner channel that can take over the full sales and delivery experience for the small and medium-sized market,” Greenbaum added. “As this market segment includes a decent swath of the current and prospective ASUG membership, the signal that SAP will be growing its partnering efforts in this regard is particularly important.”
Reed also agreed with Klein’s assessment that SAP is considered a major AI player due to its ability to embed AI in customer’s operating systems, though he pointed out that use cases and adoption of generative AI are still in early stages, with plenty left for SAP to prove.
“The value of customer-specific and industry-specific data to enterprise AI gets clearer by the day,” he said. “Where the challenge comes in for SAP is that it still has to deliver on this. In other words, I do believe SAP's stock includes an ‘AI dividend’ SAP still has to fully justify. But, to this point, SAP continues to back this all up with solid numbers.”
Reed noted that the current SAP strategy of providing access to generative AI and sustainability innovations through the RISE and GROW migration programs for SAP S/4HANA Cloud excludes on-premises customers and those modernizing their SAP systems through other routes from accessing innovation.
“All customers should have access to SAP innovations via SAP BTP regardless of whether they are on the latest versions of SAP ERP and whether they are part of RISE and GROW, via SAP's credit-based consumption AI pricing,” he said.
Greenbaum pointed out the imperative for SAP to find and deploy enough enterprise architects to support its customers’ business transformations as one area that will bear close scrutiny in the coming months and years.
In addressing this topic, Klein “acknowledged the growing talent gap,” Greenbaum said, “but, at the same time, he gave very few specifics on how SAP and its partners would address this gap in a timely-enough fashion to move significant numbers of customers from ECC to S/4HANA before the end of maintenance for ECC.”