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SAP cloud revenues are up, but Wall Street reaction is down

SAP's stock dipped after an uninspiring earnings report, but analysts said the company is set well, with strong customer demand for transformational products and investment in AI.

SAP reported mixed results in the second quarter of 2023, which did not impress investors. During an earnings call on Thursday, the company touted the transformational prospects for its modern cloud ERP portfolio, which is increasingly bolstered by AI.

SAP claimed to have a solid second quarter, reporting a cloud revenue increase of 19%, with S/4HANA cloud revenue up 74%. The current cloud backlog was up 25% and currently stands at more than €11.5 billion. Operating profit grew 28%, up from 12% in the previous quarter.

But the company also missed its Wall Street earnings targets for the quarter, and its stock price dropped by about 6% following the call.

SAP continues to perform well despite an uncertain macroeconomic environment, said SAP CEO Christian Klein in the Q2 earnings call.

"We are seeing strong demand across our portfolio," Klein said.

This demand stems from a desire by customers to redesign business processes to meet modern business challenges, he said. Business-focused AI is one of the transformative technologies that will fundamentally change the way businesses run.

"[SAP is] uniquely placed to become the leader in business AI," Klein said, referencing a phrase SAP uses to mean AI capabilities that have specific business uses.

Examples of business processes using AI include supply chains that automatically initiate a different delivery route based on weather or congestion data, or an ERP system that uses embedded environmental, social and corporate governance and business data to decarbonize the supply chain by 5%.

Companies can have one trusted cross company data layer that lets AI pull together the right data in seconds to make better decisions.

To bolster its business AI capabilities, SAP is investing in three generative AI technology startups: Aleph Alpha, Anthropic and Cohere.

Aleph Alpha, an SAP partner, creates and hosts multimodal and multilanguage models that focus on interoperability, data privacy and security. Anthropic is the developer of Claude, a rival of ChapGPT that uses natural language to generate answers to questions, process text and perform business related tasks. Cohere provides a generative AI platform that can be accessed via APIs as a managed service and deployed on virtual clouds or company sites.

"We're doing these investments to have a seat at the table," Klein said. "We want to have them as part of our ecosystem, because while we are sitting on immense, valuable data, our offering becomes even stronger if we can also embed non-SAP content and data to make our AI offering even more valuable."

Customers will need to move off legacy on-premises SAP systems to take advantage of the new capabilities, as Klein said that "SAP's newest innovations and capabilities will only be delivered in SAP public cloud and private cloud."

Take investor views with a grain of salt

Wall Street investors were unimpressed, but their reaction should be taken with a grain of salt, according to analysts.

S/4HANA cloud revenue increased, but the rest of SAP's cloud portfolio, which includes the SAP Intelligent Spend products SAP Ariba, SAP Fieldglass, SAP SuccessFactors and SAP Concur, was disappointing, said Jon Reed, co-founder of Diginomica, an enterprise applications analysis firm. However, what investors value is not necessarily what customers are looking for or need.

Wall Street wants raw meat rather than a well-cooked meal; the customers want a well-cooked meal.
Joshua GreenbaumPrincipal, Enterprise Applications Consulting

"It's mixed news for SAP. There are some interesting questions for them in terms of how to keep both investors and customers happy," Reed said. "One thing going in SAP's favor at the moment is that it looks like the vast majority of customers have at least some intention to move to S/4HANA."

This doesn't mean customers are making the move, but there aren't competitors with equivalent functionality to tempt customers off of S/4HANA, he said. The investor communities don't care as much about retaining a core customer base, as they are more interested in SaaS revenues.

The dropped stock price indicates Wall Street's "classic quarterly myopia," said Joshua Greenbaum, principal at Enterprise Applications Consulting.

Wall Street investors appear to be disappointed in SAP's cloud growth, but Greenbaum sees a lot of demand and customers are deploying S/4HANA for transformations to solve business problems.

"Wall Street wants raw meat rather than a well-cooked meal; the customers want a well-cooked meal," he said.

It should be concerning for SAP that S/4HANA cloud revenue was up 74% but overall cloud revenue was up just 19%, which might have been a factor in the stock price drop, Greenbaum said.

Necessary investments in genAI

Business AI investments are necessary for SAP to keep up. However, it remains to be seen if demand for AI is there and if customers can access the new capabilities, according to the analysts.

SAP is making aggressive moves to embed AI in its platforms. But whether this will be a differentiating factor is unclear, Reed said, as all enterprise vendors are pursuing AI as aggressively.

"Customers will likely welcome SAP's investments in these areas," he said. "But they will have questions as to how they can access that functionality -- as in, do they have to be on the latest releases to get the capabilities?"

With a reservoir of about $4.3 billion, SAP has plenty of cash to make the investments in the AI companies to both buy market share and please Wall Street, Greenbaum said.

"Investment in the gen AI companies is money well spent in terms of the Wall Street hype cycle, which is embarrassingly driven by hype rather than reality. And AI is getting everyone hot and bothered," he said.

SAP has been doing a good job of talking about some real business use cases for AI, Greenbaum said.

"They're making a statement that it's going to be important by putting some money behind it and getting that seat at the table," he said.

Jim O'Donnell is a senior news writer who covers ERP and other enterprise applications for TechTarget Editorial.

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