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SAP earnings for Q1 indicate strong cloud growth

SAP's cloud revenue for the first quarter of 2024 indicates healthy growth and sets the stage as customers plan cloud migrations and implementations of business AI functionalities.

Driven by cloud growth, SAP reported strong earnings for the first quarter of the year.

SAP reported that Q1 cloud revenue rose 25% to 3.9 billion euros ($4.1 billion) and that the current cloud backup (CCB) grew 28% to 14.2 billion euros. SAP defines the CCB as the amount of contractually committed cloud revenue that the company expects to recognize in the next year. Operating profits were reported at 1.5 billion euros -- an increase of 19% over the previous year.

SAP introduced a new disclosure category, Cloud ERP Suite -- centered on S/4HANA Cloud, public edition -- that's intended to show SAP's progress in moving its installed on-premises base to the cloud.

Q1 revenue from the SAP Cloud ERP Suite was up 32% to 3.2 billion euros.

"Cloud ERP Suite contains all the modules for our company's core processes from finance, spend management and HR to supply chain commerce, and our business technology platform, including data and analytics," said Christian Klein, SAP CEO, in an earnings call to investors and analysts. "Together, these modules have the same functional scope as our monolithic on-premises ERP."

There are three growth drivers for SAP, Klein said: Rise with SAP, the initiative to move SAP's large-enterprise installed base to the cloud; Grow with SAP, the initiative for net-new customers that are primarily small to midsize enterprises and subsidiaries; and business AI innovations that have been developed or will be released in the years ahead. To that end, business AI-focused functionality will be infused across the SAP product portfolio and SAP's generative AI assistant Joule will serve as the user experience front end.

New Rise with SAP customers include chocolatier Lindt and Sprungli, global manufacturer SKF and aerospace company Curtiss-Wright. Maersk, a global shipping firm, adopted SAP Business Technology Platform as the integration and development platform across its SAP and non-SAP IT landscape.

SAP's internal restructuring program, which is centered around transitioning the company to future-oriented areas, is "making even better progress than expected, especially with hiring new talent for future-oriented areas, such as AI," Klein said.

"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," he said. "We expect a triple-digit-million amount in efficiencies from embedding AI across all our processes."

The internal restructuring, which was unveiled in January, is expected to affect around 8,000 SAP employees. Their positions are anticipated to be covered by voluntary leave programs and internal reskilling efforts. Klein said the company's overall headcount at the end of the year is expected to be the same as at the end of 2023, however.

Healthy revenue to come if SAP keeps customers

The cloud growth for the first quarter is a solid indicator of healthy revenue to come, said Josh Greenbaum, principal at Enterprise Applications Consulting. The understated implication is that there remains a huge well of migrations from SAP's on-premises base of ERP Central Component customers and early adopters of S/4HANA waiting to be tapped.

"That's going to drive a lot of cloud implementations, and in theory, it will drive a lot of net-new revenue because these early adopters of S/4HANA really did technical implementations, not business transformations," Greenbaum said. "So there's a lot of upside potential for SAP to capture these thousands of S/4HANA adopters as they do real business transformation."

That's one of the remaining challenges that we see with SAP -- that a lot of this cloud revenue is not yet from customers that are fully live on the cloud.
Liz HerbertAnalyst, Forrester Research

This is the positive potential for SAP. But the potential negative is that SAP must make sure it retains those customers as they plan a cloud migration, he said.

"These S/4HANA early adopters are going to have to do essentially greenfield implementations to get the business transformation they want," Greenbaum said.

There's a lot of potential revenue in the upcoming cloud migrations and accompanying business transformations, he said, but only if SAP captures the transformations. That requires customers to implement a "clean core" that moves them away from heavily customized systems to fit-to-standard cloud systems. However, the risk here is that innovation now happens in the edge systems rather than the core ERP systems.

"SAP must dance a dance of professing -- correctly -- that their customer base needs to move to a modern cloud that has to be clean core and as standardized as possible while still providing the innovation at the edge that will take the customer to the next level," Greenbaum said.

Keeping in line with industry trends

SAP's Q1 cloud growth is consistent with ERP industry trends right now, as all vendors are trying to get customers to modernize their systems in the cloud and are beginning to implement more AI functionality, according to Liz Herbert, an analyst at Forrester Research.

But there's still a lot that has needs to be done and some of what are counted as cloud bookings are not yet full cloud implementations, she said.

"There are those that are counted as cloud or Rise with SAP implementations. But under the covers it's still a mix of products and deployments," Herbert said. "That's one of the remaining challenges that we see with SAP -- that a lot of this cloud revenue is not yet from customers that are fully live on the cloud."

SAP's restructuring is also a general industry trend, as technology vendors are trying to marshal resources to meet their needs for cloud and AI changes, she said. Technology vendors are reducing workforces or restructuring some employee roles to meet the new skill sets that they want.

"That's a sign of the major transition that's going on not just with AI but also with cloud conversion, which requires a different type of work," Herbert said. "Companies in all businesses but particularly in tech have to make some of these changes to stay relevant and have what's needed."

The solid quarter is notable especially in the context of SAP's internal restructuring upheaval, Greenbaum said. The restructuring seems to have satisfied Wall Street, but the overall impact is yet to be determined.

"The investors seem to like it, and the stock went up. But there is a lot of internal upheaval, which always happens in these kinds of restructurings, and we'll have to see what the long-term impact of that is," he said.

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

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