SAP announced its results for the fourth quarter and the full 2023 year. It has exceeded expectations for both operating profit and cash flow for FY 2023. As the global software vendor and ERP market leader continues to transition to a cloud vendor, it saw cloud revenue rise by 20% (23% in constant currency) for the full year, with the fourth quarter seeing cloud revenue rise by 25%. Cloud backlog also rose 25% to €13.7 billion. Importantly, its predictable revenues grew by 2% to 81% of total revenue.
The key numbers are:
- Total revenue €31,207 million
- Cloud and software revenue €26,928 million
- S/4HANA revenue grew 67% (up 72% in CC) to €3,495 million
- Gross profit was €22,527 million (IFRS), up 5%
- While operating profit was €5,785 million, down 5%
Christian Klein, CEO of SAP, commented, “SAP has delivered: We met or exceeded our outlook for 2023 in all key metrics. Based on a stellar order entry, our current cloud backlog expanded by 27% — an all-time high. We are confident about the company’s prospects in 2024. From this position of strength, SAP is opening the next chapter: with the planned transformation program, we are intensifying the shift of investments to strategic growth areas, above all, Business AI. Going forward, this will empower us to keep leading with innovation while increasing the scalability of the operating model.”
Transformation for 2024
SAP also announced its ambitions for 2024 and beyond, with Dominik Asam, CFO, noting, “2023 was a year of inflection. We kept our promise and achieved double-digit non-IFRS operating profit growth despite an adverse macro environment. In 2024, we will focus on putting the right gradient of earnings growth in place to deliver on our raised ambition for 2025 and sustain growth and financial performance beyond.”
The headline of 8,000 job losses will be part of a transformation program that will further prepare SAP for the future. It hopes to achieve this through voluntary redundancy and has also inferred that it will reskill people for alternate roles. With SAP retiring legacy solutions for which it has needed those skills, this could be good news for firms such as Rimini Street and Spinnaker Support who may be looking for additional experts to continue its support of legacy products. On balance, while these are job losses, SAP does not expect to lose headcount during 2024. It believes that the program will carry a €2 billion price tag and will not deliver a cost benefit until 2025.
The outlook for 2024 and 2025 is bullish.
- In 2024, it expects cloud revenue of €17.0-€17.3 billion (up between 24 and 27%). It is aiming for €21.5 billion in 2025
- In 2024, it expects total revenue of €29.0-€29.5.3 billion (up between 8 and 10% in constant currency). It is aiming for €37.5 billion in 2025
- In 2024, it expects non-IFRS operating profit of €7.6-€7.9 billion (up between 17 and 21%). It is aiming for €21.5 billion in 2025
- In 2024, it expects a free cash flow of €3.5 billion. This is down €2 billion because of the restructuring costs and a further €0.4 billion for other reasons
- By 2025, it also expects predictable revenue to have risen to approximately 86%
Klein gets bullish
During the analyst call, Klein cited several examples of organisations that are investing in SAP products. He spoke about Vodafone and Nvidia investing in RISE, with SAP and Volkswagen rolling out a major SuccessFactors project. However, what was different was that he called out EMS, a leading Brazilian Pharma company that is switching from Oracle to RISE with SAP. Klein has rarely called out such switches from Oracle customers. It was, however, his only mention of its fierce rival.
Importantly, customers are investing more. Klein called out, “Our top 1,000 customers are now, on average, using 4 SAP cloud solutions, up from 3 last year. For our top 100 customers, we add 5 solutions, up from 4 in 2022.” Source: SeekingAlpha.
The transformation mentioned above also aims to put AI at the heart of the SAP strategy, with Klein announcing, “To reflect the central importance of AI for our future, we have updated our ambition to be the number one enterprise application and Business AI company. The transformation program we are announcing today will shift additional resources to Business AI in line with the significant growth potential we see for SAP. Over the next 2 years, SAP will invest almost €1 billion to develop powerful AI use cases for our customers.” Source: SeekingAlpha.
Enterprise Times: What does this mean
SAP shares have risen sharply, up 8.99% to €160.76 over the last five days and up 14.96% over the last month. Klein has clearly been an inspired choice for CEO and is leading SAP back to where it once was. There are still fierce competitors, but SAP is also aiming to be at the forefront of technology, such as AI, rather than a laggard, as it was with Cloud.
The transformation should be seen as a positive rather than focusing on the job losses that many technology companies are conducting. They will hurt individuals, but staff should now be aware of the possibility of these losses and should know soon what options they have. It appears a well thought out evolution of strategy, rather than a revolution that leaves casualties in its wake. The execution is critical, however.
SAP is also building a war chest. The question is, what will it do with it? Will it make another major acquisition? Whilst the acquisition of Qualtrics was not a failure, it is also now an independent company as SAP never managed to fully integrate it. Where will it look next? Scott Russell, President, Customer Success, noted the possibility of SAP making net new acquisitions to enter new markets. Klein indicates that it would not make acquisitions to buy growth. Whatever happens, it could be an interesting choice.
