Cloud Revenue and AI Powers SAP to Strong Q2

⇨ Current cloud backlog increased by 28% to €14.8 billion and Cloud ERP Suite revenue increased by 33%.

⇨ Nearly 20% of all deals in Q2 included premium AI use cases.

⇨ SAP has confirmed their financial goals for 2024 and their plans for 2025.

SAP continued their strong performance in the first quarter with an equally robust performance in the second quarter of 2024. The current cloud backlog increased by 28% to €14.8 billion at constant currencies. Currently cloud backlog is defined as the contractually committed cloud revenue that SAP expects to recognize over the upcoming 12 months based on existing cloud subscription contracts. Cloud revenue was up 25% to €4.1 billion, and Cloud ERP Suite revenue increased 33% to €3.4 billion, making up the bulk of cloud revenue.

Although this was not the first quarter in which cloud revenue exceeded software license revenue by more than €1 billion, this was the first time that cloud revenue made up more than half of total revenue for the quarter. This represents a significant continued growth in cloud revenue but also a reduction in software license revenue, which declined by 20% this quarter. While this may appear to be a negative outcome, it highlights SAP’s continued shift to becoming a cloud company and the expectation that cloud revenue will continue to increase as traditional software license revenue decreases.

Additionally, non-IFRS operating profit increased by 35% at constant currencies although IFRS operating profit decreased by 11% due to restructuring charges amounting to €600 million. This is part of the broader restructuring plan that SAP announced in April where up to 8,000 positions were being shifted to focus on AI as the company invests €1 billion in developing business AI use cases. While SAP had initially accrued €2.2 billion for this restructuring, CFO Dominik Asam stated that SAP now expects to spend nearly €3 billion due to a significantly higher number of employees opting to participate in the voluntary retirement programs. Up to 10,000 positions will now be impacted.

AI Contributes to Cloud Revenue and Overall Success

Considering SAP’s efforts to restructure and integrate business AI across its entire suite of solutions, it is no surprise that CEO Christian Klein emphasized this during his opening remarks on the earnings call. A significant point for Klein was that AI strategy played a key role across the company, and that almost 20% of all deals in the second quarter included premium AI use cases. While Klein was unclear on the methodology for measuring premium AI use cases, or the associated product portfolio components that benefited from this impact, he highlighted that SAP’s AI investments are already helping drive revenue.

While Joule was announced in the second half of 2023, Klein revealed that the first use cases are now live for HR and Supply Chain. The goal is to allow end users to use Joule to create efficiency gains in HR content, travel, and supply chain and gain a “massive efficiency boost” from having these capabilities. These benefits will expand as Joule becomes available in more SAP solutions.

Klein also emphasized that SAP’s generative AI copilot, Joule, has become a new user experience in many solutions.  Although Joule is currently only available in a small number of solutions, it will eventually be available everywhere and Klein sees it becoming a unified single front-end. Klein also highlighted that over 150,000 users are leveraging AI features in SAP Concur each week, and that SAP has already released over 60 AI use cases so far this year, a number that is slated to go over 100 by the end of the year. Klein also emphasized the 90+ partner use cases in co-innovation through the Gen AI Hub in SAP Business Technology Platform (BTP).

RISE with SAP and SAP S/4HANA Adoption

The earning call did not mention either SAP S/4HANA or RISE with SAP adoption numbers. At Sapphire, SAP’s Chief Revenue Office, Scott Russell, indicated that there were 6,000 customers running RISE with SAP. Neither Klein nor Asam provided an updated figure although Klein highlighted that almost 1,500 customers were now running GROW with SAP, an offering targeted at small or medium-sized enterprises or those not already running an SAP ERP solution. GROW with SAP is tied exclusively to SAP S/4HANA Cloud Public Edition, but the contracts and bundling are mostly identical to RISE with SAP.

While organizations are increasingly using GROW with SAP, 60% of the customers licensing the solution this quarter were net new. This is understandable considering that GROW with SAP is designed for customers who are not using an SAP ERP or want to use a new implementation in a multi-tenant public cloud environment. In fact, Klein highlighted that GROW with SAP is ideally suited for greenfield deployments, net new customers, or subsidiaries of organizations already using SAP S/4HANA or RISE with SAP.

The lack of information on SAP S/4HANA adoption is concerning as it suggests that many existing ERP customers will be unable to transition from their current environments before the end of 2027 or even by 2030. SAPinsider research shows that adoption is steady rather than accelerating suggesting that it is unlikely that all the 25,000 to 30,000 customers that have yet to license SAP S/4HANA will do so in the next three years. This makes it crucial for SAP to prioritize ongoing support and migrate strategies for these customers through the end of the decade.

What Does This Mean for SAPinsiders?

SAP is committed to its cloud revenue, or subscription-based revenue, model. SAPinsiders hoping to return to more traditional licensing options are unlikely to see it materialize. While software license revenue still accounts for a significant proportion of total revenue, it was only just over a third (36%) this quarter. Cloud revenue now accounts for 50% of total revenue, with Cloud ERP Suite making up 42% of total revenue. Traditional software license revenue is shrinking between 20-25% each quarter and SAP expects this trend to continue.

Additionally, premium AI use cases are already having an impact on SAP’s revenue. While SAPinsider research shows that generative AI is not yet having a significant impact on the plans for SAP S/4HANA adoption, this does not imply a lack of demand for business AI in other areas. For instance, Joule has been integrated into SAP SuccessFactors for some time now and this is likely one of the premium AI solutions that Klein mentioned

SAPinsiders must be prepared for a cloud-based future if they want to continue using SAP solutions. While not all organizations have moved their SAP workloads to the cloud, SAP’s ongoing improvements and functionalities are centered here. Failing to prepare for this shift, whether it involves moving to a different ERP provider or a third-party support service, could result in significant cost and complexity.