Cloud Success Drives Strong 2023 for SAP
Massive Transformation Underway to Support AI Initiatives
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⇨ SAP completed a successful 2023 with strong cloud growth in all regions
⇨ SAP has initiated a transformation program to focus on strategic growth areas such as business AI
⇨ Cloud and subscription-based offerings continues to be the future for SAP
2023 was an extremely successful year for SAP. Despite facing “an adverse macroeconomic environment,” as described by CFO Dominik Asam, SAP saw significant increases in total revenue, cloud and software revenue, cloud revenue, SAP S/4HANA revenue, and operating profit for the full fiscal year. Even though the earnings per share (EPS) missed the market goals, IFRS basic EPS also increased by 10% year-over-year, demonstrating a strong performance.
SAP CEO Christian Klein highlighted that current cloud backlog increased by 27% to €13.745 billion, driven by 25% cloud revenue growth at constant currencies for the fourth quarter. Additionally, total cloud backlog increased by 39% to €44 billion, a significant growth that signifies a huge platform for future success. The strong quarter has driven SAP to update their 2025 ambitions, which starts with an ambitious goal of €17 billion in cloud revenue for 2024 and an aspiration of hitting €21.5 billion in 2025.
Cloud revenue increased in all regions both in Q4 and for the entire year. While the Americas is still the largest cloud market for SAP, cloud revenue saw rapid growth in APJ, increasing 36% for the quarter and 29% for the full year. Total revenue increased in all regions for both the fourth quarter and the full year, although growth was significantly lower at 9% for EMEA and 8% for the Americas and APJ. Although the Americas is SAP’s largest cloud market, EMEA remains the largest market overall. While these numbers are positive, cloud revenue only accounts for 37% of total revenue in EMEA compared to 60% of total revenue in the Americas. This suggests that many EMEA-based customers have been slow to embrace SAP’s cloud-focused strategy, a challenge that the company will need to resolve if they are to become the “number one enterprise application and business AI company.”
Despite these successes, Klein started the earnings call with SAP’s plans for a new transformation program that will shift investments to more strategic growth areas like business AI, where SAP hopes to implement AI-driven solutions to enhance overall business efficiency. As Klein stated, “SAP will completely embed AI in our solutions. We will make it readily available for end-users and connect it with business processes. This will tremendously boost the capabilities of our solutions. It will also fundamentally change how users work with our systems.”
Although the transformation plan was not clearly defined during the call, Klein’s statements suggest that SAP’s focus is not on offering an AI product, but on embedding AI technology across all SAP solutions. While this is expected to differ from the generative AI assistant Joule, which still has limited productive availability, the specific use cases for the new AI technology remain unclear. However, SAP plans to invest nearly €1 billion on developing AI use cases for customers to support these goals.
However, a significant part of this transformation initiative will include a workforce restructuring component. SAP is allocating €2 billion in 2024 for workforce restructuring that is expected to impact 8,000 positions globally or approximately 7% of the workforce. While the company has dedicated €100-150 million to education and re-skilling initiatives, Klein expects that two-thirds of the impacted positions will be voluntary exits and employees moving into new roles.
It was noteworthy that amidst this discussion, the call did not mention the recent mandate from SAP – a global return to office policy for all employees located close to SAP facilities. For example, US employees living within 40 miles of an SAP office are expected to work from office three days a week. How this will function in practice is unclear as SAP has significantly reduced office space across the country over the last four years. However, it is clear that these changes are likely to result in an uncertain work environment for employees at least over the next two quarters. Although much of this will be directed internally, it is likely that there will be at least some impact on customer interactions.
What Does This Mean for SAPinsiders?
SAP’s goal of moving all customers to subscription-based licensing will continue. SAP’s strong cloud performance in 2023 suggests that SAP is unlikely to accommodate customers who are reluctant to embrace the cloud, although Klein maintains that “no customer will be left behind.” However, software license revenue’s “solid performance” in Europe in Q4 implies that customers are still buying traditionally licensed software even with escalating licensing costs. Conversations with both SAP partners and customers have confirmed that these traditional licensing costs are much higher.
Organizations must understand that if they do not already have SAP S/4HANA licenses, there may be no other choice except RISE with SAP. SAP is now providing three different packaging options for RISE with SAP, which allow some flexibility in the move, but customers will need to select one of those packages.
Also, as SAP pivots to embedding AI in all their solutions, SAPinsiders will need to consume solutions according to their needs. While generative AI assistant Joule is SAP’s most prominent AI initiative, customers need to license separate instances for each application it will be used for as there is no central contract for Joule. It is too early to tell whether this will be the same or different for future AI use cases, but it is crucial for organizations to understand what they want to achieve and what is most important to their success as they plan for the future.