Strong Cloud Revenue Propels SAP in Q1

⇨ SAP announced strong Q1 results based on double digit cloud revenue growth.

⇨ Financial guidance for the full year and 2025 ambitions have been confirmed.

⇨ Customers should expect a continued push around the move to cloud ERP.

SAP opened 2024 with a strong start, the first quarter results laying a solid foundation for the remainder of the year. The strongest growth area was the current cloud backlog (CCB), which grew 28% at constant currencies to €14.2 billion. This was followed by cloud revenue with a 25% increase at constant currencies to €4 billion. SAP also saw strong growth in Cloud ERP Suite revenue that increased 32% at constant currencies to €3.2 billion. With this performance SAP has confirmed guidance for the full year as well as 2025 financial ambitions.

Cloud ERP Suite revenue, a new metric SAP started reporting this quarter, refers to the portfolio of software-as-a-service (SaaS) and platform-as-a-service (PaaS) solutions tightly integrated with core ERP solutions, included in packages like RISE with SAP. The following offerings contribute to Cloud ERP Suite revenue: SAP S/4HANA Cloud, SAP Business Technology Platform (BTP), core solutions for HR and payroll, spend management, commerce, customer data solutions, business process transformation, and working capital management. SAP earlier reported separately on SAP S/4HANA Cloud revenue, but it made up only a portion of what is now the broader Cloud ERP Suite reporting number. SAP will also report a Cloud Extension Suite number including the remaining SaaS and PaaS solutions that supplement and extend Cloud ERP Suite.

This shift is significant for customers as it signifies an increased SAP focus not only on SAP S/4HANA Cloud but on the surrounding solutions and services, including SAP Success Factors, SAP Concur, SAP Signavio, SAP Ariba, and SAP Datasphere. It suggests that SAP will continue to push not only packaging options like RISE with SAP and GROW with SAP but will also focus on cross-sell and up-sell deals that start with an initial footprint and then expand to more Cloud ERP Suite solutions. SAP also sees the broader Cloud ERP Suite as part of a €700 billion market opportunity by 2031.

Speaking about existing customers, SAP’s CEO Christian Klein stated that €11 billion in remaining support revenue still needs to be converted to cloud ERP and SAP BTP. It represents customers still running SAP Business Suite or SAP S/4HANA in on-premise environments or with traditional licensing. Klein highlighted that the conversion potential for these customers is two to three times that of current support revenue and there is also an extensibility potential of up to €7 for each euro spent on software. This significantly plays into the upsell potential that SAP envisages for every customer moving to the cloud.

Impact of Artificial Intelligence

While there are no specific numbers in the quarterly report, Klein emphasized that business AI influenced many first quarter deals. This was also underscored by both Klein and SAP’s Chief Revenue Officer, Scott Russell, who highlighted that AI is a topic of discussion in all C-level conversations occurring today. But Klein also emphasized that there are now 27,000 customers using business AI although most of these are likely to be using the embedded AI scenarios within solutions like SAP S/4HANA where there are over 200 AI use cases available today.

For SAP, Joule will be the single front-end for AI across the entire SAP portfolio. SAP wants Joule to provide a unified experience for customers no matter the solution they are using, and this is a significant investment focus area. For example, SAP released over 30 new AI scenarios during the first quarter, one every week. There are also over 60 partners now leveraging the AI Foundation within SAP BTP to build custom scenarios, demonstrating that this is a popular and easy point of engagement.

Overall Performance

SAP’s CFO, Dominik Asam, echoed Klein’s remarks, emphasizing that SAP has had a strong start in 2024. In addition to the cloud revenue numbers, non-IFRS operating profit increased 19% at constant currencies to €1.5 billion, with cloud gross profit growing by 28% at constant currencies to €2.8 billion. Importantly for SAP, deals greater than €5 million in volume contributed more than half of the cloud revenue for the first quarter. However, despite the strong cloud revenue growth, software license revenue declined 25% year-over-year indicating that SAP is selling less traditional licenses each quarter. Asam also highlighted strong cloud performance in all regions with double digit revenue increases in the Americas, EMEA, and APJ. Cloud and software revenue also grew in all regions at a slower pace.

President of SAP North America, Lloyd Adams, also called out the strong performance in the Americas in a statement released after the earnings call. “In our first quarter earnings results for 2024, we saw strong growth and customer adoption among Intelligent Spend Management, SAP SuccessFactors and Cloud ERP, driven by RISE with SAP and GROW with SAP,” Adams iterated. Adams further noted that “SAP’s cloud revenue performance was particularly robust in the Americas region,” and highlighted customers such as Churchill Downs, Sutherland, PureTech Scientific, Clearway Energy Group, and the ALDO Group who purchased or went live on SAP solutions during the quarter.

SAP’s restructuring process initiated in April has so far had minimal impact on its performance. During the call it was indicated that the €2.2 billion that SAP has accrued for restructuring has mostly not been paid out. Asam also emphasized that restructuring will continue into the first quarter of 2025, and that acceptance rates for the early retirement program were higher than anticipated in North America which will likely increase the total restructuring costs.

What Does This Mean for SAPinsiders?

For customers that have remained on the fence about cloud ERP adoption, the window is rapidly closing on moving to SAP S/4HANA outside a cloud environment, if it has not already closed completely. Cloud ERP Suite is now the sole focus of the SAP customer success team and CRO, Scott Russell. Organizations running any on-premise ERP systems are being considered as potential opportunities to increase cloud revenue at a multiple of the existing on-premise maintenance value. SAP is also exploring selling additional services up to seven times the value of the initial investment as these customers transition to the cloud.

SAPinsiders must be prepared for the future as SAP will continue to focus on cloud ERP and business AI use cases connected to the broader suite of cloud solutions. This is where executives have stated that development investments will focus, and updates and announcements only reinforce these statements. This means customers must start preparing for the future, today.

Understand the landscape. Map customizations both to processes and tables and understand what is critical and what is no longer in use. Utilize tools like SAP Readiness Check to see how ready your system is for a move. The change may not come today, but the pressure to change will continue to grow until all SAP customers are running a cloud ERP offering.