Q1 2024 Summary
Published Feb 18, 2025, 5:24 PM UTC- Strong demand for SAP's Business AI is accelerating cloud adoption, with customers moving faster to S/4HANA to leverage AI capabilities. This is contributing to growth in the Current Cloud Backlog (CCB).
- SAP's Cloud ERP Suite achieved its ninth consecutive quarter of over 30% growth, demonstrating sustained momentum and significant cross-selling opportunities within the installed base.
- Successful transition of the installed base from maintenance to cloud through RISE and GROW with SAP offerings is expected to boost revenue growth and profitability beyond 2025. More than half of the €11 billion maintenance base is poised for cloud conversion, enhancing long-term revenue prospects.
- Uncertainty around customers converting from maintenance to cloud products by 2027 could impact future revenue. Dominik Asam mentioned that more than half of their €11 billion maintenance base is in products going out of regular maintenance by end of 2027. He acknowledged that while "the lion's share... will... disappear" by 2030, there may be delays in customers transitioning to cloud solutions, potentially affecting revenue growth.
- Higher restructuring costs and stock-based compensation expenses may negatively affect profitability. SAP accrued €2.2 billion in restructuring provisions, closer to the upper end of initial expectations, partly due to a strong share price increase affecting stock-based compensation expenses by €135 million. Dominik Asam noted that these expenses are based on preliminary assumptions and that visibility will improve over the course of the second quarter.
- Stagnation in transactional business could dilute cloud revenue growth despite strong CCB growth. Dominik Asam stated that the biggest dilutive factor from current cloud backlog to cloud revenues is the transactional business, which is "now kind of stagnating" and "actually very, very slightly even decreasing," potentially impacting overall cloud revenue growth.
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AI Impact on Growth
Q: How is AI contributing to growth and monetization?
A: SAP reports that AI is a key driver in accelerating customer migrations to S/4HANA and increasing adoption of cloud services. Customers are motivated to move faster to leverage SAP's business AI capabilities, stimulating growth in the Cloud Current Backlog (CCB), now at 27%-28% growth. AI is integrated into offerings like Joule, and customers are adopting premium AI packages, contributing to revenue. -
Margin Expansion and Rule of 40
Q: Can SAP achieve the Rule of 40 in margin expansion?
A: SAP acknowledges the Rule of 40 as an industry benchmark and aims to gradually move towards it. Currently, combining free cash flow to sales margin plus growth, SAP is at 25% for 2023. By 2025, SAP expects to cover more than half the gap, focusing on accelerating revenue growth and improving margins. -
Cloud Current Backlog (CCB) Growth
Q: Is the high CCB growth sustainable going forward?
A: SAP is confident in sustaining high CCB growth rates of 27%-28%, driven by strong demand and pipeline. The adoption of business AI and increased Cloud ERP Suite growth, which has seen 30%+ growth for nine consecutive quarters, supports this outlook. -
Maintenance Transition to Cloud
Q: How much maintenance revenue needs to transition to cloud by 2027?
A: Approximately more than half of SAP's EUR 11 billion maintenance base is in products that require transition to cloud by 2027. SAP anticipates that the lion's share of this will move to cloud by 2030, as they will not extend maintenance on these products. -
Transformation Charges and Restructuring
Q: How will transformation charges phase over the year?
A: SAP has accrued EUR 2.2 billion for restructuring, with minimal cash out in Q1. The program will run throughout 2024 and into Q1 2025, with cash outflows expected over this period. They are managing the workforce transformation carefully to align with business needs. -
Stock-Based Compensation Impact
Q: How will higher stock-based compensation affect EBIT guidance?
A: Due to a significant increase in share price in Q1, SAP faced an incremental EUR 135 million in stock-based compensation charges. Despite this, SAP maintains its unchanged EBIT guidance by compensating through cost management elsewhere. They expect sensitivity to reduce as they transition to more equity-settled plans. -
Free Cash Flow and Factoring
Q: Did free cash flow include final factoring repayment?
A: SAP's strong free cash flow in Q1 partially reflects the discontinuation of factoring practices. Some factoring roll-off occurred, but not fully, as some deals are longer-term. SAP also paid EUR 0.2 billion in fines in Q1, which is now digested. -
Services Business Growth
Q: Why did services business grow only 1%?
A: The modest 1% growth in services is due to seasonality and one-time factors from the previous year. SAP delivers 90% of services through its ecosystem, focusing internally on high-margin services like architecture and business transformation consulting. -
Large Deals and Net New Customers
Q: Are large deals driven by net new customers?
A: Large deals are often part of customers' multiyear transformations, including both migration and expansion into new modules. While migrations like RISE with SAP contribute significantly, SAP also sees net new customer growth, starting with smaller deals that expand over time. -
Cloud Incentives Impacting CCB
Q: Did cloud incentives accelerate CCB growth?
A: SAP expanded cloud incentives in Q1 to include the entire Cloud ERP, not just S/4HANA Finance. This positively impacted CCB growth by encouraging customers to migrate additional modules to the cloud. SAP views this as a strategic move to build recurring revenue rather than a headwind. -
Internal AI Efficiencies
Q: How much efficiency is gained from internal AI use?
A: SAP anticipates triple-digit million euro efficiencies from applying AI internally. By automating tasks in areas like SuccessFactors, procurement, finance, and development, they expect to increase productivity, such as a 30%-40% boost in developer productivity.