Q2 2024 Summary
Published Feb 18, 2025, 5:24 PM UTC- SAP is experiencing strong demand and pipeline momentum, with no significant macroeconomic headwinds impacting their business. This is evidenced by a very healthy sales pipeline entering the second half of the year and positive feedback from customers, particularly at the Sapphire conference.
- The company's Business AI strategy is resonating well with customers, leading to increased bookings and cloud migration. Customers are accelerating their move to SAP's cloud ERP suite to leverage AI capabilities, which is driving growth and expanding SAP's market share.
- The successful execution of SAP's transformation program is improving operational efficiency and profitability, allowing the company to increase its operating profit ambition for 2025 by approximately EUR 200 million.
- SAP's reliance on a strong Q4 performance adds execution risk, particularly given the challenging macroeconomic environment. Management emphasized that "Q4 performance will be crucial in achieving our full year targets and our 2025 ambitions," indicating that any downturn or failure to execute could significantly impact results.
- Declining transactional cloud revenues in the U.S. indicate potential weaknesses in key segments. SAP reported a minus 2% growth in Q2 on transactional cloud revenue in the U.S., with expectations of similar trends in the second half of the year. This trend may reflect economic factors affecting transactional revenues and could hamper overall growth.
- Expanded restructuring efforts suggest internal challenges and potential disruptions. SAP increased its restructuring program to affect between 9,000 and 10,000 positions, with expenses totaling approximately EUR 3 billion, raising concerns about operational impacts and employee morale. There may be uncertainties in achieving the projected savings and potential risks to future performance.
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Macro Impact and Pipeline Confidence
Q: Why isn't SAP showing macro impact others mention?
A: SAP saw fantastic performance in H1 and enters H2 with a very healthy sales and innovation pipeline. The strong adoption of GenAI use cases and the shift to a "best of suite" approach are driving confidence. SAP remains confident for the second half due to strong customer interest and a robust product offering. -
Business AI Use Cases Driving Efficiency
Q: What AI use cases are resonating with customers?
A: SAP has live use cases for Joule in HR, finance, and supply chain. Customers gain efficiency in content search and document management. For example, 150,000 Concur users benefit from AI that itemizes hotel bills and processes them automatically. Embedded AI reduces manual compliance checks and simplifies closing the books. -
Restructuring Impact on Profits
Q: Is there upside to 2024 profit with the expanded restructuring?
A: Early departures, especially in the U.S., provided relief in Q2. While hiring is accelerating, SAP is optimizing skill and location mix to improve profitability. The company increased its ambition for 2025 by EUR 200 million and feels confident about this year's profitability. -
Free Cash Flow Development
Q: What is the outlook for free cash flow despite restructuring?
A: Despite increased restructuring payouts to approximately EUR 3 billion, SAP maintains its outlook for 2024 and ambition for 2025. Working capital improvements are progressing faster than expected. Beyond 2025, cash conversion improvements will be gradual due to normalization of benefits from stock-based compensation. -
Cloud Migration Demand
Q: Is pull-forward demand for cloud migration still strong?
A: SAP continues to see strong pipeline momentum, with customers pulling forward moves to the cloud ERP suite. Customer feedback is highly positive, and SAP is expanding its reseller channel. SAP remains very optimistic for the year and for 2025. -
Cloud Backlog Growth and Macro Impact
Q: Any macro headwinds affecting cloud backlog growth?
A: No macroeconomic impacts were observed on deals. The cloud backlog is strong, and SAP sees opportunities to upsell and expand with existing customers. The land-and-expand strategy is effective in both large enterprises and mid-market segments. -
Enterprise Architects and Skill Gaps
Q: How is SAP addressing the shortage of enterprise architects?
A: SAP is reskilling existing architects and moving them to support RISE customers. Training is being expanded through academies, and external hiring is underway. This helps SAP guide customers in business transformation and enhances the RISE offering. -
Q4 Significance for Cloud Revenue Growth
Q: Why is Q4 decisive for 2025 cloud revenue growth?
A: Q4 is SAP's biggest quarter for order entry and cloud bookings. While the pipeline looks good, execution in Q4 will impact the company's ability to achieve its cloud revenue growth targets for 2025. SAP is cautious and prudent about the market environment. -
Transactional Cloud Revenue Outlook
Q: What's the outlook for transaction-related cloud revenues?
A: In Q2, transactional cloud revenue in the U.S. declined 2%. A similar or slightly better performance is expected in H2. Transactional revenues are becoming a smaller percentage of overall revenue, lessening their impact. -
Client Decision-Making and AI
Q: Are clients delaying decisions due to AI developments?
A: SAP is not seeing delays; instead, embedding GenAI is accelerating demand. SAP uses customer insights to develop AI use cases that deliver efficiency gains. The company collaborates with industry partners to prototype and build AI solutions. -
Headcount Changes and Hiring Strategy
Q: Why is SAP hiring more despite headcount reductions?
A: Higher adoption of voluntary exit programs led to more departures. SAP is rehiring in areas with greater skill scarcity or consolidating teams in cost-effective regions. This strategy improves efficiency even if headcount remains flat. -
Long-Term Efficiency Initiatives
Q: Is there scope for more efficiency gains in the medium term?
A: SAP continues to find efficiency opportunities, such as streamlining operations and expanding digital channels. Automation and AI are being applied internally to gain productivity. Centralizing cloud operations will also lead to more efficiency over time.