Q4 2023 Summary
Published Feb 18, 2025, 5:23 PM UTC- Exceptional cloud revenue growth and strong backlog: SAP reported that current cloud backlog increased by 27%, the fastest pace on record, indicating robust future revenue potential. This was underpinned by strong customer demand for their RISE and GROW with SAP offerings, with large cloud transactions contributing significantly to cloud order entry.
- Profitability acceleration through transformation program: SAP is implementing a transformation program expected to increase the non-IFRS operating profit ambition for 2025 from EUR 11.5 billion to EUR 12 billion. The restructuring aims to enhance scalability and operating leverage, leading to margin expansion beyond 2025.
- Strategic investment in Business AI driving future growth: SAP is investing almost EUR 1 billion over the next two years in Business AI to become the #1 enterprise application and Business AI company. The company's strong position in AI, combined with its extensive customer base and data access, positions it well to capitalize on the growth opportunities in generative AI.
- The significant restructuring planned for 2024, affecting 8,000 positions worldwide, may lead to execution risks and potential disruption in sales operations, causing volatility in the early parts of 2024. This concern arises because the restructuring involves the go-to-market organization, and there is a chance of disruption to the sales motion.
- SAP's profitability in Q4 2023 was negatively impacted by increased expenses, including settlements related to compliance cases with the DOJ, SEC, and Brazilian authorities amounting to approximately EUR 200 million, higher bonus accruals, and accelerated amortization charges on commissions. These factors may continue to weigh on future earnings.
- Stagnant transactional revenue, particularly in the supplier network business, is acting as a headwind on cloud revenue growth, shaving off about 1.5 percentage points from growth in 2024. This stagnation may impact SAP's ability to meet future cloud revenue growth expectations.
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Restructuring Plan and Margin Expansion
Q: Will restructuring drive margin expansion beyond 2025?
A: Management expects the restructuring program to yield benefits beyond the uplift in 2025, aiming to decouple cost growth from top-line growth and converge to best-in-breed fall-through. This should lead to continued margin expansion beyond 2025. -
Cloud Growth Outlook and CCB Acceleration
Q: What's driving the acceleration in cloud growth and CCB?
A: The strong 27% CCB growth in Q4 was driven by a great end of year in bookings and contributions from LeanIX. Despite transactional revenues stagnating at around €800 million, overall cloud momentum continues, supported by a total cloud backlog of over €44 billion. Management is confident in the cloud revenue guidance of 24%-27% for 2024. -
Free Cash Flow Conversion
Q: How will free cash flow improve in 2024 and 2025?
A: The uplift in profit, net of the tax rate, will flow into cash flow. Improvements in stock-based compensation cash conversion and moderate enhancements in working capital, such as collecting money earlier, are expected. Management is confident these factors will drive free cash flow growth, with no miracles required, just proper execution. -
ERP Suite and Nonperforming Cloud Assets
Q: What are plans for non-cloud ERP assets in the portfolio?
A: SAP's cloud ERP suite represents 82% of revenues, growing at 33%. The other 18%, including the former Enterprise Cloud business, is in decline. The company is shifting customers to the RISE with SAP offering, with no further restructuring required. The extension suite is expected to be a mid-single-digit grower, and the ERS business is projected to decline by 16% next year. -
License and Maintenance Revenue Decline
Q: Do you anticipate a steep decline in maintenance revenue?
A: Over time, a continuous decline in license revenue is expected due to structural transitions to cloud. However, there is volatility, and Q4 saw a good performance in license revenue. Maintenance revenue shows resilience as customers return to SAP from third-party support providers, signaling a strong underlying business. -
Constraints on Converting Backlog into Revenue
Q: Are there bottlenecks in converting cloud backlog to revenue?
A: While capacity challenges existed due to strong demand, SAP is working closely with partners to ramp up implementation capacity. In 2023, SAP's practice grew faster than anything else in partner portfolios, and efforts to increase capacity will continue in 2024 to ensure conversion of backlog into revenue. -
Impact of AI and SAP's Differentiation
Q: How does AI differentiate SAP's offerings?
A: SAP is developing a strong organic AI platform, infusing AI directly into business processes through tools like CoPilot. With access to mission-critical data from over 30,000 customers, SAP's AI algorithms become smarter daily, solving problems others can't and ensuring responsible AI. This deep integration provides a significant competitive advantage. -
Execution Risks Due to Restructuring
Q: Will restructuring disrupt the sales motion?
A: Management has a mature plan and is confident in execution. They are not touching quota-carrying sales roles but are harmonizing roles and responsibilities around them. Pipeline and market data are strong, and the go-to-market transformation aims to access and expand into new markets, mitigating potential disruptions. -
Transactional Cloud Revenue Stagnation
Q: What's the outlook for transactional cloud revenue?
A: Transactional revenue, approximately €800 million, remained flat in 2023 and is expected to stay stagnant in 2024, reducing cloud revenue growth by about 1.5 percentage points. Strategic investments in the supplier network business are anticipated to lead to more normal growth in 2025, possibly high single-digit.