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SAP delivers solid Q1 and says it is in ‘advanced stages’ of applying generative AI

Derek du Preez Profile picture for user ddpreez April 21, 2023
Summary:
SAP also updated its outlook and lowered forecasts to reflect the expected Qualtrics divestiture that was announced earlier this year.

SAP
(SAP )

SAP has delivered a solid set of numbers for its Q1 2023 earnings, as its cloud revenue continues to grow, fuelled by strong S/4HANA bookings. The company’s CEO Christian Klein also said that SAP is working with OpenAI as an early release partner and that it will announce ‘disruptive new AI use cases’ in the coming months. 

However, the vendor has slightly softened its outlook to reflect the  expected sale of Qualtrics, an experience management platform that it acquired in 2018, to Silver Lake and CPP Investments. 

Speaking with analysts on today’s earnings call, Klein said: 

Importantly, in Q1 we delivered double digit operating profit growth demonstrating the significance of Q4 2022 as a tipping point of our transformation. We have now entered a new phase where our innovative portfolio is at the heart of our continued growth in 2023. We are continuing to execute on our focused growth strategy with S/4HANA and BTP at the core.

Our announcement in March that we came to an agreement to sell our stake in Qualtrics is an example of this focus on our portfolio. We believe that this transaction will unlock significant value for both companies and their shareholders; for SAP to focus more on our core cloud growth and profitability, and for Qualtrics to expand its leadership in the XM category that it pioneered. 

The key numbers for Q1 2023 include: 

  • Cloud revenue was up 24% to €3.18 billion and up 22% at constant currencies, up 1 percentage point sequentially. SAP S/4HANA cloud revenue was up 77% to €716 million and up 75% at constant currencies.

  • Current cloud backlog grew by 25% to €11.15 billion and was up 25% at constant currencies, a sequential growth improvement of 1 percentage point. SAP S/4HANA current cloud backlog was up 78% to €3.42 billion and up 79% at constant currencies.

  • Cloud and software revenue was up 10% to €6.36 billion and up 8% at constant currencies. Services revenue was up 12% to €1.08 billion and up 11% at constant currencies. 

  • Total revenue was up 10% to €7.44 billion and up 9% at constant currencies.

  • Cloud gross profit was up 28% (IFRS) to €2.24 billion, up 28% to €2.27 billion (non-IFRS), and up 27% (non-IFRS at constant currencies).

Updating its January 2023 forecast, as a result of the Qualtrics divestiture, SAP has said that its full year 2023 outlook for cloud and software revenue (at constant currencies) will be between €26.9 – 27.4 billion (+6% to +8), compared to its previous estimatte of €28.2 – 28.7 billion. 

Generative AI is coming 

As has been highlighted on diginomica, the launch of OpenAI’s ChatGPT has driven the B2B technology market into a frenzy, with vendors left, right and center rushing to integrate the technology and prove their generative AI capabilities. 

SAP hasn’t made any such announcement yet, but CEO Klein said that customers can expect announcements imminently - most likely at the company’s upcoming user event, Sapphire. He said: 

Let me touch on our efforts to embed AI across our portfolio. Our AI is built for business, with AI capabilities built in to deliver strong business outcomes for our customers' most critical business functions. 

We are in advanced stages to apply generative AI across our portfolio and we are working as an early release partner with OpenAI and together with other vendors. We are planning to announce new disruptive AI use cases. Stay tuned for Sapphire.

Klein also touched on recent successes from its RISE with SAP offering, which is geared towards getting customers onto the company’s cloud platforms. He said: 

Our offerings provide a pathway to solve many of the fundamental challenges that companies are facing today. This is behind the strong customer mentality we saw in Q1. RISE with SAP has become the preferred choice for customers transforming their businesses in the cloud. 

We are developing deep broad-based partnerships around the globe. Here are some examples: in January we announced the expansion of our long standing partnership with BMW Group. This will help them accelerate their digital transformation and manage the end to end business processes in the cloud. 

Henkel has selected RISE with SAP to transform their digital landscape and move to the cloud. Dolce and Gabbana, the luxury goods leader, recently chose RISE to drive their finance transformation. And HP, the global technology leader operating in more than 170 countries, selected RISE with SAP and expanded its investment in Q1, to support business transformation for its customers around the globe.

These customer examples show how SAP is continuing to deliver, despite the continued challenges being faced across nations and industries today. This is because our vision is directly tied to solutions that fortify our customers against those challenges and lead to stronger companies. 

My take

It wasn’t too long ago that SAP faced an uncertain future, with onlookers and customers unsure about whether it was successfully transforming itself into a cloud-based business and convincing buyers to migrate to S/4HANA. Recent quarters suggest that this is no longer the case and the company’s cloud business has strong momentum, achieving solid results in an unstable economic environment. Klein finished the call by saying: 

Our strategic transformation has reached a new phase where we are now a force for transformation across industries worldwide. 

Once the sale of Qualtrics is complete, SAP hopes that it can focus on its core offering and continue to drive cloud adoption across its install base. We will be following Sapphire closely as the event takes place next month in Orlando.

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