Shares of SAP rise as AI fuels cloud transition plans – Business
Shares of the enterprise software giant SAP SE were moving higher in extended trading today after the company posted mixed first-quarter earnings results.
The Germany-based firm reported total sales for the March quarter of €8.04 billion ($8.57 billion), up 8% from a year earlier and just above Wall Street’s consensus estimate of €8.02 billion. Earnings before certain costs such as stock compensation came to 81 cents per share, below the consensus estimate of 98 cents per share.
Cloud revenue came to €3.93 billion, up 24% from the same period one year earlier, in line with the Street’s estimates. The company also reported software revenue of €3.03 billion, slightly ahead of the Street’s forecast of €3.01 billion. SAP said it ended the quarter with a cloud backlog of €14.2 billion, up 27% from a year earlier. Cloud backlog is a measure of cloud-based revenue that’s expected to be booked within the next 12 months. ‘
All told, the company reported an operating loss of €787 million, with the deficit being blamed on the impact of a €2.2 billion provision relating to share-based compensation expenses. Without that, its profit would have come to €1.53 billion, below the forecast of €1.7 billion.
SAP, which is the biggest software company in Europe, has been looking to migrate customers from its legacy, on-premises systems to the cloud. To entice customers, it has been luring them with the promise of advanced artificial intelligence services that can enhance their business processes. Earlier this year, the company revealed it’s offering discounts of up to 50% to existing clients that agree to accelerate their shift to cloud subscription models that ultimately tend to be more profitable.
That plan appears to be going well. SAP Chief Executive Christian Klein (pictured) said the company has gotten off to a “great start” to fiscal 2024, adding that he’s confident it will achieve its goals for the year. “Looking ahead, we have powerful growth drivers in place with business AI, cross-selling across our cloud portfolio, and we’re winning new customers particularly in the midmarket,” he said.
SAP has been at the forefront of an industry-wide trend to incorporate generative AI tools into its various products and services, with one of its main offerings being a virtual assistant called Joule that helps users to find insights from within its vast databases. Eventually, SAP hopes to evolve Joule to take on more advanced tasks, such as troubleshooting supply chain and logistics issues for customers. In its most recent update, SAP added generative AI features to its SAP Datasphere platform, a revamped cloud data warehouse that’s designed to serve as the main, centralized point for connecting, harmonizing and distributing customers’ data, both from SAP and non-SAP applications.
As part of SAP’s AI push, it has also been investing heavily in a number of startups, participating in major rounds by Aleph Alpha GmbH, as well as Anthropic PBC and Cohere Inc.
SAP once again reiterated its 2024 financial outlook, calling for cloud revenue of between €17 billion to €17.3 billion, which would represent a gain of 24% to 27%. It’s also forecasting combined cloud and software sales of €29 billion to €29.5 billion, up 8% to 10%, with adjusted profit for the year expected to come to between €7.6 billion and €7.9 billion. The company said it expects to see compounded average revenue growth of 10% through to 2025, and plans to accelerate its growth from there.
In January, SAP announced a restructuring program that’s key to its growth plans, which will see it eliminate or reassign around 8,000 jobs. The plan is intended to accelerate SAP’s AI feature deployments and “transform its operational setup to capture organizational synergies, AI-driven efficiencies and prepare the company for highly scalable future revenue growth.”
American depository receipts of SAP rose 2.5% in late trading, adding to a 1% gain during the regular trading session. In the year to date, SAP’s shares are up 15%.