The Six Five team discusses SAP Q2FY24 earnings.
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Transcript:
Daniel Newman: SAP once again doing its thing. How did it pan out for them?
Patrick Moorhead: Yeah. I feel like they absolutely crushed it. I gave on X, I said a solid quarter, but the more I dug in, and the conversations I had with the folks in IR at the company, the better it looked, and the numbers speak for themselves. And listen, compare it to some overall company growth rates by the Mag Seven, 10% might not seem like something that gets you excited, but what I think people should get excited about is the growth in Cloud, and whether it’s Cloud Revenue, Cloud ERP, Cloud Backlog, Non-IFRS, which is Non-GAAP EPS, just up, up, up. And the star of the show, even free cash flow know, 114% improvement. On EPS, it was up 59%, right? And then on the Revenue side, and Cloud, you’re looking between 25 and 33% depending on which number you go into.
And why is Cloud such a big deal? Well, there’s two reasons. First of all, the big SAP growth comes from when its clients move from the old bits, to the new bits. And there’s a couple of different implementations on it. It’s a hybrid multicloud capability. But the other key element there is you have to do Cloud to do Generative AI, and customers are absolutely moving. I remember when Christian Klein, when he started the numbers, and the 2024 estimates that he gave, people really didn’t fully buy in, or investors really didn’t buy in. But as we see right now, they had a 7% stock bump by the way, that’s been very durable since their earnings came out. They had this initial pop, and they’ve kept it.
Investors are starting to believe. One thing that the street liked was an increase in the amount of job cuts. Let’s just be fully transparent here. The initial number was 8,000, and it got moved to 10,000. So a 25% bump in the amount of job cuts. And by the way, when Christian peeled that onion back, it wasn’t that those people aren’t going to be backfilled. The key message here is getting the right people doing things that matter. I’m sure there are going to be some efficiencies from Generative AI, and AI internal there, but I like the way that they’re playing this. So great job Christian and team. And by the way, if you go and look at the annual, that stock, SAP is up 60% in the past year. That is absolutely astounding, and I dial back. When Christian first started, people were not viewing SAP as a serious next generation technology company.
And that doesn’t mean it’s not critical, because it is, more factories, more businesses. It is your ERP system goes down, or your supply chain system goes down, or even your HCM system goes down, well actually HCM can go down, but you got to make sure people get paid. But ERP goes down, you’re pretty much dead in the water. So congrats to the entire team. More people are becoming believers. My final comment for 2025, the company increased what it calls its ambition by 2%. They increased 2025 profit by 2 percentage points, in addition to reiterating their 2024 outlook.
Daniel Newman: Yeah. Look, Pat, you hit a lot of the important data on the head. I want to double click a minute on the restructuring, and that’s the word that they’re using. But let’s be very clear about what that is. That was a turnover. We are in an inflection point where you actually, if you’re evaluating a company, and they aren’t making some pretty fundamental changes in their personnel right now, they’re probably going to be falling behind substantially. The talent that’s going to be required for this next iteration of transformation in the AI era is going to be different. And I’ve talked a lot over the last, I don’t know, 100 podcasts about this idea of prune to grow. And I’m going to continue to reiterate this idea of prune to grow. During this era, companies are looking for efficiencies. Guys, the economy’s not that good.
It’s just not. We are in a very interesting moment. We’ve got AI as a tailwind for the tech industry, but it’s only really helped a small number of companies. We are looking for this digestion period to move into something more substantial, more palpable, that is going to impact more companies, more industries. And by the way, we’ll release some data on that at Futurum Group really, really soon when we put out our new chipset data. And ultimately, these are smart plays. You’ve got to get to the right size, and then you add back very strategically. But the market is tough. The actual number of jobs in the Silicon Valley right now for technical roles in these big tech companies is back to pre-COVID levels. So we had that huge spike, and we talked about all the hiring. It’s back to. So we’ve added all this earnings growth, all this revenue growth, and then companies found out they didn’t need as many people to do it.
And I know it’s an unpopular sentiment, and when I say this, people are going to be like, “Oh. You don’t care, and you don’t want people.” It’s like, “No. It’s just that companies came to realize Elon Musk when he did this, and everybody can hate X, but X has been pretty successful, and he did it with 80% less people.” Now is that the norm? Probably not. But most companies, whether it’s been the IBM best practice of the longest time, of that 10% of the bottom get cut every year is companies need to prune to grow. It’s good, what we talked about at the beginning, the talent, the best 11 on the field. The only other comment I’m going to make about SAP is look, Cloud growth is there.
They’re growing in the area that they said they would grow. And they’ve got the Cloud backlog. They’ve got the Cloud growth. Customers are moving over, and they’ve done a pretty good job of being customer friendly, not really upsetting the apple cart too much, but at the same time making sure that their best features, their Generative AI features are dependent upon the utilization of their product in the Cloud, and not allowing people to customize their prem-based instance of SAP to death, which a lot of companies will do. They’re still running 10 plus year old SAP instances. So that update is going to be good. And it’s a big opportunity. It’s a big opportunity for SAP. It’s been a big opportunity for its competition, Pat. So overall a good quarter for the company.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
