The Six Five team discusses SAP’s Q2 2023 earnings release.
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Transcript:
Daniel Newman: Yeah. So it was solid quarter, but I think the future is more of what there is to be excited about than the quarter itself. Why do I mean that? Well, across most of its numbers for overall revenue, cloud revenue, it was kind of in line. It was in line or actually a little below. Here’s the hard news.
Pat Moorhead: The data, the facts.
Daniel Newman: The pure ground truth of the earnings result was in just about every area, while there was growth in across the board, it was a little less, it was literally nominally less in almost every category than where they were projected. So when you have a quarter like that, you’d think, “Oh, that was bad.” But they raise guidance. So clearly what SAP is seeing is they’re seeing momentum pick up in a really significant way. Now, Pat, you and I have talked about them every quarter for quite some time and where is the growth coming from? What should people be looking for? And really the question is, is SAP building something that’s going to be exciting for the generative AI era? Because these are the questions that really need to be asked and need to be answered.
First and foremost, it’s a very steady business. One of the things I like a lot about SAP is it’s got high dependable recurring revenue streams, very similar to the company we just talked about at Oracle. Hundreds of thousands of customers run on SAP, so this isn’t a company that’s going to see massive ebbs and flows. This is a company that’s trying to reach double-digit revenue growth with some higher revenue growth in what you would consider to be its areas of innovation, most specifically cloud and now with AI.
So while the overall sort of metrics came in just below, the company had strong operating profit growth, the company had strong cloud profit, the company saw its earnings per share up double digits on both a diluted and non-diluted basis. And it saw some really good cloud numbers, Pat. Let me give you a couple to pay attention to here. So the S/4HANA, its core database business growth in cloud up 74%, its backlog for S/4HANA cloud, 65%, its cloud revenue and cloud backlog, the overall cloud business, 19% growth and 21% growth respectively. So the company is seeing that moving directionally the correct way.
And furthermore, you know how I said their revenue is sort of safe and reliable, Pat? They’re seeing that number grow even further. That number now has hit 82% of the business now is considered predictable revenue. So I like that they use predictable because it’s not truly SaaS every month recurring, but it is attached to companies running SAP and it’s pretty measurable that these numbers will be reliable.
But, Pat, my number one thing that I was happy about to see was the guidance. There’s three numbers that everybody cares about. Number one is revenue, number three is profit, and wait, number one and number three? I can’t even get them in order. Number one is revenue, number two is profit-
Pat Moorhead: Grab another cup of coffee or Red Bull, buddy.
Daniel Newman: I was jumping ahead, I was jumping ahead, just bear with me. And number three, I spilled my coffee on myself, I think I told you that, so it hasn’t been drank but it’s being ingested through osmosis. Number three is guide. And oftentimes good quarter, meaning when you beat top and bottom and you guide poorly, people are like, “That’s in the past.” So I would almost rather see a company that slightly missed on the top and bottom, but that’s guiding ambitiously towards growth. So while it’s an imperfect set of numbers because you want to have all three beat raise, it’s still a strong result overall.
But, Pat, let me just talk about one other thing. We’ve talked a lot about cloud with SAP over the past several quarters and what I would say now is I think it’s pretty well understood that SAP has a cloud strategy, it’s migrating customers to cloud, and it has a continued opportunity for growth in this space. Different than Oracle, their approach is much more collaborative. SAP is not trying to be a hyperscale cloud provider. What they’re trying to do is partner with the hyperscalers to make SAP run successfully in the cloud.
But AI, and the company, what it’s calling business AI, which has led to partnerships with Google, partnerships with AWS, partnerships with Microsoft, an approach for generative using its database technology and using SAP as a workload that most companies depend on is really the story of the future for this company. It has seemingly found the right pairings, it’s using its best of breed and best of domain knowledge. Things like HR, things like supply chain, and it’s building generative and AI tools. And I like that they’re calling it business AI, Pat. We talk a lot about enterprise AI, but SAP’s had a bit of a legacy of talking to customers that aren’t only the largest enterprises, but I don’t know if you remember, SAP runs mid-size companies and its campaign.
It is one of those things that I think the company could differentiate on. And I’ve said that for a while. While everyone’s saying enterprise AI, SAP is saying business AI. And I think that’s one of the things is every company on the planet can benefit from implementing AI into their strategy. So with that in mind, overall a pretty solid number for SAP. Work to be done, guide up, AI has got to be the future, they got to land that story, but so far I’m encouraged with what I’m seeing.
Pat Moorhead: Yeah. As tech industry analysts versus equity analysts, we look for different things in these. The numbers are interesting, but stuff said in the call and content that’s disclosed, it’s ground truth, you can’t stretch it. So first of all, the numbers would’ve been a lot better that the predictable revenue number was up as I think you inferred. Stuff like Fieldglass, Concur, the SaaS stuff was down. And if you think about the market with temporary hiring reduced, it just makes sense. On the cloud, a lot of key messages. I mean, the S/4HANA numbers were really good.
And key messages here. SAP is really at this inflection point. Well, first of all, they used to apologize for not having an IAS service, which at the time when they were doing it, they stretched that out a little bit too long. But what they did is they found their way, they accepted the hybrid cloud and the fact that it’s not just beneficial if it’s their IAS, but it’s beneficial if it’s their software in somebody else’s cloud. And that’s really where they’re at right now and the key message here is that innovation at SAP is only going to be served up through the cloud.
And it’s not that SAP is not going to do a hosted service, but it’s all about rise the cloud, it’s like clean core cloud optimized, everything keeps updated. And we’ve seen very similar transformations with companies like Oracle and Microsoft app experiences that were all native on-prem and then had to be moved to the cloud. It is impossible for a company to have as clean an application on-prem as it is going to be in the cloud unless you completely rewrite it. And that is what Oracle went through with its entire application stack.
The other thing that pointed out for me was a lot of discussion about AI and they put a 30% value premium on having AI in the SAP workflow. Think about it, it makes sense. You have a couple options. You can take data that you have in SAP, you can ETL it out to something to do all the magic, and then pull it back in to do automation on it. And the other way to do it though is to have AI write where all the data is. And that is SAP’s play. And I think SAP users should have confidence in the data, because you’re not moving it out, you’re not transforming it.
And I think from a trust standpoint, SAP being a European-based company, Germany of course, but they have stricter restrictions around data and the three Rs. We heard responsible, and that’s policies. We heard reliable, and that’s cloud, that’s the accuracy of the data, the quality of the data, is the context preserved? And we also heard relevance, which is in the flow of what you’re doing. The in-the-flow reminds me a lot of what I heard from Salesforce, which was, “Okay, we have AI today, we’re going to supercharge it with generative and it’s in the flow, it’s what you recognize as opposed to having to go off and relive something.” So exciting times. The predictable number and the cloud revenue, really good signs, looking good. Congrats, SAP.
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.
