The Six Five team discusses SAP Q4 2023 earnings.
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Transcript:
Daniel Newman: Actually, I saw Christian Klein. I had a chance to talk to them a little bit when I was in Davos last week.
Patrick Moorhead: Nice.
Daniel Newman: It was good to see him, always good to chat, but this is another company that’s in a transformational story. SAP is by far one of the most implemented and deployed software stacks on the planet for companies’ ERP and operationally running their businesses. Of course, they have a lot of diversification in other areas but best known, of course, for ERP.
The company did well. It beat what the street was expecting and it had a good outlook. It was a mostly positive quarter overall, but the numbers, everybody’s been watching and the numbers I’ve been telling people to watch for the last several quarters have been in the cloud. Is the company growing their cloud revenue? Are they building a cloud backlog? Are they making more profit in the cloud? Are they accelerating their cloud? Then, of course, how are they tying and being able to complement the AI innovation that it’s making to winning more customers? The key for SAP is going to be getting their customers to S/4, getting their customers running on a clean core so that they can actually build and expand on their business.
Now, having said that, probably the most interesting data point of their earnings this quarter was their note that they’re going to be making some transitions on personnel. I think there’s about 8,000 people affected. I do have to call that out because, when I put that out as a tweet and on LinkedIn, I had a lot of people commenting on that. Over the last couple of years, companies have been looking at technology, looking at how to optimize their businesses and this is one of those things where, behind these conversations, there’s always a balance of people and technology. I think 8,000’s not all displaced, it’s not all about … I think some of them are going to get different roles. They’re looking at how to re-skill people, how to change roles for people and some of them will be bought out packages. That was very interesting, but not surprising.
Having said that, that was a footnote that I think over the next few quarters, you’ll see new ways of growth in SAP coming from their AI investments and AI technology. As the company gets their customers over to S/4, running on clean core, this is going to be where the opportunity comes for the company to expand. It’s going to be where their newest and best AI innovation will be visible, not just Joule, their overall business AI strategy. It’s the ability to take data, deliver to insights, do it very quickly. Of course, the company’s also very focused on operationalizing and streamlining workflows. This was something I’ve heard a lot on the earnings call, this is something I’ve heard a lot through the readout, is that SAP end-to-end is becoming more and more capable and, if you are on S/4, it’s more and more capable to deliver what the enterprise and the enterprise of the future needs.
Pat, you saw 20% revenue growth in cloud, 25% for the year, sorry, and 25% for the quarter, so it’s accelerating. Saw the backlog grow from 25 to 25% and you saw the profit grow up 23%, so good numbers overall. The operating profit was down a little bit. Something to watch but like I said, Pat, I think if they can keep accelerating cloud revenue, the company will be in good shape.
Patrick Moorhead: Dan, great breakdown. There was so much richness in this, you didn’t take all the oxygen out of this room. On Q4, if you remember years back the critics, and I was one of them, that SAP really didn’t have a cloud strategy and here we are: for the fourth quarter, they had 20% growth. They have a 25% cloud backlog. They have a growth of 20% in cloud revenue, 55% growth on S/4HANA. Largest growth in five quarters, so accelerating. SAP got a slower start but man, are they making up for it right now. It reminds me of Oracle. SAP doesn’t do IaaS, but they do SaaS and PaaS. I really did appreciate the breakout and I don’t know if this is a new breakout or maybe I just was asleep at the wheel, but I appreciated the 19% growth on SaaS and the 42% growth on PaaS services. 2023 net net, Dan, they did what they said they would do and they’re being rewarded for that.
What does ’24 and ’25 mean? Revenue growth is going to come. Their plan is to come from RISE with SAP and GROW with SAP, expanding through BTP, Flywheel, cross-selling all of their PaaS, SaaS and software capabilities, generating revenue through business AI. They talked a lot about strategic M&A partnerships. Interesting, strategic M&A. We could probably spend an entire session on that. Their plan for profitability is transformation, which is a combination of rebalancing heads. I feel awful for anybody who ever gets laid off but I have to tell you, I’ve been laid off at most companies and it always ended up being a much better opportunities. For the record, it was never for performance. I had a business unit shut down at NCR. AltaVista offered to move me from sunny southern California to Palo Alto. I said, “Ehhh, I’m going to AMD.” AMD had three months of cash left. They needed to get rid of people like me who aren’t an engineer or in sales.
Anyways, I digress. Profit also driven by cloud ERP. Interesting, interesting. Do you hear that, Oracle NetSuite and Fusion? I’ve got to tell you, one thing I really appreciated about what SAP does on its earnings: it seems to be more strategic than … I don’t know if that’s because it’s a German company and that’s what the requirement are, they just have more wiggle room or they don’t get whacked by the German SEC for this, but some really good insights that they brought out.
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.
