SAP commits to massive AI-centric restructuring as share price soars to new high on strong Q4 numbers
A €2 billion ($2.2 billion) AI-centric restructuring that will impact around seven percent of SAP’s 108,000 full-time staff stole the thunder from a strong set of Q4 numbers today. According to CEO Christian Klein:
With this program, we are planning to intensify the shift of investments to strategic growth areas above all Business AI and to drive new efficiencies powered by AI across the business.
AI is dominating customer conversations, he stated, describing generative AI as “the greatest opportunity since the rise of the cloud”, hence the need for this transformation program:
To reflect the central importance of AI for our future, we have updated our ambition to be the number one enterprise application and Business AI company. The transformation program we are announcing today will shift additional resources to Business AI in line with the significant growth potential we see for SAP. Over the next two years, SAP will invest almost €1 billion to develop powerful AI use cases for our customers.
This will positively impact SAP’s bottom line, argued Klein:
Building on the significant work we have done in the last few years, we see an opportunity to accelerate profitability beyond our initial ambition for 2025. The level supporting this accelerated profit growth are the following and more cloud and adoption centric go-to-market model with clear roles and responsibilities along the customer value journey. A more focused portfolio, concentrating investments on areas that drive major synergies with our core. This allows us to capitalize on the massive market we can address for our cloud ERP suite, a comprehensive infusion of Business AI across all functions and processes and an accelerated workforce transformation to ensure we have the best skills in the right places.
But there will be an impact for staff, he added:
The decision affecting colleagues this way is never easy, but we truly believe it is the right next step. We are setting up SAP for strong competitive future that all stakeholders, including employees, will benefit from. This program is expected to affect 8,000 positions worldwide. We will make every possible effort to focus on re-skilling and voluntary exits with the aim to mitigate the social impact of the program. Given that re-investments into strategic growth areas, we expect to finish 2024 with a headcount similar to current levels.
Numbers
The restructuring was announced at the same time as the company turned in its Q4 numbers. On a non-IFRS basis, total revenue was €8.47 billion, up from €8.06 billion in the year-ago quarter. Cloud revenue rose to €3.70 billion from €3.08 billion, while license revenue fell to €841 million from €907 million. Operating profit fell from €2.56 billion to €2.51 billion. Klein commented:
Q4 provided an exceptionally strong finish to 2023, most importantly, in terms of cloud momentum. Current cloud backlog increased by a strong 27%, that’s higher growth than ever before and cloud revenue growth accelerated to 25%…For the full year, we met or exceeded all our outlook KPIs. Current cloud backlog grew 27% to €13.7 billion. Cloud revenue was up 23% to €13.7 billion. Our operating profit exceeded the guidance range by nearly €100 million. What is more, total cloud backlog increased 39% to €44 billion, giving SAP incredible resilience for the years to come.
He added:
The ingredients are clear. We lead with our RISE and GROW with SAP offerings. On RISE, we are signing up hundreds of net new customers every year. On top, we still have more than €11 billion of support revenue that we can convert to cloud revenue over the long-term. We are rolling out targeted migration incentives and methodologies to accelerate the RISE conversion. At the same time, GROW is gearing up to be a big success with over 700 new customers signing up since our launch. With RISE and Grow comes the Business Technology Platform, BTP has become a central piece in the architecture of our customers. And our Platform-as-a-Service solutions now stand at a revenue run-rate of €2.5 billion, with strong double-digit growth. The flywheel is just starting to spin as more and more customers and partners move to a clean core on top of BTP.
Klein said that the firm is seeing increasing levels of cross-sell based on the integrated suite approach, with SAP’s top 1000 customers on average using four cloud solutions, up from three last year. For the top 100 customers, that average is five, up from four 12 months ago.
He cited three use case exemplars of what he called “strong customer momentum” in the quarter:
Vodafone is betting on RISE with SAP. They have selected Signavio for their Business Process Management as well as BTP, Datasphere and Business AI from SAP. This will help Vodafone to boost innovation and drive productivity. EMS, a leader in the Brazilian pharma market is migrating its Oracle platform to RISE with SAP. The company is looking to modernize operations, enhance scalability and drive cost predictability for future growth. Volkswagen has been implementing the first large-scale cloud project in the Human Resources function based on SAP SuccessFactors. They will now also use SuccessFactors to digitize all essential HR processes and take the employee HR experience to the next level.
My take
We had promised to quickly turn SAP into a cloud company, a company with double-digit profit growth and we can comfortably say we delivered. SAP is stronger and more relevant than ever and the figures for 2023 clearly show that the transformation we have been driving for the past 3 years is now entering into a new phase.
The rocketing SAP share price this morning tells its own story, hitting a new high on the back of the numbers, but also I suspect on the perceived solidity of the company’s strategic direction towards an AI-centered next phase.
Onwards!
