SAP Stock: 2024 Q1 Earnings Summary

SAP SE(SAP), a global powerhouse in the enterprise software market, provides a comprehensive range of solutions that support the critical business functions of diverse industries. As we review the first quarter of 2024, this report aims to provide stakeholders with a detailed analysis of SAP's financial outcomes, strategic directions, and market performance.

Participants

• Anthony Coletta: Chief Investor Relations Officer.
• Christian Klein: Chief Executive Officer.
• Dominik Asam: Chief Financial Officer.
• Scott Russell: President, Customer Success.

Financial and Performance Report

Key Financial Metrics

• Current Cloud's backlog grew by 28% to EUR 14.2 billion, marking the fastest growth on record.
• Cloud revenue increased by 25% reaching EUR 3.9 billion.
• Operating profit was reported at EUR 1.5 billion in Q1, up by 19% from the previous year.

Revenue Details

• Cloud ERP Suite revenue was up by 32%, reaching EUR 3.2 billion.
• Software license revenue decreased by 25%.

Regional Performance

• Strong cloud revenue growth in APJ and EMEA; robust performance in the Americas.
• Notable performances in Brazil, Canada, Germany, Italy, UAE, India, and South Korea.

Profitability and Expenses

• Cloud gross profit grew by 28%, resulting in a cloud gross margin improvement of 1.8 percentage points to 72.5%.
• IFRS operating profit impacted by EUR 2.2 billion of restructuring provisions leading to an IFRS operating loss of EUR 787 million.

Operational Highlights

Customer Acquisition and Expansion

• New sign-ups for RISE with SAP included companies like Lindt & Sprüngli, SKF, and Curtiss-Wright.
• Adoption of Business Technology Platform (BTP) by Maersk for integration across SAP and non-SAP IT landscapes.

Sustainability Initiatives

• Addition of over 100 customers for SAP's sustainability solutions including new clients like Ericsson and Weiland.

Product and Service Updates

RISE with SAP Program

• Large installed bases with over EUR11 billion remaining support revenue to be converted to cloud services.
• Focus on transforming core processes end-to-end for customers moving their installed base to the cloud.

GROW with SAP Offering

• Targeted at net new customers or new business units within large enterprises for rapid deployment of ERP solutions.

Business AI Integration

• Over thirty new AI scenarios released across the portfolio since Q4 last year with more than one hundred additional ones planned for release throughout the year.

Future Outlook and Guidance

Financial Projections

• Confirmation of the outlook for FY2024 as well as ambitions set for FY2025 based on current performance metrics and strategic initiatives underway.

Strategic Focus Areas

• Continued emphasis on scaling revenue through innovations such as Business AI which is expected to transform customer engagement models significantly.
• Ongoing internal transformation program aimed at enhancing operational efficiencies which are projected to yield triple-digit million amounts in savings primarily through AI integration across processes.

This detailed summary encapsulates the key discussions from SAP SE's Q1 earnings call including financial performance, strategic initiatives like RISE with SAP and GROW with SAP offerings along with a significant push towards integrating Artificial Intelligence into their service offerings which collectively contribute towards a positive outlook for FY2024 and beyond.

Q&A

Toby Ogg - JP Morgan Cazenove Limited: Can you provide insights on the margin expansion and the Rule of 40 target?

The management discussed the Rule of 40 as an observation based on benchmarking with competitors. They highlighted their progress towards achieving it by scaling costs slower than revenues, anticipating revenue mix improvements, and accelerating revenue growth.

Adam Wood - Morgan Stanley: How is AI being monetized, and what are the opportunities for capturing custom code spend?

The management explained that AI is monetized through consumption-based models, premium offerings like RISE and GROW packages, and custom AI scenarios built on Business Technology Platform (BTP). They emphasized the value proposition of SAP Business AI in terms of out-of-the-box functionality, choice of leading models, and integration with enterprise standards.

Johannes Schaller - Deutsche Bank: What's driving the acceleration in Cloud Current Backlog (CCB), particularly in Cloud ERP Suite growth?

The management attributed the acceleration in CCB to strong demand for best-in-class processes, automation capabilities, data integrity within SAP platforms, and innovation insights driven by Business AI. They also highlighted a robust pipeline growth across regions.

Frederic Boulan - Bank of America: How do cloud incentives impact CCB acceleration? Is there a potential headwind to CCB from these incentives?

The management discussed how migration incentives incentivize customers to migrate to Cloud ERP modules beyond S/4HANA finance. These incentives aim to drive recurring revenue streams while supporting customers' transformation journeys without impacting margins negatively.

Michael J. Briest - UBS Limited: What's the phasing plan for restructuring charges throughout the year? Are there plans for working capital improvements impacting EBIT guidance?

The management clarified that restructuring charges will be phased throughout 2024 into early 2025. They mentioned ongoing discussions with affected employees and emphasized that any additional reductions would be based on sound business cases. Regarding working capital improvements, they noted ongoing progress but cautioned against aggressive assumptions for 2025.

James Goodman - Barclays Capital: Can you discuss cloud migration incentives rolled out in Q1? How does stock-based compensation impact financials?

The management explained that migration incentives focus on transitioning to Cloud ERP modules beyond S/4HANA finance without negatively affecting margins. They also addressed stock-based compensation increases due to share price appreciation but anticipated no significant reoccurrence due to unique factors driving up costs temporarily.

Disclaimer: This analysis is based on the provided stock chart snapshot and is not a substitute for professional investment advice. Always conduct your own research or consult a financial advisor before making investment decisions. Try Intellectia.AI Usecase to get more details.