Supply Chain Matters provides highlights of B2B, and ERP Cloud based software provider SAP SE’s formal reporting of Q1-2024 financial performance.

Q1-2024 Financial Performance Highlights

This week, SAP’s report of Q1-2024 financial performance were headlined with added Cloud based adoption and increased revenue backlog.

The headlines included:

  • Quarterly Cloud revenues of €8.04 billion, up 25 percent at constant currencies supported by a reported 32 percent growth in adoption of this provider’s Cloud ERP
  • Cloud based revenue backlog growth of 28 percent in constant currencies to €14.2 billion, and was noted as the fastest growth rate on record for SAP.
  • IFRS Gross profit went up 9 percent in constant currencies to €2.83 billion.
  • IFRS operating loss of €787 million and a negative earnings per share.
  • Free cash flow in the quarter of €2.49 billion, and increase of 28 percent.

SAP CEO Christien Klein noted in the company’s reporting that: “We’re off to a great start in 2024 and we’re confident we’ll achieve our goals for the year. Looking ahead, we have powerful growth drivers in place – Business AI, cross-selling across our cloud portfolio, and winning new customers, particularly in the midmarket.”

Corporate Restructuring Impact

Noted in the commentary was that the quarterly loss was primarily impacted by a €2.2 billion restructuring charge associated with the announced 2024 corporate wide restructuring program that was highlighted by Supply Chain Matters in January.

At that time, corporate restructuring expenses were estimated to be around €2 billion, the majority being recognized in the first half of 2024. Upwards of 8,000 employees will be reportedly impacted, however, the tech provider indicates that the company expects to end 2024 at a headcount level similar to existing levels. The aim of this restructuring was noted intensifying the shift of investments to strategic growth areas, above all generative AI enabled technology. In the latest financial performance summary, it was noted that there was a positive reception associated with the voluntary early retirement program among eligible employees and that resulted in added impacts in share based compensation.

2024 Financial Outlook

SAP’s 2024 financial outlook remained positive with expectations related to:

  • Between € 29 billion and €29.5 billion in Cloud and software revenues at constant currencies compared to 2023 performance of €26.9 billion, a growth rate of between 8 percent to 10 percent.
  • Between €17.0 billion and €17.3 billion in Cloud revenue at constant currencies compared to 2023 performance of €13.67 billion, a growth rate of between 24 percent to 27 percent.
  • Between €7.6 billion to €7.9 billion in non-IFRS operating profit in constant currencies compared to 2023 performance of €6.5 billion, a growth rate of between 17 percent to 21 percent.

 

Additional Thoughts and Perspectives

SAP’s Cloud growth adoption momentum is laudable, and can certainly be attributed to increased momentum from the Rise with SAP customer support program to accelerate that journey. But a more important factor in this customer momentum was more likely SAP’s sweetening of the incentive, namely a reported upwards of 50 percent discount on software to existing customers for adopting the Rise program.

In our commentary related to Q4 and 2023 full year financial performance, we noted that for SAP customers specifically, the impact of this corporate restructuring on technology and delivery strategies will have more to do with the specific meanings of advanced AI adoption from internal or external services perspectives.

In the January slide deck related to SAP’s senior executive briefing, the leveraging of Business AI was defined as: “Comprehensive infusion of Business AI across all functions and processes.”

The enterprise software provider has announced investments in Gen AI start-ups Aleph Alpha, Anthropic and Cohere.

Marketing Spin

In our prior Supply Chain Matters commentaries related to SAP’s financial performance, we have shared our observation of marketing spin being weaved into financial performance commentaries.

The latest was SAP CFO Dominik Asam’s statement to business media that: “We already have more than 27,000 customers using AI-powered use cases.” We urge SAP customers to be cautious of the interpretation of AI use cases, specifically whether they involve application of traditional AI and machine learning enabled applications, which can be termed narrow AI.

The notion of Gen AI based applications are still a work in process, and for many SAP customers to be able to leverage this technology, they will have to have adopted the newest Cloud based versions of SAP s/4 HANA ERP, applications incorporated in the SAP Business Technology Platform along with various advanced data management of data lake investments.

An equally important consideration was included in Prediction Five our research arm’s 2024 Predictions for Industry and Global Supply Chains. Business and supply chain teams will be placing added attention on the needed scope and landscape of data management and harmonization to be able to pave the way for the eventual benefits of more cognitive and Generative AI based decision-making. Across supply chain planning, execution and materials management dimensions that is likely to take additional time and resources.

 

Bob Ferrari

© Copyright 2024, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.