SAP Financial Results Q2 2023
SAP has announced its financial results for Q2 2023, showcasing a robust performance for the quarter. This week, IgniteSAP will summarize the numbers and analyze their implications, particularly in the context of SAP’s ongoing cloud growth.
- SAP Cloud revenue is up 19% and (22% at constant currencies) with SAP S/4HANA cloud revenue up by 74% and increasing to 79% (at constant currencies).
- Current cloud backlog is up 21%, (25% constant currencies).
- IFRS cloud gross profit rose 20%, with non-IFRS cloud gross profit up 20%, (24% at constant currencies), due partly to SAP’s new cloud delivery program.
- IFRS operating profit increased to 28%, with non-IFRS operating profit up 23%, (28% at constant currencies)
- The revenue and operating profit outlook for SAP in 2023 has been updated.
- SAP Business AI and premium AI offerings have expanded market opportunities.
SAP CEO Christian Klein said:
“This has been another strong quarter. We see significant opportunities ahead, in particular through the transformative power of AI. We are focused on delivering SAP Business AI that’s relevant, reliable, and responsible, and we see significant possibilities for market expansion through these technologies and new premium offerings.”
SAP’s new CFO Dominik Asam said:
“We are very pleased with our first half results. The revenue growth and increased profitability, combined with sustained growth of our cloud backlog, demonstrate the strength of our business model. Q2 performance puts us on the right trajectory and allows us to raise our cloud and software revenue, as well as the operating profit outlook for the year.”
Financial Highlights of Q2
Current cloud backlog increased 21% to €11.54 billion, and to 25% at constant currencies. The current cloud backlog for SAP S/4HANA rose by 65% to €3.72 billion, (70% at constant currencies).
Cloud revenue in Q2 grew by 19% to €3.32 billion (22% at constant currencies). SAP S/4HANA cloud revenue was up 74% to €823 million (79% at constant currencies).
Revenue from software licenses reduced by 26% to €316 million and was down 24% at constant currencies. Together, cloud and software revenue rose by 5% to €6.50 billion (8% at constant currencies). Services revenue increased 4% to €1.05 billion (7% at constant currencies). The total revenue for the quarter grew 5% to €7.55 billion (8% at constant currencies).
The share of more predictable revenue in Q2 increased by 2 percent to 82%.
Cloud gross profit was up 20% (IFRS) to €2.36 billion, up 20% to €2.40 billion (non-IFRS), and up 24% (non-IFRS at constant currencies), due to the successful completion of the new cloud delivery program.
IFRS operating profit increased 28% to €1.36 billion, mainly due to cloud revenue growth, the new cloud delivery program, and better efficiency.
SAP’s decision to wind down its business operations in Russia and Belarus reduced operating profit in the second quarter of 2022, but Q2 IFRS operating profit growth resulted from the restructuring expenses reported in Q2 2022. Higher share-based compensation expenses primarily due to the share-price development over the second quarter of this year also reduced the degree of operating profit growth.
IFRS basic earnings per share increased 15% to €0.62. Non-IFRS earnings per share (basic) increased 12% to €1.07. The effective tax rate was 33.8% (IFRS) and 30.4% (non-IFRS).
In Q2 2023 free cash flow increased to €604 million, because of expansion of operating profit and a reduction of payments, including share-based compensation, Capex, and leasing. Free cash flow rose by 19% to €2.56 billion for the half year.
Qualtrics Divestiture Completion
SAP announced the completion of the sale of its stake in Qualtrics on June 28, at US$ 18.15 per share. The transaction close added an after-tax gain on sale of roughly €3.2 billion (IFRS) and approximately €2.6 billion (Non-IFRS) to SAP’s results. The increased cash resulting from the purchase price was €7.1 billion (€6.4 billion net of cash and cash equivalents held by Qualtrics).
New Rise with SAP customers in the second quarter of 2023 included ARAG, Bacardi-Martini, Bayer, DFS Deutsche Flugsicherung, Empresas Polar, Foodstuffs South Island, GOL, McBride, Municipality of Utrecht, and Sochor.
ABN AMRO Bank, Cirque du Soleil, HanesBrands, Levi’s, Tech Mahindra, Versuni, completed SAP S/4HANA Cloud deployments in the second quarter.
SAP’s new offering for midsize customers Grow with SAP was adopted by The Brenda Strafford Foundation, in-tech GmbH, NKK Switches, Onyx Renewable Partners, StepLock, and Sunny Sky Products.
New key customers in other areas of SAP’s portfolio included: Breakthru Beverage, Deutsche Börse, Endress+Hauser InfoServe, La Poste, LB Group, Sabadell Digital, Santander, TATA Projects and Visa. Asahi Kasei Corporation, Coca-Cola HBC, Falabella Financiero, González Byass, Fujitsu, NTT, and OMV have also gone live with other SAP solutions.
Strong cloud revenue performance in Q2 was demonstrated across all regions. Germany, Brazil and India showed outstanding cloud revenue growth, and United States, the Netherlands, France, China and Chile performed significantly well.
SAP and HP Inc. announced an expansion of its strategic relationship on April 26, 2023. HP chose RISE with SAP solution to accelerate digital transformation, optimization of their portfolio, efficiency gains across operations.
SAP and Google Cloud announced an extensive expansion of their partnership on May 11 with a comprehensive open-data offering intended to simplify data landscapes and leverage business data.
SAP also announced Dr. h.c. Punit Renjen was elected as new member of the company’s Supervisory Board and as the designated successor to Prof. Dr. h.c. mult. Hasso Plattner at the Annual General Meeting of Shareholders of SAP SE.
The AGM approved all other proposals of the Executive Board and Supervisory Board, including the compensation system for Executive Board members: incorporating changes based on feedback from shareholders, and a buy back of treasury shares. The AGM also approved a dividend proposal of €2.05 per share for fiscal year 2022.
SAP announced an expansion of its partnership with Microsoft on May 15, with the co-innovation of generative AI to help solve customers’ crucial business challenges. SAP SuccessFactors solutions will be integrated with Microsoft 365 Copilot as well as Copilot in Viva Learning, and Microsoft’s Azure OpenAI Service for in depth language models to analyze and generate natural language.
A new share repurchase program was announced on May 16, with a volume of up to €5 billion, which is scheduled to start in the second half of 2023, and to be fully executed by the end of 2025.
SAP Business Artificial Intelligence
SAP and IBM announced on May 2, that IBM Watson technology will be embedded across a range of SAP solutions to allow new AI-driven analysis and automation to drive innovation and design efficient and functional user experiences throughout the SAP application portfolio.
Sapphire Ventures announced on July 11 that it is investing more than US$ 1 billion in AI-powered enterprise technology startups, adding to Sapphire’s previous investment in and scaling of enterprise AI startups. Sapphire Ventures evolve the AI technology stack, including foundation models, enablers and middleware, and next-gen AI applications.
SAP announced on July 18, a new focus on delivering relevant, reliable, and responsible Business AI with strategic direct investments in three leading generative AI companies. The investments in Aleph Alpha, Anthropic and Cohere are intended to help embed AI across SAP solutions as part of a wider series of AI partnerships and enterprise use cases announced in May.
AI capabilities already released include: intelligent collections in SAP S/4HANA, intelligent slotting in SAP Extended Warehouse Management, line item matching in SAP Central Invoice Management, and SAP Intelligent Product Recommendation.
Segment revenue in Q2 in AT&S was up by 5% to €7.27 billion (7% at constant currencies), due to rapid cloud revenue growth, and supported by SAP S/4HANA and the SAP Business Technology Platform. Operating Expenses of the segment decreased by 2% and remained flat at constant currencies, leading to a segment margin of 32.3% (32.6% at constant currencies). This implies a growth of 4.6% (4.9% at constant currencies) compared to this time last year.
SAP has updated its revenue and operating profit outlook for 2023 and now expects:
€14.0 to 14.2 billion cloud revenue at constant currencies ( compared with €11.43 billion in 2022), a rise of 23% to 24% at constant currencies, narrowing the range by €200 million. Previously the range was €14.0 to 14.4 billion (at constant currencies).
€27.0 to 27.4 billion cloud and software revenue at constant currencies. In 2022 this was €25.39 billion. An increase of 6% to 8% at constant currencies: limiting the range by €100 million as compared with €26.9 to 27.4 billion at constant currencies.
€8.65 to 8.95 billion non-IFRS operating profit at constant currencies (2022: €7.99 billion), up 8% to 12% at constant currencies. This increases the expected operating profit by €50 million. Improving on the previous range of €8.6 to 8.9 billion at constant currencies.
A share of more predictable revenue of roughly 82% (2022: 79%): defined as the total cloud revenue and software support revenue, divided by total revenue.
Free cash flow of approximately €4.9 billion (2022: €4.4 billion)
An effective tax rate (IFRS) of 28.0% to 32.0% (2022: 32.0%) and an effective tax rate (non-IFRS) of 26.0% to 28.0%, compared with 29.6% in 2022.
SAP has updated its mid-term ambition: a result of its strong business growth, and Qualtrics divestiture and now expects:
Cloud revenue of more than €21.5bn
Total revenue of more than €37.5bn
Non-IFRS cloud gross profit of approximately €16.3bn
Non-IFRS operating profit of approximately €11.5bn
A share of more predictable revenue of approximately 86%
Free cash flow of approximately €7.5bn
The 2025 ambition is based on an exchange rate of 1.10 USD per EUR.
SAP Cloud Growth and Embedded AI Capabilities
SAP has been positioning itself to take advantage of emergent technologies and changes in global IT infrastructure cloud transformation. Their success in doing so has led to access to new markets for SAP products and services.
While global events like the pandemic and the Ukraine war have inevitably impacted SAP revenue negatively, their position as an enabler of transformation, and the associated resilience and adaptability that cloud transformation provides SAP customers has led to an increase in both cloud revenue and cloud backlog.
Importantly, these changes to SAP’s business model have resulted in a more predictable revenue stream, meaning that, along with funds from the divestiture of Qualtrics, SAP is able to further invest in AI, ensuring their relevance to business and organizations into the future.
The use cases for generative AI in business operations are multiplying, and SAP is making acquisitions and partnerships to ensure an expansion of their AI capabilities across the portfolio.
Along with these adjustments to its business strategy which result in greater profitability for SAP, and those partners who offer SAP product delivery and services, the SAP ECC support deadline of 2027 is also creating a spike in demand for SAP consultants.
While the world economy is in the process of slow recovery from disruption, SAP has been successful in demonstrating it is part of the solution, and as a consequence is outperforming expectations.
If you are an SAP consultant looking for a new role in the SAP ecosystem then our team of expert recruiters can find your ideal employer and negotiate a salary which reflects your valuable skills, so join us at IgniteSAP