SAP financial results for Q3 2023 have been announced, showing a strong performance for the quarter and bright prospects for the future, so this week IgniteSAP will provide a summary of the report and discuss what these numbers mean for SAP and the wider ecosystem of partners.
SAP Cloud revenue is up 16% and (23% at constant currencies).
Current cloud backlog of €12.3 billion is up 19%, (25% constant currencies).
IFRS cloud gross profit rose 21%, with non-IFRS cloud gross profit up 21%, (28% at constant currencies), supported by the expansion of cloud gross margin.
IFRS operating profit increased 11%, with non-IFRS operating profit up 10%, (16% at constant currencies).
The revenue and operating profit outlook for SAP in 2023 has been reaffirmed.
SAP CEO Christian Klein said:
“Our Q3 results are yet another proof point that we have entered the next phase of our transformation. We accelerated cloud growth across our portfolio and significantly expanded our cloud gross margins. Our strong focus on innovation, including our latest SAP Business AI capabilities, ensure SAP’s continued resiliency in the face of tough macroeconomic conditions and increasing geopolitical tensions.”
SAP’s CFO Dominik Asam said:
“Our Q3 results demonstrate strong execution and the resilience of our business, including sustained cloud growth in spite of persisting macro headwinds. Also, we carefully balance growth and profitability at all times. In combination, this allows us to boost our bottom-line with the aim to achieve double-digit operating profit growth this year.”
In the third quarter of 2023, SAP’s cloud backlog grew 19% to €12.27 billion, up 25% on a constant currency basis. The SAP S/4HANA cloud backlog increased 58% to €4.20 billion, up 66% at constant currencies.
Cloud revenue for the quarter rose 16% to €3.47 billion, up 23% at constant currencies, primarily driven by growth in SAP’s combined SaaS and PaaS portfolio, which increased 19% and 26% on a constant currency basis. SAP S/4HANA cloud revenue jumped 67% to €914 million, up 77% at constant currencies.
Supported by a few major transactions, software license revenue decreased 17% to €335 million, (down 14% at constant currencies). Total cloud and software revenue increased 4% to €6.68 billion,(9% at constant currencies). Services revenue remained the same at €1.07 billion but up 4% at constant currencies. Overall revenue rose 4% to €7.74 billion, (9% at constant currencies).
More predictable revenue rose 2% to 82% in the third quarter.
Cloud gross profit climbed 21% to €2.53 billion, up 21%, and increased 28% at constant currencies. Strong growth in cloud gross margins supported the increase in cloud gross profit. Cloud gross margin expanded by 2.9%.
Operating profit grew 11% to €1.72 billion. This growth was driven by the resilience of the on-premise business and ongoing operational discipline, which offset the negative impact of accelerated amortization of capitalized sales commissions related to the on-premise business.
IFRS earnings per share (basic) jumped 45% to €1.09. Non-IFRS earnings per share (basic) rose 32% to €1.45. The effective tax rate was 27.8% (IFRS) and 27.1% (non-IFRS).
Free cash flow in the third quarter surged 69% to €865 million. Although payments for taxes and share-based compensation increased, positive development was driven by SAP’s profitability, working capital improvements, and lower payments for capex and leasing. For the first nine months, free cash flow increased 29% to €3.42 billion.
On May 16, 2023, SAP announced a new share repurchase program with an aggregate volume of up to €5 billion and a term until December 31, 2025. By September 29, SAP had repurchased 7,190,252 shares at an average price of €125.49 with a value €902 million when purchased.
Customers from all global regions continued to choose RISE with SAP in Q3 2023 to drive their business transformations. These customers included ADAC, Alnatura, BC Hydro, Bobst Mex, Constellium, Graybar, Hitachi Zosen Corporation, KAESER KOMPRESSOREN, LG Electronics, LG Energy Solution, PUMA, Siemens Healthineers, and University of Leeds.
During this quarter BMW Group, Celltrion Healthcare, City of Vancouver, Schneider Electric, Toll Group, and UPL Limited went live on SAP S/4HANA Cloud.
Atria, elobau, Leanin’ Tree, Northstar Clean Technologies, PERSSA, Phoenix Global, Tait International, and Ziegler Holding chose GROW with SAP: the new offering to help midsize customers adopt cloud ERP.
Key customer wins across SAP’s solution portfolio included: Accenture, Adobe, BVG (Berlin public transport), Ecovacs, freenet DLS, Fressnapf, Heidelberger Druckmaschinen, Hyundai Motor Company / Kia, Jollibee Foods Corporation, Lenovo, RICOH, Salling Group, and thyssenkrupp Steel Europe.
Ducati Motor Holding, Gilead Sciences, Hunkemöller, The KaDeWe Group, Swiss Federal Railways, and SCOTT Sports went live on other SAP solutions.
SAP’s cloud revenue performance was particularly strong in APJ and EMEA and solid in the Americas region. Brazil, India, and the Netherlands had outstanding cloud revenue growth while Canada, China, France, Germany, Japan, and Switzerland performed particularly well.
On July 4, 2023, SAP was informed that Standard and Poor’s (S&P) upgraded its credit rating to A+ from A, citing SAP’s sound cloud transition execution, its track record of deleveraging quickly and its high cash generation.
On July 18, 2023, SAP announced the next step in its commitment to deliver Business AI that is relevant, reliable, and responsible with strategic investments in three leading generative AI companies. Investments in Aleph Alpha, Anthropic, and Cohere reinforce SAP’s open ecosystem approach to AI, leveraging the best technology to embed AI throughout SAP’s portfolio.
On August 29, 2023, SAP announced that Gina Vargiu-Breuer has been appointed to the Executive Board of SAP as Chief People Officer and labor director, effective from February 1, 2024: succeeding Sabine Bendiek, who is leaving the company at her own request on December 31, 2023.
On August 29, 2023, SAP and Google Cloud announced an expanded partnership to help enterprises harness the power of data and generative AI. The companies will combine their integrated open data cloud using the SAP Datasphere solution with Vertex AI to develop generative AI-powered industry solutions, initially in the automotive industry, and also to introduce new capabilities to help customers improve sustainability performance.
On September 1, 2023, SAP announced Walter Sun as the new Global Head of Artificial Intelligence. Sun joined SAP from Microsoft where he was vice president of Copilot Applied Artificial Intelligence for business applications.
On September 7, 2023, SAP and LeanIX GmbH announced that SAP has entered into an agreement to acquire LeanIX, a leader in enterprise architecture management (EAM) software. The planned acquisition will help SAP expand its business transformation portfolio, giving customers access to the full suite of tools required for continuous business transformation and facilitating AI-enabled process optimization. The transaction is expected to close in the fourth quarter of 2023, following customary closing conditions and regulatory approvals.
On September 26, 2023, SAP announced a natural-language, generative AI copilot called Joule. Joule will be embedded throughout SAP’s cloud enterprise portfolio, delivering proactive and contextualized insights from across SAP solutions and third-party sources.
In the third quarter of 2023, segment revenue in Application Technology & Services (AT&S) was up 3% to €7.46 billion (9% at constant currencies). This revenue growth was primarily driven by strong cloud growth, which was supported by SAP S/4HANA and Business Technology Platform. Operating expenses of the AT&S segment decreased by 3% but increased by 2% at constant currencies in the third quarter of 2023. This resulted in a segment margin of 35.7% (35.8% at constant currencies). The margin growth represents an increase of 4.3% (4.4% at constant currencies).
In 2023 SAP continues to expect:
€14.0 to 14.2 billion in cloud revenue at constant currencies (2022: €11.43 billion), up 23% to 24% at constant currencies.
€27.0 to 27.4 billion cloud and software revenue at constant currencies (2022: €25.39 billion), up 6% to 8% 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.
A share of more predictable revenue of approximately 82% (2022: 79%).
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% (2022: 29.6%).
SAP’s financial results in this quarter demonstrate they are experiencing growth in most areas of their business, but as CFO Dominik Asam said, they are carefully balancing growth with profitability. This judicious growth is very attractive to investors down the road, and they have also put in place a share buy-back scheme, which is likely to increase earnings per share.
With an eye on long-term growth, SAP pivoted towards a new business model in October 2020 which was primarily to operate as cloud-based software services company. As a consequence SAP experienced a severe drop in share price but even with the added disruption of the Ukraine war and the winding up of much of its operations in Russia, SAP is now reaping the benefits of its long-term planning.
SAP was caught between investors who were after short-term gain, customers who were yet to see the advantage of cloud deployments of ERP and so holding on to their on-premise systems, and a new wave of technological change in the form of cloud, AI, and automation.
They chose to go with the technology, understanding that it was necessary for maintaining the profitability of their customers’ businesses and their own business into the future. Seeing that customers were having trouble with understanding the need for change and wary of investing in something they did not understand, SAP created the Transformation-as-a-Service platform Rise with SAP.
Rise with SAP has now found many customers as customer success stories have multiplied and the business case for cloud deployment has become clear. SAP has added new, more flexible ways to pay for the service and also a version for smaller businesses called Grow with SAP.
Apart from the approaching support deadline for legacy SAP systems like SAP ECC, customers cannot take advantage of new technologies like AI in on-premise SAP instances because the technology requires the vast processing resources available with cloud infrastructure.
AI has been embedded now across SAP solutions in the form of SAP Business AI and SAP Joule, which is a generative AI that uses natural language processing in conjunction with data from the SAP system to increase the availability of data to SAP users: so that they can get answers quickly and be more productive. This has benefits for all business users of SAP systems. AI is also being embedded as a tool to support emissions tracking and sustainability initiatives so that companies can be compliant with new legislation designed to combat climate change.
Importantly for consultancies offering SAP services, the increasing dominance of the SaaS model is leading to more predictable revenue. SAP’s share of more predictable revenue, at 82%, is due primarily to the pivot to the cloud, and this means that SAP services consultancies will also experience a rise in more predictable revenue as more of their own customers will require more frequent but less extensive help with SAP projects in the future. When the revenue streams of companies are more predictable, they are able to act and invest in new technology with more confidence, speeding up their own development and expansion.
Essentially, cloud models and the associated technology are leading to an acceleration in the pace of change, but also, once the upcoming spike in demand for SAP services due to technological deadlines has passed, a more reliable source of income for SAP services companies.
SAP consultants are therefore likely to experience an extremely high demand for their services over the next four to five years, and after that period they can expect a more regular form of employment model and workload than the one they are currently experiencing.
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
