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SAP Financial Results Q4 And Full Year 2023

SAP financial results for Q4 and the Full Year 2023 have been announced, demonstrating strong cloud growth and higher total revenue, with a transformation program and restructuring planned for 2024.

Here IgniteSAP will provide a summary of the report and discuss what these numbers mean for SAP and the wider ecosystem of partners.

Key Facts

SAP’s Performance Overview for FY 2023:

Exceeded non-IFRS operating profit and cash flow expectations.

Cloud revenue increased by 20%, and 23% at constant currencies.

Fourth quarter witnessed a 25% growth in cloud revenue at constant currencies.

Current Cloud Backlog and Profit Growth:

Cloud backlog stands at €13.7 billion, marking a 25% increase, and 27% at constant currencies.

IFRS cloud gross profit rose by 23%.

Non-IFRS cloud gross profit also up by 23%, and 27% at constant currencies.

Operating Profit Trends:

IFRS operating profit decreased by 5%.

Non-IFRS operating profit climbed by 9%, and 13% at constant currencies.

Future Projections and Strategic Plans:

2024 outlook predicts accelerated cloud revenue growth.

Implementation of transformation program in 2024, focusing on scalability and Business AI.

Revised 2025 non-IFRS operating profit and free cash flow ambition, incorporating new non-IFRS definition and an expected half a billion Euro efficiency gains from the program.

Executive Summaries

SAP CEO Christian Klein said:

“SAP has delivered: We met or exceeded our outlook for 2023 in all key metrics. Based on a stellar order entry, our current cloud backlog expanded by 27%: an all-time high. We are confident about the company’s prospects in 2024. From this position of strength, SAP is opening the next chapter: with the planned transformation program, we are intensifying the shift of investments to strategic growth areas, above all Business AI. Going forward, this will empower us to keep leading with innovation while increasing the scalability of the operating model”

SAP’s CFO Dominik Asam said:

“2023 was a year of inflection. We kept our promise and achieved double-digit non-IFRS operating profit growth despite an adverse macro environment. In 2024, we will focus on putting the right gradient of earnings growth in place to deliver on our raised ambition for 2025 and sustain growth and financial performance beyond”

Financial Performance

Financial Highlights for Q4 2023

In Q4, SAP witnessed a remarkable surge in its cloud business, with sequential increases in both the current cloud backlog and cloud revenue. The current cloud backlog soared by 25% to €13.75 billion, marking a 27% rise at constant currencies – the fastest ever recorded. Specifically, SAP S/4HANA’s current cloud backlog escalated by 58% to €5.05 billion, and 61% at constant currencies. Cloud revenues also experienced a robust growth of 20% to €3.70 billion, and 25% at constant currencies, primarily fueled by the expansion of SAP’s combined SaaS and PaaS offerings, which increased by 22% and 28% at constant currencies respectively. SAP S/4HANA Cloud revenue impressively climbed by 55% to €1.03 billion, and 61% at constant currencies.

Despite challenges, software licenses revenue in Europe showed resilience, declining only by 7% to €841 million, and 6% at constant currencies. Cloud and software revenue rose by 6% to €7.39 billion and 10% at constant currencies, while services revenue remained steady at €1.08 billion, increasing by 4% at constant currencies. Total revenue witnessed a 5% increase to €8.47 billion, with a 9% rise at constant currencies.

There was a notable shift towards more predictable revenue streams, with a 2% increase to 77% in the fourth quarter.

Cloud gross profit registered a 25% hike (IFRS) to €2.66 billion, a 24% increase to €2.69 billion (non-IFRS), and 30% (non-IFRS at constant currencies), bolstered by a significant rise in cloud gross margins.

However, IFRS operating profit saw a 5% decrease to €1.90 billion. Non-IFRS operating profit declined by 2% to €2.51 billion but rose by 2% at constant currencies. These figures were impacted by accelerated amortization of capitalized sales commissions linked to the on-premise business and increased bonus accruals due to strong financial performance. The previous year’s fourth quarter IFRS operating profit included a disposal gain of €175 million, leading to a non-IFRS operating profit of €109 million from the sale of the SAP Litmos business.

IFRS earnings per share (basic) saw a significant 60% increase to €1.02, while non-IFRS earnings per share (basic) rose by 44% to €1.41. The effective tax rate stood at 33.8% (IFRS) and 31.4% (non-IFRS). The year-over-year decrease in the effective tax rate was mainly due to changes in tax-exempt income, especially from Sapphire Ventures, offset partly by changes in valuation allowances on deferred taxes and withholding taxes.

Financial Highlights For The Full year 2023

As of December 31, SAP’s total cloud backlog experienced a remarkable 37% increase to €44 billion, with a 39% rise at constant currencies.

For the entire year, cloud revenue showcased a robust 20% growth to €13.66 billion, and 23% at constant currencies. This surge was primarily due to substantial double-digit expansions within the SaaS and PaaS sectors, which saw increases of 23% and 26% at constant currencies, respectively. Notably, SAP S/4HANA Cloud revenue jumped by 67% to €3.49 billion, and an impressive 72% at constant currencies.

However, software licenses revenue experienced a downturn, falling 14% to €1.77 billion, and down 12% at constant currencies. Despite this, cloud and software revenue collectively rose by 6% to €26.93 billion, and 9% at constant currencies. Services revenue also saw a positive trend, increasing by 4% to €4.28 billion, and 6% at constant currencies. Overall, total revenue climbed by 6% to €31.21 billion, and 9% at constant currencies.

The proportion of more predictable revenue streams notably increased by 2 percentage points year-over-year, reaching 81% for the full year 2023.

In terms of cloud gross profit, there was a 23% increase (IFRS) to €9.78 billion, and a matching 23% to €9.91 billion (non-IFRS), with a 27% rise (non-IFRS at constant currencies). IFRS cloud gross margin improved by 2.2 percentage points to 71.6%, with the non-IFRS cloud gross margin also up by 2.2 percentage points to 72.6%, and a further increase of 2.4 percentage points at constant currencies.

On the operating profit front, IFRS figures showed a 5% decline to €5.79 billion, with the IFRS operating margin shrinking by 2.1 percentage points to 18.5%. Conversely, non-IFRS operating profit grew by 9% to €8.72 billion, and by 13% at constant currencies, with the non-IFRS operating margin improving by 0.9 percentage points to 27.9%, and up 1.2 percentage points to 28.2% at constant currencies.

IFRS earnings per share (basic) saw a 10% increase to €3.08, whereas non-IFRS earnings per share (basic) rose by 24% to €5.01. The effective tax rate stood at 32.6% (IFRS) and 29.3% (non-IFRS), slightly higher than the forecasted ranges of 28.0% to 32.0% (IFRS) and 26.0% to 28.0% (non-IFRS). This increase was mainly attributed to changes in valuation allowances on deferred taxes.

Free cash flow for the year showed a healthy 16% increase to €5.08 billion, surpassing the revised projection of around €4.9 billion. Despite higher tax payouts and restructuring costs, the positive trend was driven by SAP’s profitability, working capital improvements, and reduced interest payments. Additionally, lower expenses on share-based compensation, capital expenditures, and leasing further bolstered this positive trend. At the year’s end, net liquidity stood at €3.52 billion.

Share Repurchase Program

On May 16, SAP launched a new share buyback scheme with a total allocation of up to €5 billion, set to run until December 31, 2025. By the end of 2023, SAP had bought back 7,563,796 of its shares at an average cost of €125.49 each, amounting to around €949 million spent under this initiative.

Business Highlights

In Q4, the global customer base continued to embrace “RISE with SAP” for comprehensive business transformations. This included notable entities like Amer Sports, AusNet, Boots, Christchurch City Council, Coles Group, and others, such as Daimler Truck, Deutsche Telekom, and NVIDIA. Additionally, firms like AES Indiana and Zurich Insurance Company successfully implemented SAP S/4HANA Cloud.

Meanwhile, companies like Lowe Enterprises and Mangopay opted for “GROW with SAP”, tailored for midsize customers seeking rapid cloud ERP adoption. Significant client acquisitions across SAP’s product range included Ahold Delhaize, Beiersdorf, and Volkswagen.

Notably, several companies, including Axpo Holding and Campari Group, went live with SAP solutions. SAP’s cloud revenue was particularly robust in the APJ and EMEA regions, with Brazil, Germany, and India showcasing outstanding growth.

For the full year, countries like Germany, Brazil, and India excelled in cloud revenue, with France and Japan also performing strongly.

Key announcements included Siemens Healthineers AG choosing RISE with SAP on October 25, the unveiling of generative AI capabilities at SAP TechEd on November 2, and the completion of LeanIX’s acquisition on November 8. SAP also announced a partnership with the Mercedes-AMG PETRONAS F1 Team on November 21 and revealed Hilti Group’s use of the Circelligence solution on November 22.

December 13 saw SAP deepen its AI and Quantum collaboration with IBM, which also adopted RISE with SAP enterprise-wide. On January 9, 2024, SAP announced Executive Board changes, including the creation of a new Board area led by Thomas Saueressig to boost cloud growth from April 1, 2024. Muhammad Alam will succeed Saueressig in SAP’s product engineering.

Finally, on January 17, SAP was recognized as one of the world’s 100 most sustainable companies, reaffirming its position in the Corporate Knights Global 100.

Segment Results

In Q4, the AT&S segment of SAP reported a revenue increase of 5% to €8.17 billion, and a 9% rise at constant currencies. This growth was largely driven by robust cloud revenue performance, bolstered by SAP S/4HANA and the Business Technology Platform. However, the segment’s Operating Expenses also went up by 8%, and 13% at constant currencies. Consequently, the segment margin stood at 32.9% in both actual and constant currencies, representing a decrease of 2.2 percentage points from the same quarter in the previous year, both in actual and constant currencies.

Cloud Performance

Business Outlook

SAP’s business outlook, encompassing the financial projections for 2024 and the financial targets for 2025, is grounded in SAP’s revised non-IFRS profit measurement criteria. Starting from 2024, this new framework will account for share-based compensation expenses while excluding net gains and losses from equity securities.

Financial Outlook 2024

For the year 2024, SAP has set the following expectations:

Cloud revenue is anticipated to be between €17.0 and €17.3 billion at constant currencies, marking a significant increase from 2023’s €13.66 billion, with growth projected between 24% to 27% at constant currencies.

The cloud and software revenue is forecasted to range from €29.0 to €29.5 billion at constant currencies, up from €26.93 billion in 2023, representing an 8% to 10% increase at constant currencies.

Non-IFRS operating profit is expected to be in the range of €7.6 to €7.9 billion at constant currencies, a considerable rise from the €6.51 billion in 2023 (based on the revised non-IFRS operating profit definition), with an anticipated growth of 17% to 21% at constant currencies.

Free cash flow is projected to be around €3.5 billion, a decrease from the €5.08 billion in 2023. This projection includes an estimated €2 billion for payouts linked to a specific program, a €0.2 billion impact from an earlier settlement of regulatory compliance issues accrued in 2023, and a €0.2 billion negative impact due to the discontinuation of a SAP-initiated financing program.

The effective tax rate (non-IFRS) is estimated to be approximately 32%, a slight increase from the 2023 rate of 30.3%, based on the updated non-IFRS tax rate definition.

SAP Ambition For 2025

SAP is revising its financial goals for 2025, a decision influenced by the robust performance in Q4 2023, the modified non-IFRS profit measurement criteria, and the expected advantages from the transformation program planned for 2024.

This revision in the non-IFRS operating profit target accounts for a reduction of about €2 billion due to the inclusion of share-based compensation expenses under the new non-IFRS definition. However, it also incorporates an approximate increase of €0.5 billion, expected from incremental efficiency gains through the transformation program.

By 2025, SAP now projects:

Non-IFRS cloud gross profit to be around €16.2 billion, which now includes share-based compensation expenses of approximately €0.1 billion. This is a slight adjustment from the previous estimate of approximately €16.3 billion, which did not include these expenses.

Non-IFRS operating profit is expected to be around €10.0 billion, factoring in share-based compensation expenses of about €2 billion. Previously, the estimate was approximately €11.5 billion, excluding these expenses.

Free cash flow is anticipated to be approximately €8.0 billion, up from the earlier forecast of about €7.5 billion.

SAP’s ongoing expectations remain for:

Cloud revenue to exceed €21.5 billion.

Total revenue to surpass €37.5 billion.

A more predictable revenue share of roughly 86%.

These 2025 ambitions are based on an exchange rate assumption of 1.10 USD per EUR.

In addition to financial targets, SAP maintains its commitment to achieving Net Zero carbon emissions across its value chain by 2030 and increasing the representation of women in executive roles to 25% by the end of 2027. Furthermore, SAP aims to continually improve both the employee engagement index and the customer net promoter score.

Further Significant Changes Expected In 2024

SAP’s financial performance in 2023 and the outlook for 2024 mark a significant strategic evolution for the company in its shift to becoming primarily cloud-first software services provider.

The Q4 results and the overall financial performance for 2023 demonstrate decisive actions in the direction of moving customers onto cloud SAP deployments, who will be more likely to take action this year due to the impending support deadline for SAP ECC and other legacy products in 2027 (2030 for customer with Extended Support).

This shift of the corporation and their customer base is not just a strategic realignment but a necessity, as cloud migrations can take up to two years, pressing legacy customers migrate to S/4HANA Cloud and other cloud-based services.

In Q4, SAP’s cloud revenue growth was helped by a 25% increase in cloud revenue in Q4 alone.
Along with their full year results, this performance indicates SAP’s successful adaptation to new market demands, particularly in cloud computing.

SAP’s CEO Christian Klein’s comments reflect this success and the company’s readiness to embark on the next phase of its journey, focusing on strategic growth areas like Business AI.

The announcement of a major restructuring program to shift 8,000 jobs towards AI-driven business areas underlines SAP’s commitment to that innovation initiative. The €2 billion program aims at internal re-skilling and voluntary leave, indicating a proactive approach to workforce transformation in line with evolving business needs.

Klein is balancing innovation required to remain relevant as an ERP provider and maintaining SAP’s existing customer base.

Expected efficiency gains through AI and the focus on cloud as a platform for innovation are being used to encourage migrations to the latest cloud-based SAP services, while support extension for on-premise SAP products to 2040 is ensuring customer loyalty.

SAP’s financial outlook for 2024 is ambitious, with a projected cloud revenue of €17 billion to €17.3 billion, indicating expectation of significant growth. This is in line with SAP’s 2025 ambition for more than €21.5 billion in cloud revenue. The growth strategy involves converting existing support revenue to cloud revenue and driving new customer acquisitions through the RISE and GROW with SAP offerings.

The restructuring program, though challenging, is a necessary step for SAP to maintain its competitive edge and focus on strategic growth. The impact on the workforce is being mitigated through a focus on reskilling and voluntary exits. Despite these changes, SAP’s headcount is expected to remain stable.

SAP’s financial performance in 2023 vindicates its decision to transition towards a cloud-first approach, underpinned by substantial and accelerating cloud revenue growth. The company’s strategy for 2024 and beyond, including the major restructuring and investment in Business AI, positions SAP well to capitalize on the increasing opportunities presented by generative AI and cloud computing. This strategic shift, while challenging, is vital for SAP to remain a leader in the enterprise application arena and become a leader Business AI space, ensuring the long-term growth and sustainability of SAP..

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