SAP Caps Strong Cloud-Focused Q1

⇨ Overall revenue increased by 9% and current cloud backlog by 25%

⇨ Strong cloud performance across all regions was a key factor as well as expanding deals from core ERP wins

⇨ UiPath Automation Platform will be available as an endorsed app in the SAP App Store

SAP announced a strong first quarter based on positive cloud momentum in its recent earnings call. The overall revenue for the quarter increased by 9% at constant currencies to €7.441 billion, with cloud and software making up the bulk at €6.358 billion. The current cloud backlog increased 25% to €11.148 billion, of which SAP S/4HANA made up €3.418 billion, an increase of 79% at constant currencies from Q1 2022. More predictable revenue now makes up 82% of all SAP revenue, a slight increase year-over-year.

Strong Cloud Performance Drives Revenue Increase

SAP’s CEO Christian Klein centered his remarks on the strong demand for solutions across the company’s portfolio and focused on the launch of two game-changing solutions this quarter—GROW with SAP and SAP Datasphere. GROW with SAP helps mid-market organizations grow with agility and speed by providing rapid adoption services, and SAP Datasphere aligns SAP with other significant data warehouse vendors with a service that collects and federates SAP and non-SAP business data across the enterprise. Klein also revealed that new business-focused AI capabilities will be announced at Sapphire in May.

While discussing the outlook for the remainder of 2023, Klein emphasized that SAP continues to deliver for its customers and that SAP’s vision is tied to solutions that will enable customers to secure their organizations. Klein affirmed his commitment to the company’s 2023 guidance with the exception that Qualtrics will be a separate entity and that significant opportunities for growth exist, which are demonstrated through SAP’s cloud backlog.

The new CFO, Dominik Asam, who took over from outgoing CFO Luka Mucic in March 2023, focused on SAP’s overall performance, including a 22% growth in cloud revenue amounting to €3.178 billion. Asam also stressed SAP’s double-digit cloud revenue growth across all regions and the trend of larger cloud transactions with a 45% increase in deals larger than €5 million this quarter. Software-as-a-service revenue grew 22% year-over-year, platform-as-a-service revenue grew 45%. and non-IFRS operating profit increased 12% year-over-year at constant currencies.

Cloud Strength Starts at the Core

While answering questions during the financial analyst call, Klein reiterated that SAP’s strong performance started with SAP S/4HANA core and SAP S/4HANA with SAP BTP are central to the overall cloud growth. While Klein admitted that some line of business (LoB) applications had a tougher sales environment, he stressed that SAP is winning where they can expand from the core.

Customer Success lead Scott Russell, whose executive board contract was recently extended, said even with the tougher environment, the core LoB solutions experienced double-digit growth this quarter. SAP Concur, SAP Ariba, and SAP BTP all saw higher transaction volumes. This fortifies that SAP’s ability to upsell and cross-sell its broader portfolio once the client has already bought into SAP S/4HANA and SAP BTP is a big advantage.

When asked about SAP’s plans for supporting on-premise deployments moving forward, Klein said the end of standard maintenance for core Business Suite applications is 2027, underscoring that there will be no extension beyond 2027. Klein also mentioned that SAP is focused on using its R&D capacity effectively by adopting technologies, such as ChatGPT, for deployment in the cloud. He emphasized that although SAP is actively investing in areas such as globalization and data privacy, they cannot make those investments for technologies released prior to SAP S/4HANA.

Russell remarked that all the customers he speaks to have decided to move to the cloud, although their journeys will differ. He added that the goal of RISE with SAP wasn’t to have a target architecture of being in the cloud but to help customers on a transformation journey that will fit their landscape. The feedback Russell received was that all customers are moving to cloud-based architecture and want innovation and service in a local regulatory-aligned framework. He also claimed that SAP is focused on helping them make that journey on their terms, unlike most other vendors.

Deeper Partnership with UiPath

SAP also announced an expanded partnership with UiPath, although the SAP executives on the call mentioned the announcement in passing. The partnership makes UiPath Automation Platform available to SAP customers as an SAP-endorsed application on the SAP App Store. The goal is to complement SAP Build Process Automation and enable organizations to improve efficiency and productivity across SAP and non-SAP workloads.

Russell and UiPath Co-CEO Rob Enslin’s public statements focused on the importance of digital transformation journeys of organizations. The statements echoed that the partnership’s goal is to allow organizations to create new business models and ways of working using robotic process automation. The agreement will also help organizations using SAP S/4HANA Cloud to leverage their clean core better and optimize business processes across SAP and non-SAP solutions.

What Does This Mean for SAPinsiders?

Cloud continues to be central to SAP’s business model, and the revenue it generates accounts for almost half of SAP’s total cloud and software revenue—that is twice the rate of overall cloud and software revenue. At this accelerated pace, it will not be long before it amounts to a significant proportion.

But while SAP insists that nearly all customers are moving to the cloud, it does not necessarily mean SAP S/4HANA Cloud. While SAP S/4HANA Cloud revenue did grow faster than total cloud revenue, it accounted for less than a quarter of that revenue. With the announcement of GROW with SAP, which only offers SAP S/4HANA Cloud, public edition, it is expected to grow faster as more mid-market customers adopt the offering.

However, SAP also stated that its goal is to recognize and help customers on their unique cloud journeys. This will be important for customers who do not plan on moving to SAP S/4HANA yet, even if they are looking to leverage new and more flexible environments.

For SAPinsider community members, it is important to ascertain what best fits their needs. Both SAP and non-SAP solutions are now strongly supported by SAP through partnerships like one with UiPath. While SAP claims to understand that each organization will take its own route to the cloud, organizations must take the time to prepare for and thoroughly plan their transformations so that it can be completed on their terms and in the time frame that best suits them.