SAP makes a loss, the share price rises

SAP remains on course for growth thanks to booming cloud revenues. In the first quarter of 2024, the Walldorf-based software group increased revenue from its cloud services by 24% to a good 3.9 billion euros. This growth easily compensated for the decline in revenue from traditional on-premises software activities of minus five percent to three billion euros. Including one billion euros in service revenue, SAP reported consolidated revenue of a good eight billion euros, eight percent more than in the previous year.

SAP CEO Christian Klein also spoke of a "great start to 2024" when presenting the quarterly results. The manager was extremely confident that the company would achieve its self-imposed growth targets for cloud and cloud and software revenue of 24 to 27 percent and eight to ten percent respectively in 2024. In doing so, Klein is relying on the three risers Rise for more (cloud) business in the installed base, Grow to acquire new customers in the public cloud environment and - of course - AI, or Business AI in SAP jargon.

Cloud pays off

It would appear that Klein's cloud strategy is paying off, at least financially – despite the displeasure of local users. Growth in the cloud business continued to accelerate in the first quarter. The order backlog (current cloud backlog) increased by 27 percent (28 percent adjusted for currency effects) to 14.18 billion euros, growing faster than ever before. SAP's chief accountant Dominik Asam also reported a trend towards larger orders: Contracts with a volume of more than five million euros are said to have already accounted for more than half of the cloud order intake in the first quarter.

According to SAP CEO Klein, many of the deals were "influenced" by Business AI. However, he did not provide any concrete figures. Instead, the manager spoke at length about the numerous AI-supported innovations in the development pipeline, the growing importance of the Gen AI-based assistance system Joule as a front end and the more than thirty new AI-supported application scenarios in the cloud portfolio that have been published since the fourth quarter. The Walldorf-based company itself is speculating on an "efficiency increase in the hundreds of millions" through the internal use of AI. Klein went on to say that the Group was making "even better progress than expected" with regard to the restructuring program announced in January- particularly in terms of hiring new talent for forward-looking areas such as AI.

Expensive restructuring

Initially, the restructuring, which is expected to affect around 8,000 jobs, will cost a lot of money. As a precautionary measure, provisions of 2.2 billion euros were set aside in the first quarter to cover the majority of the expenses. The amount is therefore around ten percent higher than originally planned - partly because the early retirement program has met with great interest in the USA. In addition, the departing employees will be paid more money for their share options due to the high price of SAP shares. It is not yet possible to determine how costly the restructuring will actually be - partly because the exact conditions for severance payments in some regions, such as Germany, have yet to be finalized.

Due to the 2.2 billion euro provision, SAP had to report a hefty loss of 824 million euros in the first quarter. An operating loss of 787 million euros was reported.

However, the high quarterly losses did not bother financial analysts and investors much - because without the restructuring costs, operating profit and profit according to non-IFRS ultimately increased by a solid sixteen percent to 1.53 billion euros and nine percent to 944 million euros respectively. The high-growth momentum in the cloud business combined with improved gross margins and the promise of AI set the right triggers for the stock market. The reward was a jump in the SAP share price of a good five percent to 174.86 euros on Tuesday after the presentation of the balance sheet.

(mack)