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Is SAP on a steamroll?

The news

On Monday, July 22, 2024, SAP presented its numbers for Q2 and H1, 2024. 

The highlights include:

  • Cloud backlog up by 28% (27% in Q1)

  • Total revenue up 10% (8% in Q1)

  • Cloud and software revenue up 10% (9% in Q1)

  • Cloud revenue up 25% (24% in Q1)

  • Cloud ERP suite revenue up 33% (31% in Q1)

This in combination with an increasing margin. The total revenue growth and high profitability needs to be seen in the context of the company's still ongoing cloud transformation, with continuously decreasing software license and support revenues.

Obviously, the financial community liked these numbers, as can be seen by the jump of SAP’s share price by more than 5 per cent from about $200 to $212 after releasing the earnings numbers.

According to CEO Christian Klein, a lot of this success can be attributed to SAP’s AI strategy. Klein stated that almost a fifth of all closed deals included premium AI use cases.

A grain of salt in the soup is the employee engagement index that is part of the non-financial outlook. SAP reduced the 2024 target from 76 – 80 per cent in Q1 to 70 – 74 per cent. 

The bigger picture

To put this in perspective with cloud juggernaut Salesforce, the total revenue growth is comparable with the Salesforce Q1, 2025 statement. Salesforce’s revenue grew by 11 per cent and the current performance obligation by 10 per cent. Also, in contrast to Salesforce, SAP reiterated and strengthened its outlook instead of painting a more muted picture.

The main competition in the next months and years will happen in the area of AI infused services. There is an increasing skepticism of the cost-value equation offered by generative AI. There is also an increasing awareness of a continuing need for specialized models. In fact, there is a report commissioned by vultr that shows that advanced businesses run on average 175 models and do not rely on a one model fits all strategy. At the same time, investment bank Goldman Sachs asks whether generative AI delivers enough return for its cost.

Consequently, there need to be – and will be – serious efforts in showcasing the value that is offered by AI instead of continuing to build on the continuation of the current generative AI hype. Vendors will increasingly look at delivering high value use cases that actually solve business challenges beyond making this or that more efficient (often on cost of the employee) and/or close capability gaps.

My analysis and point of view

SAP’s revenue numbers basically tell that the company increasingly and profitably transforms itself into a cloud company with a focus on cloud ERP. The cloud ERP revenue growth continues to outpace the overall cloud revenue growth. In fact, cloud ERP makes up 82.2 per cent of the cloud revenue in Q2, 2024, up from 80.6 per cent in Q1. Depending on how the exact – and undisclosed – revenue distribution and allocation is, this means that SAP’s CX business is not big and not a focus. This is something that the SAP CX line of business shares with Microsoft Dynamics CRM. Still, albeit on a lower base, it’s growth should outpace Salesforce’s growth, which is mostly driven by integration and analytics services, plus Slack. 

The continuous strength of SAP’s cloud ERP growth is also a sign that the two-pronged strategy of favoring cloud delivery when it comes to innovation and SAP RISE seems to work out. 

That customers are willing to buy the company’s “premium AI services” shows that SAP is able to convince its customers that these services offer appropriate value. Apparently, SAP is communicating that it is addressing the right problems. However, not all of these AI solutions will be underpinned by sufficient data that is available to customers to prove this proposition, yet. So, it will remain crucial for SAP to deliver the hard data that shows it. Yes, this challenge is mitigated by SAP’s approach of looking at telemetry data to identify usage patterns and therefore use cases to address. This is one of the core values of SAP’s AI hub. Still, it will remain important to maintain the right balance between services that are part of the core subscription and those ones that warrant an additional fee. Not every customer will appreciate or understand a vendor’s desire to charge a premium for functionality that gets increasingly commoditized. After all, the subscription fee for a solution does also cover its ongoing development and not only the fixing of defects. And these days, many features that make a vendor’s solution attractive, are at least AI infused. Also, many of these features did exist before the current hype, just that they were implemented differently – with differently not necessarily meaning in an inferior way. 

The other part that I miss is a stronger emphasis on the support of customer facing processes. SAP has competitive sales and service solutions, with Emarsys, it has a very interesting marketing solution, commerce is on the verge of recovering. Even, probably especially following a strategy that combines industry and customer facing processes, it is time to increase the visible profile of SAP’s CX solution set. After all, to quote Milton Friedman the business of SAP’s customers is business. And to make business, it needs customers. These are engaged using a CX solution set. 

Which should make CX quite an important line of business for SAP.

Having said all this, yes, it appears that SAP is indeed on a steamroll and the company is not unlikely to become the biggest business software vendor worldwide once more – major acquisitions of Salesforce pending.



 

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