AI demand drives Q1 SAP cloud revenue up 25% year-on-year

AI demand drives Q1 SAP cloud revenue up 25% year-on-year

Christian Klein

AI adoption demand is fueling cloud growth and cross-sell opportunities for SAP, but the cost of its restructuring plans is taking its toll on the bottom line. 

For the quarter ended 31 March, total revenue came in at €8.04 billion ($8.57 billion), up eight percent year-on-year. Of that, cloud revenue accounted for €3.93 billion, up 25% year-on-year, while license revenue was €3.03 billion. A €2.2 billion provision for SAP’s previously announced Next Level Transformation program took what would have been a €1.53 billion operating profit down to an operating loss of €787 million. 

Other stats of note from the post-results announcement analyst call: 

• GROW with SAP chalked up 100 new customers with a 64% share of net new customers in Q1.
• Current cloud backlog grew 28% to €14.2 billion.
• Since the end of Q4, SAP has released over 30 new AI scenarios across its cloud portfolio, with a further 100 in the pipeline for the rest of this year. 
• 27,000 customers are already using SAP Business AI. 
• The company expects “a triple digit million amount in efficiencies” from embedding AI across all its processes.

SAP CEO Christian Klein talked about the shape of the Business AI strategy: 

At SAP, we infuse Business AI across our portfolio. First of all, Joule will be our new user experience via natural language, our one front end. We have based our Joule roadmap on an analysis of the most frequent business and analytical transactions of our end users. This way, we make sure that the most heavily used transactions will be fully AI-enabled by the end of this year.

He added: 

No matter if you do work on travel, on finance, on supply chain, on procurement, it will all happen via human language. And that is included in our premium AI offering, which is consumption-based. We package it, some AI units [are] already in our RISE and GROW packages, and that is actually running extremely well. And on top, of course, you can also consume Business AI by buying more consumption packages of our offerings.

As to whether this is being monetized to date, Klein said: 

I have no C-level conversation anymore without talking about Business AI and the impact on the business. Just last week I had a conversation about production downs in manufacturing and how our gen AI hub can help to get the machines faster up and running again, which actually would result in hundreds of millions of efficiency gains for this large chemical company. And you see in these conversations, are these AI use cases already live and fully adopted? No, they are now in the making. But with that comes more and more consumption. And we're going to monetize that in the upcoming quarters and in the upcoming years. 

Cloud migration 

It is however having a tangible impact on cloud migration, he noted: 

What we are seeing now with Business AI is actually that a lot of customers who probably planned their migration start date for S/4 [for] end of this year or next year, that they actually now want to move faster, because they see the capabilities with SAP Business AI on asset management, on just automating many, many workflows in their company, but also when it comes to analytics, especially in supply chain planning, which is an extremely important part of many companies right now.

There is a lot of cross-sell opportunity here, he added: 

Business AI helps us to sell more supply chain, to sell more HR, to sell more finance. And then last but not least, which makes me so confident also about the growth potential for 2025 plus, when you start with finance and you talk about your business model, you talk immediately about the billing, about the commissions. Then you're actually moving into the supply chain and then you're doing demand and supply. You’re also then talking about design to operate. And now we are seeing a huge uptick in our manufacturing cloud business…So what we are seeing in many RISE customers over time, that there are a lot of cross-sell potential and that the first phase is only about landing and then start provisioning, start to re-design the process landscape.

Klein went on: 

What you also see with RISE, it's not only that we are landing, of course, and converting maintenance with a factor of 2 times to 3 times to the cloud. What we are then seeing after is that, next on land-and-expand, customers want to replace their HCM module. And this is then oftentimes a double-digit success factor, and a pretty central deal. Needless to say, payroll is a massive business, which we are also more and more now shifting to the cloud. So there are a lot of large cross-sell opportunities after we land with RISE.

And SAP is eating its own AI dog food, he confirmed: 

What we are already doing right now, we roll out Joule, especially for SAP SuccessFactors. So, job description, learning, co-pilot, interviews, feedback, that's all automated now via Joule. In procurement, we have content recommendations rolled out in category tools. In IT or in the cross-function, for example, take F&A, we have to screen hundreds of thousands of contracts every year. That's now completely automated with generative AI. In the sales world, we actually also use now AI for content generation, for demo, actually for the business case creation, which saves a lot of time.

My take

I want to see now, with Business AI, the upside in accelerating the move of our installed base because every customer now finally gets that in the cloud there is so much innovation. There's also AI differentiation. So I actually expect that we see a further acceleration of our installed base move to the cloud.

That’s the plan. Q1’s impressive cloud revenue growth suggests that it’s working to date. Wall Street was certainly impressed by the numbers. 

There’s still the matter of the transformation program’s layoffs to be dealt with, with the whole initiative set to roll on into Q1 2025. CFO Dominik Asam noted that of the €2.2 billion accrued for restructuring, “very little, if anything” has been paid out in Q1 and “it’s not the final number yet”. 

There are still voluntary programs where SAP is waiting to see what the acceptance rate is, as well as “negotiations with social partners” ongoing. That said, Klein remains confident that things are on track: 

We are a little bit ahead, [since] we started the restructuring program, on people leaving SAP and we do this in a very controlled manner. We have identified the job profiles which we either reskill or actually want to reduce also via restructuring.

Onwards!