Yahoo Finance SAP SE (NYSE:SAP) Q1 2024 Earnings Call Transcript
SAP SE (NYSE:SAP) Q1 2024 Earnings Call Transcript April 22, 2024
SAP SE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome, and thank you for joining the SAP Q1 2024 Financial Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Anthony Coletta, Chief Investor Relations Officer. Please go ahead.
Anthony Coletta: Good evening, everyone, and welcome. Thank you for joining us. With me today are CEO, Christian Klein; CFO, Dominik Asam; and Scott Russell, Head of Customer Success. On this call, we will discuss SAP's first quarter 2024 results. You can find the deck supplementing this call, as well as our quarterly statement on our Investor Relations website. During this call, we'll make forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including, but not limited to the risk factors section of SAP's annual report on Form 20F for 2023.
Unless otherwise stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS year-on-year at constant currencies. The non-IFRS financial measures we provide should not be considered a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. Before we start, I'd like to first remind everyone of the adjustment to our reporting practices announced on December 18, last year. This adjustment notably incorporating share based compensation into our non-IFRS results are now fully reflected in our Q1 results. I would also like to call your attention to our upcoming Financial Analyst Conference, which will take place on June 5 as part of our Sapphire event in Orlando, Florida.
This will be broadcast on our website. And with that, I'd like to now turn the call over to Christian.
Christian Klein: Yes. Thank you, Anthony, and thanks to everyone on the line for joining our first earnings call for 2024. When we look at SAP's longer term growth journey, 2024 is a key year. It's the year to scale up revenue and profitability. And I'm so proud to say, what we saw in Q1 makes us very confident about our goals. We are off to a strong start, and we have laid a solid foundation for 2025 and beyond. Let's look at the key metrics for Q1. Current Cloud's backlog grew 28% to EUR14.2 billion This is the fastest growth on record and demonstrates the strong momentum across our portfolio with Business AI as an enabling factor with a strong impact already on our Q1 backlog. Cloud revenue increased 25% and reached EUR3.9 billion.
Our operating profit came in at EUR1.5 billion in Q1, 19% higher than a year ago. The new disclosure of Cloud ERP Suite creates transparency for you and us. It shows how we are executing on moving our installed base to the cloud and how we are driving SAPs ERP leadership position with our land and expand strategy. The Cloud ERP Suite contains all the modules for our company's core processes from finance, spend management, and HR to supply chain commerce, and our business technology platform, including data and analytics. Together, these modules have the same functional scope as our monolithic on premise ERP. Our modular and integrated Cloud ERP is unmatched in covering the core processes for over 25 industries and 130 countries in the world and represents a $700 billion market opportunity by 2027.
In Q1, revenue from the Cloud ERP Suite was up 32% and reached EUR3.2 billion We have seen exponential growth in this metric for two consecutive years as we are successfully expanding our footprint in our installed base. The land and expand strategy works beautifully. Every customer right now has to redesign core processes end-to-end to master the business transformation in the industry. And this is only the beginning. The flywheel has just started to spin. I will go deeper into that in a minute. There are many exciting customer stories behind our strong start to the year. In Q1, a range of exciting companies signed up for RISE with SAP. To name just a few examples, the premium chocolate maker Lindt & Sprüngli, the global manufacturing company SKF, and the US aerospace company, Curtiss-Wright.
We also saw a great customer take up across the portfolio. Maersk, a world leader in container logistics adopted the BTP as the integration and development platforms, spanning across the SAP and non-SAP IT landscape. Our GROW with SAP offering was very successful with 100 of new customers and a 64% share of net new customers in Q1. One of them is the carbon capture start up, Climeworks. As for our sustainability solutions, we won another 100 customers in Q1 on top of more than 1,000 we had before. New customers like Ericsson, the global leader in wireless technologies, and [Weiland] (ph), a leader in energy saving technologies, chose SAP's sustainability control tower for their regulatory ESG reporting. So in summary, we had a strong start in Q1, and we are happy to confirm our 2024 outlook as well as our 2025 ambition.
We are also very confident about the resilience of our growth story beyond 2025, because we have all the right ingredients in place. Our three growth drivers are, RISE with SAP as the leading transformation offering for our installed base, GROW with SAP for net new customers, smaller subsidiaries, and acquisitions, and the innovations we delivered and we will release in the upcoming years, above all, Business AI. Let's first look at RISE with SAP. Our installed base is large with over EUR11 billion remaining support revenue to be converted to the cloud. Typically, by a factor of around two to two. On top, the EUR700 billion Cloud ERP market offers significant cross selling opportunities, and I have no doubt that SAP's integrated best of suite capabilities will win in the core business of our customers.
As part of RISE and via the clean core journey, SAP and our ecosystem will help our customers to remove the ERP custom code and instead develop integrated ERP extensions on BTP. This gives us an immense additional revenue potential considering that customers in the on premise world spend up to EUR7 on custom code for every euro they invest in ERP software. Customers like Hitachi, Hi-Tech, for example, reduced the number of custom code add ons by over 19%. RISE has just become the de facto standard for our installed base. It offers a holistic business process redesign combined with the migration to our modular Cloud ERP, resulting in fast time to value and being always on the latest release, consuming new innovations without time intensive ERP upgrades like in the past.
Let's have a brief look at GROW with SAP, our second growth driver. As SAP's greenfield cloud ERP offering for net new customers or new business units of large enterprises, GROW delivers go lives in weeks for every business model in every industry in every country. With our ERP solution, SME customers can grow and scale their business without migrating to a new ERP. Ultimately, RISE and GROW offer customers similar advantages, innovation, modularity, scalability, and integration. Coming to the third driver of our growth, which is innovation with Business AI at the core. SAP Business AI will once again transform how businesses run and how end users will work in the future. 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. Second, we are embedding GenAI directly in our cloud products. Since Q4, we have released over 30 new AI scenarios across our cloud portfolio. Additional ones come out almost every week with more than 100 in the pipeline for the remainder of the year. Third, our customers, partners, and SAP can use the AI foundation on the BTP, including the GenAI hub to build custom AI scenarios. Over 60 ecosystem partners are taking advantage of these capabilities already and working on over 80 use cases right now. Among the over 27,000 customers already using our Business AI is ZF Friedrichshafen, a leading automotive supplier.
ZF is lifting significant financial value by optimizing demand and supply chain planning with embedded AI. Together with our partner NVIDIA, we are currently building new GenAI capabilities. One use case will revolutionize how software will be developed in the future. Jensen and I are looking forward to telling you more about this partnership at Sapphire. Commercially, customers can buy SAP Business AI as consumption based AI units, which can be used across the entire portfolio or via our premium RISE and GROW offerings that include AI units, so customers can get started right away. Both commercial offers have already seen high demand, and many Q1 deals were influenced by SAP Business AI. Overall, we offer a unique value proposition versus the competition with three elements.
SAP Business AI works out of the box. For their own GenAI enabled extensions, customers and partners have full choice which leading model they want to use, including modules from OpenAI, Google, the best open source alternatives, or using their own modules. And SAP Business AI comes with our leading enterprise standards and is deeply integrated with our data and security model. In summary, we had a strong start to 2024, and we are confident we will achieve our goals for the year. Looking ahead, we have powerful growth drivers in place and many innovations in our R&D pipeline. The strong development of our cloud backlog is a testament to that momentum. With regard to our transformation program, we are making even better progress than expected, especially with hiring new talent for future oriented areas, such as AI.
The program will help us to capture growth and increase efficiency at the same time, among other things, by pushing the internal use of AI. We expect a triple digit million amount in efficiencies from embedding AI across all our processes. Equally important for us as an employer, where our SAP colleagues are affected by restructuring, we are moving with care and empathy, always aware of our social responsibility. And with that, I'm handing over to you, Dominik.
Dominik Asam: Thank you, Christian, and thank you all for joining us this evening. Let me start by echoing Christian's sentiment that the fundamentals remain exceptionally strong. March marked my first anniversary as SAP CFO, and I consider myself very fortunate to have joined the company just in time with the business in pole position to capitalize on the tremendous AI opportunity lying ahead of us. The hard work of the prior year starts to pay off handsomely, also for those investors who kept the faith in the company during these turbulent times. It is because of the dedication of our workforce that we continue to experience strength across the business. Our solutions are becoming increasingly differentiated, demonstrated by continued revenue growth throughout the world, expanding cloud gross profit, and improved cash conversion.
We've kept the promise and walked the talk, setting the stage for sustained growth in the coming years. Fiscal year 2024 is already off to a strong start. We continue to build on our robust foundation as evidenced by the impressive growth of our current cloud backlog and continued momentum of our cloud revenue. In addition, non-IFRS operating profit showed significant double digit growth even when including stock based compensation. Our key priorities, including our investments in Business AI, demonstrate our commitment to leading the charge in this new era of business transformation and exemplify our relentless drive for growth and operational excellence. The company wide transformation program we initiated in January is progressing well, focusing on enhancing our operational efficiencies and setting the stage for improved financial performance.
We're also deploying our own AI solutions internally as a powerful lever to drive productivity. Digital transformation is imperative in today's evolving landscape, and SAP remains the partner of choice. Building on our strategic commitment, the introduction of the Cloud ERP Suite is a pivotal step in aligning our product offering more closely with our core ERP and integrated business solutions. All of this has helped foster the trend towards larger cloud transactions with deals greater than 5 million in volume, contributing more than half of our cloud order entry. This is remarkable for the Q1 of the year. I will now go into further details on our financial highlights. Current cloud backlog was EUR14.2 billion accelerating its impressive growth to 28%, solidly keeping us on the trajectory towards our fiscal year 2024 outlook and fiscal year 2025 top line ambition.
Cloud revenue grew 25% year-on-year, mainly driven by the continued strength of our Cloud ERP Suite. It grew by 32% in Q1, its nineth consecutive quarter of growth in the thirties. This sustained momentum underscores our expectations that Cloud ERP Suite will continue to capture a growing share of our cloud business, thanks to its critical role in our customers' digital transformation journeys. It actually already represents 84% of our combined PaaS, SaaS revenue, up 3 percentage points as compared to the prior year's quarter. Software license revenue saw a decrease of 25%. So the dilution of its share of the total revenue from 9% to 5% in only one year impressively illustrates the continued secular shift in market preference towards cloud based solutions in the enterprise.
Finally, total revenue surpassed $8 billion in Q1, up 9% year-over-year, showing unabated growth momentum. Now let's take a brief look at our regional performance. In the first quarter, SAP's cloud revenue performance was particularly strong in APJ and EMEA and robust in the Americas region. Brazil, Canada, Germany, Italy, the United Arab Emirates, India, and South Korea had outstanding performances in cloud revenue growth, while the US, Japan, and Spain were particularly strong. Now let's move further down the income statement. Our cloud gross profit grew by 28%, driven by cloud revenue growth and further efficiency gains. This resulted in cloud gross margin improving from the year ago period, expanding by 1.8 percentage points to 72.5%. IFRS operating profit in the Q1 was impacted by EUR2.2 billion of restructuring provisions associated with the transformation program initiated in January.
This resulted in an IFRS operating loss of EUR787 million. This accrual represents the vast majority of the total restructuring expenses we currently expect to incur in the context of the program. The amount is closer to the upper end of what we had anticipated initially, which is primarily driven by the strong share price performance in the Q1 and the higher than expected acceptance rate of the early retirement program in the US. We continue to be in the very early stages of executing the program, which we expect to be concluded by the beginning of 2025, and projected expenses are based on preliminary assumptions. We expect visibility to further improve over the course of the second quarter and plan to provide an update once the related measures are fully assessed.
Finally, non-IFRS operating profit grew by 19%, evidencing our sustained push towards enhanced profitability. The underlying profit extension expansion was tempered by a EUR135 increase in stock based compensation expense, mainly as a result of a very strong appreciation of our share price in the first quarter. Q1 2024 was actually the quarter with the highest increase in SAP's market capitalization ever. As we settled for the last time, the entire trench of our obligations under the move -- 2021 move SAP program in Q1, fully in cash, we expect a significantly lower sensitivity in the coming quarter as we move to equity-settled. Therefore, the non-IFRS operating profit outlook is reaffirmed for the full year 2024 despite this headwind. Non IFRS earnings per share in the quarter increased 8% to EUR0.81.
The IFRS effective tax rate for Q1 was 16%, and the non IFRS tax rate was 32.4%. Now onto our cash generation. Free cash flow for q one came in at EUR2.49 billion, up 28%, again, putting us on the right trajectory to maintain our full year outlook. There was only a minor cash flow impact from our transformation program in the first quarter. So we reiterate our 2024 outlook on all parameters. For the detailed outlook, please refer to our quarterly statement published earlier today on our Invest Relations website. In summary, Q1 marks a strong start to the year, highlighted by continued growth in both our current cloud backlog and Cloud ERP Suite. Business traction combined with focus on execution is positioning us well to meet our objectives for the remainder of the year.
Before we open it up to Q&A, I would like to say that we are very much looking forward to welcoming you to our financial analyst conference in June. As already mentioned by Anthony, it will take place in conjunction with Sapphire in Orlando. And the team and I are very much looking forward to meeting you there in person. So thank you, and we'll now be happy to take your questions.
Anthony Coletta: Operator, please open the line.
See also
40 Best Business Schools in the World for 2024 and
10 Best Performing Biotech ETFs in 2024.
To continue reading the Q&A session, please click here.
