German tech giant SAP raises full-year outlook on cloud hopes

The German tech giant SAP has reported robust third-quarter earnings and raised its full-year outlook for important metrics, including cloud computing and software revenue, operating profit, and free cash flow.

Despite a subdued economy in Germany, the software company has thrived due to its strategic pivot towards artificial intelligence.

SAP’s American Depositary Receipts (ADRs) rose by 3.5% in after-hours trading on the New York Stock Exchange, indicating a likely higher opening in Frankfurt.

SAP remains one of the top performers in the European markets, up 51% year-to-date, closing at €211 per share on Monday. Its shares have repeatedly reached all-time highs over the past five months, fuelled by consistently positive earnings results.

Artificial Intelligence-Focused Shift

SAP’s cloud revenue has been accelerating since the first quarter, growing by between 20% and 30% over the first three quarters.

The success of SAP’s AI-powered core business is a testament to its restructuring plans and strategic shift.

CEO Christian Klein said in the latest statement released on Monday: “Q3 was another strong quarter for SAP, and we are confidently raising our 2024 financial outlook.

Cloud revenue growth was particularly impressive, especially for our Cloud ERP Suite. Even more importantly, we are making strong progress in Business AI with groundbreaking innovations such as SAP Knowledge Graph. A significant portion of our cloud deals in Q3 included AI use cases.”

Since the beginning of the year, SAP has made a strategic shift towards artificial intelligence, particularly Business AI.

“SAP will further sharpen its focus on key strategic growth areas, particularly Business AI. It also intends to transform its operational setup to capture organisational synergies, AI-driven efficiencies, and to prepare the company for highly scalable future revenue growth,” the company stated in January.

As part of this strategy, Europe’s largest software maker announced a plan to cut 8,000 jobs to support its AI-driven business model, increasing this target to a 9,000–10,000 headcount cut in July.

However, the restructuring cost the company approximately  €2.8bn in the first nine months.

Cloud Revenue Continues Strong Growth in the third quarter

SAP’s current cloud backlog, a key metric referring to the revenue expected to be booked over the next 12 months, reached €15.4bn, up 25%, or 29% at constant currencies, year-on-year in the third quarter.

This followed a 28% increase in the second quarter and a 27% growth in the first quarter.

Cloud revenue rose by 25%, or 27% at constant currencies, while overall revenue increased by 9.4% year-on-year to €8.47bn, slightly surpassing analysts’ estimates of €8.47bn.

SAP reported earnings per share of €1.23, beating the consensus forecast of €1.22 per share.

SAP has now raised its 2024 outlook for key metrics, forecasting cloud and software revenue of between €29.5bn and €29.8bn, with the midpoint representing a €400m increase, or 10% to 11% annual growth at constant currencies.

The company also expects operating profit to rise by 20% to 23% year-on-year, raising the midpoint by €150m. Free cash flow is now projected to reach €4.0bn, up from the previously estimated €3.5bn.