SAP's strong growth in cloud revenue in the third quarter is driven by a 34% increase in cloud ERP suite revenue. SAP still expects the highest cloud revenue growth of 27% for the full year, raising its full-year cloud and software revenue guidance to an expected increase of 10% to 11%. SAP stated that its restructuring plan affected as many as 10,000 positions, with many covered by internal leave and retraining. The related expenses generated in the first nine months of this year amounted to 2.8 billion euros, accounting for 93% of the total expected expenses. SAP's US stock rose more than 4% in after-hours trading
In the third quarter of this year, SAP, the largest software company in Europe and a software giant in Germany, maintained a double-digit rapid growth momentum in its cloud business, reflecting the demand for AI services under the AI boom, as well as the company's efforts to drive customers to upgrade their old locally installed systems.
After the US market closed on Monday, October 21, SAP announced its financial data for the third quarter of 2024 and provided annual performance guidance for 2024.
1) Key Financial Data:
Revenue: Total revenue in the third quarter under non-IFRS standards was 8.47 billion euros, a year-on-year increase of 9.4%, with analysts expecting 8.45 billion euros, and a 10% increase from the second quarter.
EPS: Earnings per share (EPS) in the third quarter under non-IFRS standards was 1.23 euros, a 6% increase year-on-year, and approximately 59% increase from the second quarter.
Gross Profit: Gross profit in the third quarter under non-IFRS standards was 6.236 billion euros, a 10% increase year-on-year, and approximately 11% increase from the second quarter.
Operating Profit: Operating profit in the third quarter under non-IFRS standards was 2.244 billion euros, a 27% increase year-on-year, and approximately 33% increase from the second quarter.
2) Segment Data:
Cloud and Software: Revenue from cloud and software in the third quarter under non-IFRS standards was 7.429 billion euros, an approximately 11% increase year-on-year, and approximately 10% increase from the second quarter.
Cloud: Cloud revenue in the third quarter under non-IFRS standards was 4.351 billion euros, an approximately 25% increase year-on-year, with analysts expecting 4.36 billion euros, and approximately 25% increase from the second quarter.
Cloud Backlog: Cloud backlog in the third quarter was 15.377 billion euros, a 25% increase year-on-year, and 28% increase from the second quarter.
3) Performance Guidance:
Revenue: Calculated at fixed exchange rates, cloud and software revenue for 2024 is expected to be between 29.5 billion and 29.8 billion euros, a 10% to 11% increase, with the midpoint of the guidance raised by 400 million euros from the previous range of 29 billion to 29.5 billion euros. Cloud revenue for 2024 is still expected to be between 17 billion and 17.3 billion euros, a 24% to 27% increase at fixed exchange rates.
Operating Profit: Calculated at fixed exchange rates, non-IFRS operating profit for 2024 is expected to be between 7.8 billion and 8 billion euros, a 20% to 23% increase, with the midpoint of the guidance raised by 150 million euros from the previous range of 7.6 billion to 7.9 billion euros.
Free Cash Flow: Free cash flow for 2024 is expected to be between 3.5 billion and 4 billion euros, lower than 2023's 5.09 billion euros, with the previous expectation around 3.5 billion euros.
After the financial report was released, SAP's US-listed stocks on the NYSE, which had already fallen by 0.4%, rose in after-hours trading, surging over 4% at one point
Third Quarter Cloud ERP Suite Revenue Accelerates Growth, Still Expected to Increase Cloud Revenue by up to 27% for the Full Year, Raises Full-Year Cloud and Software Guidance
According to the financial report, SAP's cloud business revenue growth rate in the third quarter remained the same as the second quarter, continuing to exceed 20%, mainly driven by a slight acceleration in the growth of cloud Enterprise Resource Planning (ERP) suites. Revenue from cloud ERP suites in the quarter increased by 34% to 3.64 billion euros, exceeding the 33% growth in the second quarter.
During the release of the financial report, SAP's CEO Christian Klein pointed out,
In the company's cloud business in the third quarter, the performance of cloud ERP suites was particularly outstanding. "More importantly, we have made significant progress in business AI with breakthrough innovations such as SAP Knowledge Graph. A large part of our cloud transactions in the third quarter included AI use cases."
Klein stated that the strong performance in the third quarter once again gives SAP confidence to raise its full-year guidance for this year.
In terms of performance guidance, SAP's cloud revenue guidance for this year remains unchanged, still expecting growth of over 20%, with a maximum increase of 27%. The revenue guidance for cloud and software has been raised, with the lower end of the guidance range increased by 1.7% and the upper end increased by 1%.
Restructuring Plan Affects Up to 10,000 Company Positions, Related Expenses for the First Nine Months Amount to 2.8 Billion Euros, Accounting for an Estimated Total of 93% of Expenses
In January of this year, SAP announced that it would implement a restructuring plan aimed at ensuring that SAP's skills and resources continue to meet future business needs, with the plan expected to conclude by early 2025.
In this financial report, SAP disclosed the progress of the restructuring plan. The Chief Financial Officer (CFO) of the company, Dominik Asam, stated that the transformation plan has begun to improve the company's efficiency, enabling the company to achieve strong operating profit and free cash flow.
SAP stated that this year the company has further increased its focus on key strategic growth areas, especially in business AI. The restructuring plan is changing the company's operational setup, enabling it to achieve organizational synergies and AI-driven efficiency, preparing it for future highly scalable revenue growth.
Currently, SAP expects the restructuring plan to affect 9,000 to 10,000 company positions, with the majority covered by employee voluntary leave programs and internal skills retraining measures. Considering reinvestment in strategic growth areas and the acquisition of WalkMe, SAP expects the total number of employees to be slightly higher than the same period last year by the end of this year.
SAP stated that the total expenses related to the restructuring plan for the first nine months of this year amounted to 2.8 billion euros, with the total estimated expenses related to the plan being around 3 billion euros. This means that over 93% of the expenses related to the restructuring plan were incurred in the first nine months of this year.
SAP also mentioned that the restructuring expenses for the third quarter and the first nine months of this year were 300 million euros and 800 million euros, respectively. The total expected expenses related to the plan are around 3 billion euros, with approximately 500 million euros in expenses expected to be incurred by 2025