Release Date: July 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- SAP SE (SAP, Financial) reported strong growth momentum in Q2 2024, with cloud revenue expanding by 25% to EUR4.2 billion.
- The company's operating profit jumped 35% to EUR1.9 billion year over year, driven by increased profitability and operational efficiency.
- SAP SE (SAP) has successfully integrated business AI into its portfolio, with 20% of all deals in Q2 including premium AI use cases.
- The company has a robust pipeline for the second half of 2024, with significant interest from large customers and partners in its GenAI hub.
- SAP SE (SAP) is making significant progress in its transformation program, with plans to achieve EUR200 million in additional run-rate savings by 2025.
Negative Points
- Software licenses revenue decreased by 27% compared to the same period last year, indicating a continued shift towards cloud solutions.
- The company incurred approximately EUR600 million in incremental restructuring expenses in Q2 2024, impacting IFRS operating profit.
- SAP SE (SAP) expects the majority of restructuring payouts to occur in the second half of the year, which could affect cash flow.
- The company faces a challenging macroeconomic environment, which could impact future growth and profitability.
- There are concerns about the availability of enterprise architects to support the company's Wise transformation journeys, which could affect execution.
Q & A Highlights
Q: Dominik, why do you think that you are not showing any signs of macro impact that others are calling out? Could this be a timing issue in terms of the flow through the pipeline? And could it be a worry for next year? Or is it just simply the way you're executing or the business model? Any color would be appreciated.
A: (Christian Klein, CEO) We have seen a fantastic performance in half-year one, and now entering half-year two, we see a very healthy pipeline. Our innovation pipeline, especially in GenAI use cases, is strong, and customers are seeing a ton of value. Our best-of-suite approach is also resonating well, as customers need to connect different parts of their business and supply chain. (Dominik Asam, CFO) The mix of our cloud revenue is improving, with a decreasing dilutive effect from extension suite and infrastructure-as-a-service. This, combined with our ability to convert our installed base, is driving our confidence.
Q: Christian, you've clearly flagged business AI as a big driver. Is this a general desire of the customer base to adopt these technologies, or are there specific use cases that are resonating?
A: (Christian Klein, CEO) We see strong resonance for use cases in HR, finance, supply chain, and order management. End users benefit from efficiency gains in content search and document management. For example, Concur's embedded AI is already helping 150,000 users process hotel bills in real-time. Supplier and contract management are other areas where AI is making a significant impact.
Q: Can you give some sense of where the people will be leaving from in the restructuring program? And is there upside risk to 2024 profits given the expanded program?
A: (Dominik Asam, CFO) The phasing has been positive, especially in countries with fast voluntary measures like the US. We are seeing a significant ramp-up in headcount reductions, particularly in Germany. We are confident in our profitability for this year, but we are cautious about software revenue, which has been declining. (Christian Klein, CEO) We are optimizing our location and skill mix, investing in future growth areas like data science and architecture, which will help us achieve our 2025 ambitions.
Q: Dominik, you alluded to some working capital savings. Can you elaborate on the free cash flow development and the balance between savings and reinvestment?
A: (Dominik Asam, CFO) We have seen good progress in working capital improvements, which, along with restructuring benefits, are helping us maintain our free cash flow outlook. The heavy lifting in terms of cost savings will be done by 2025, with gradual improvements thereafter. We aim to achieve a cost increase to revenue increase ratio more in line with our competitors.
Q: Christian, you mentioned earlier in the year that some customers were looking to pull forward their move to the cloud ERP suite. Is this still holding up?
A: (Christian Klein, CEO) Yes, we see strong pipeline momentum, both from our installed base and new customers. Our channel business is also expanding, with more resellers interested in our modular best-of-suite offerings. We remain optimistic for the year and for 2025.
Q: Can you comment on the growth of transaction-related cloud revenues in the quarter and the outlook for H2?
A: (Christian Klein, CEO) Transactional cloud revenue growth was slightly negative in Q2, but we expect a similar or slightly better performance in H2. The subscription side of Concur is doing well, driven by GenAI use cases. (Dominik Asam, CFO) The impact of transactional revenues on overall cloud revenue is decreasing, making it less significant in our financial performance.
Q: Can you clarify the commentary about Q4 being decisive for cloud revenue growth in 2025?
A: (Christian Klein, CEO) Q4 is always our biggest quarter for order entries and cloud bookings. While the pipeline looks good, we need to execute well in H2. (Dominik Asam, CFO) We acknowledge the challenging market environment but remain confident in our ability to achieve our targets.
Q: Can you provide more details on the enterprise architects being allocated to customers? How many do you have, and how many do you need?
A: (Christian Klein, CEO) We are not starting from zero; we already have enterprise architects in our max attention offering and services team. We are reskilling existing staff and hiring externally to meet the demand. Our academies are also doubling down on training for these roles. The feedback from customers has been very positive, and we are expanding our coverage.
Q: Given the ongoing transformation program, will all the benefits be visible in 2025, or will some extend into 2026?
A: (Christian Klein, CEO) The bulk of the program will be executed in 2024, with most benefits realized in 2025. However, this is not just a one-off program; we are optimizing our cost base and reallocating investments to strategic growth areas, which will continue to benefit us in 2026 and beyond.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
