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SAP SE Earnings - Analysis & Highlights for Q4 2024
Overview
PositivesNegativesOutlook
- The company achieved all its cloud goals in 2024 despite macro headwinds and the ongoing transformation inside SAP.
- The company has access to business data that no other tech company has, and with regard to AI, yesterday's tech news provided another strong validation of the strategy.
- The current cloud backlog increased by 29% on top of an already larger base.
- The company had a really great one, with Land and expand working well.
- The number of customers with over four SAP solutions more than doubled since 2021.
- The company signed up for many automotives but they are not in a good position due to concerns in the industry.
- The company's KPIs need to improve going forward to improve the ratio of selling expenses to revenues.
- The company is raising the bar for the years to come.
- The company will see a gradual decline in maintenance revenues.
- The company aims to reduce volatility and minimize the impact of exchange rate fluctuations on free cash flow by aligning hedging instruments with forecasted cash flows and maintaining a 1:1 hedge ratio.
- The company is offering transformation credits to customers to incentivize them and help them with the transformation period, which is creating some upfront cash-out relatively to the phasing of the profits in these customers.
Q&A Highlights from SAP SE Earnings Call Q4 2024
- Analyst asked about the company's installed base and the potential for further upgrades to S/4.
- Christian Klein, CEO of SAP, stated that the company has a record Q4 exceeding all expectations, and that 40% of their customers are on the move with RISE to their business suite in the cloud. He also noted that the company is adding hundreds of net new names and that their win rates in the public cloud are increasing. He concluded by saying that the outlook is ambitious and that the company is confident for the year ahead.
- Christian Klein, CEO of SAP, stated that the company has a record Q4 exceeding all expectations, and that 40% of their customers are on the move with RISE to their business suite in the cloud. He also noted that the company is adding hundreds of net new names and that their win rates in the public cloud are increasing. He concluded by saying that the outlook is ambitious and that the company is confident for the year ahead.
- Analyst asked about the company's revenue acceleration thesis and the potential for deceleration in the installed base.
- Dominik Asam, CFO of SAP, stated that the company has seen a slight deceleration in revenue, but that this is probably better than what has been embarked on in some of the models the company has seen on the sell-side. He also noted that the company is focusing on process simplification and new business modules, and that customers need time to make the transition to the cloud.
- Dominik Asam, CFO of SAP, stated that the company has seen a slight deceleration in revenue, but that this is probably better than what has been embarked on in some of the models the company has seen on the sell-side. He also noted that the company is focusing on process simplification and new business modules, and that customers need time to make the transition to the cloud.
- Analyst asked about the company's support revenue in 2025 and how it will affect cloud revenue.
- Dominik Asam, CFO of SAP, stated that the company expects a slight decline in maintenance revenues, but that it will not be a complete collapse. He also noted that the company has gradual rollover from maintenance base to cloud revenues, and that customers are seeing value in SAP support. Christian Klein, CEO of SAP, added that the company is offering customers the ability to replace third-party assets in their stack and to continue their transition while not getting hit by the end of maintenance.
- Dominik Asam, CFO of SAP, stated that the company expects a slight decline in maintenance revenues, but that it will not be a complete collapse. He also noted that the company has gradual rollover from maintenance base to cloud revenues, and that customers are seeing value in SAP support. Christian Klein, CEO of SAP, added that the company is offering customers the ability to replace third-party assets in their stack and to continue their transition while not getting hit by the end of maintenance.
- Analyst asked about the reasoning behind SAP's ERP private edition option and its impact on the installed base.
- Christian Klein, CEO of SAP, explained that the ERP private edition option is for a few large customers who need help migrating to the cloud and have over 100 ERPs. The option includes moving to the cloud, replacing third-party components, and running in a supported way. The offering is not about extending on-premise maintenance and is aimed at helping customers fully transform and migrate to the cloud.
- Christian Klein, CEO of SAP, explained that the ERP private edition option is for a few large customers who need help migrating to the cloud and have over 100 ERPs. The option includes moving to the cloud, replacing third-party components, and running in a supported way. The offering is not about extending on-premise maintenance and is aimed at helping customers fully transform and migrate to the cloud.
- Analyst asked about the thought process behind the moving parts in the FY 2025 outlook, specifically the change in the definition of free cash flow.
- Dominik Asam, CFO of SAP, explained that working capital is hard to predict around the turn of the year, and the company has received payments and offered transformation credits to customers, which has resulted in the outlook given. The company has also pulled in cash in 2024, which was ahead of plan, and is operating well, with promising signs in the cash flow statement. The stock-based compensation is also a significant factor, with a positive effect on the cash flow statement. The company is committed to continuing to grind on the cash conversion and keep the high cash conversion that it has had in both 2024 and 2025.
- Dominik Asam, CFO of SAP, explained that working capital is hard to predict around the turn of the year, and the company has received payments and offered transformation credits to customers, which has resulted in the outlook given. The company has also pulled in cash in 2024, which was ahead of plan, and is operating well, with promising signs in the cash flow statement. The stock-based compensation is also a significant factor, with a positive effect on the cash flow statement. The company is committed to continuing to grind on the cash conversion and keep the high cash conversion that it has had in both 2024 and 2025.
- Analyst asked about the breakdown of cloud growth in 2024, specifically how much came from maintenance conversion, cross-selling, and net new sales.
- Christian Klein, CEO of SAP SE, explained that the company added approximately €3.5 billion in cloud growth in 2024, with 60% coming from IBase customers moving to the cloud, 30% from net new sales, and 10% from up-selling into the existing installed base. Klein also noted that the mix of cloud growth is healthy, with a strong move from the installed base and net new sales adding incremental business.
- Christian Klein, CEO of SAP SE, explained that the company added approximately €3.5 billion in cloud growth in 2024, with 60% coming from IBase customers moving to the cloud, 30% from net new sales, and 10% from up-selling into the existing installed base. Klein also noted that the mix of cloud growth is healthy, with a strong move from the installed base and net new sales adding incremental business.
- Analyst asked about the progress of Joule, SAP SE's AI platform, and how it is tracking in terms of adoption and revenue generation.
- Christian Klein, CEO of SAP SE, provided an update on Joule's progress, stating that the company is seeing significant order entry driven by AI, including Joule, and that revenue is starting to grow as well. He shared a story from a recent meeting with a CFO of a large German company, where they demonstrated how Joule can help resolve disputes and improve cash collection by orchestrating the process and reaching out to different agents. Klein also noted that the company's focus on building the strongest AI foundation for businesses, rather than solely on large language models, has been successful, and that the consumption-based commercial model has been key to driving adoption.
- Christian Klein, CEO of SAP SE, provided an update on Joule's progress, stating that the company is seeing significant order entry driven by AI, including Joule, and that revenue is starting to grow as well. He shared a story from a recent meeting with a CFO of a large German company, where they demonstrated how Joule can help resolve disputes and improve cash collection by orchestrating the process and reaching out to different agents. Klein also noted that the company's focus on building the strongest AI foundation for businesses, rather than solely on large language models, has been successful, and that the consumption-based commercial model has been key to driving adoption.
- Analyst asked about the main cost levers beyond 2025 and how the company plans to achieve them.
- Christian Klein explained that the company is working on transforming its go-to-market function, including assigning partners dedicated territories and investing in the channel. He also mentioned that the company is focused on being more disciplined in terms of the number of calls and commissions paid, and that these changes will give the company scale efficiency and further investment opportunities. Dominik Asam added that the company is derisking its cost base and that AI plays a big role in this process. He also mentioned that the company is focused on improving its KPIs, such as selling expenses to revenues, and that it is confident in its ability to achieve its goals.
- Christian Klein explained that the company is working on transforming its go-to-market function, including assigning partners dedicated territories and investing in the channel. He also mentioned that the company is focused on being more disciplined in terms of the number of calls and commissions paid, and that these changes will give the company scale efficiency and further investment opportunities. Dominik Asam added that the company is derisking its cost base and that AI plays a big role in this process. He also mentioned that the company is focused on improving its KPIs, such as selling expenses to revenues, and that it is confident in its ability to achieve its goals.
- Analyst asked about how AI translates into margins and growth in the business.
- Dominik Asam explained that AI is necessary for improving the ratio of selling expenses to revenues and that the company is confident in its ability to achieve its goals. Christian Klein added that the company is focused on change management and explaining to people how AI can change jobs, and that the company is growing so much under-proportional in many functions of the company also because of AI.
- Dominik Asam explained that AI is necessary for improving the ratio of selling expenses to revenues and that the company is confident in its ability to achieve its goals. Christian Klein added that the company is focused on change management and explaining to people how AI can change jobs, and that the company is growing so much under-proportional in many functions of the company also because of AI.
- Analyst asked about the extended maintenance to 2033 being available to all customers or just a select few.
- Christian Klein, CEO of SAP SE, explained that the extended maintenance offering is legally available to all customers, but it is primarily targeted towards large customers who are already on the move to the cloud. He also clarified that the offering is not mandatory for all customers and that the company is focused on supporting its customers' transformations to the cloud.
- Christian Klein, CEO of SAP SE, explained that the extended maintenance offering is legally available to all customers, but it is primarily targeted towards large customers who are already on the move to the cloud. He also clarified that the offering is not mandatory for all customers and that the company is focused on supporting its customers' transformations to the cloud.
- Analyst asked about the thinking behind potentially taking the extended maintenance option off the price list and clarified what is meant by "deceleration".
- Dominik Asam, CFO of SAP SE, explained that the deceleration in CCB revenue is due to the low growth rates of maintenance and license revenues, as well as the low growth rate of services. He also mentioned that the company is aiming for total revenues to accelerate by 2027 and that the deceleration lies somewhere between the current growth rate and the acceleration rate of 11% that the company has guided for 2025.
- Dominik Asam, CFO of SAP SE, explained that the deceleration in CCB revenue is due to the low growth rates of maintenance and license revenues, as well as the low growth rate of services. He also mentioned that the company is aiming for total revenues to accelerate by 2027 and that the deceleration lies somewhere between the current growth rate and the acceleration rate of 11% that the company has guided for 2025.
