SAP SE (NYSE: $SAP) is a global enterprise application software and business intelligence solutions leader. Based in Walldorf, Germany, SAP SE provides software and services for improved efficiency in business operations and customer relations. The company’s flagship product is the SAP Enterprise Resource Planning application, which helps businesses integrate and optimize key processes across departments.
On Monday, April 22, 2024, SAP announced its Q1 fiscal 2024 financial results for the first quarter ended March 31, 2024 after markets closed to a positive market reaction.
Strong Cloud Revenue Growth
The company reported strong growth in its cloud business, with cloud revenue increasing by 24% year-over-year to €3.93 billion ($4.2 billion). At constant currencies, cloud revenue grew an impressive 25%. The strong performance was driven primarily by SAP’s Cloud ERP Suite, where revenue surged 31% compared to the same period last year.
“We’re off to a great start in 2024, and we’re confident we’ll achieve our goals for the year,” said Christian Klein, CEO of SAP. “Looking ahead, we have powerful growth drivers in place – Business AI, cross-selling across our cloud portfolio and winning new customers particularly in the midmarket.”
SAP’s current cloud backlog, an indicator of future cloud revenue, reached a record €14.2 billion, up 27% (28% at constant currencies) year-over-year – the fastest growth rate on record. This impressive backlog growth underscores SAP’s strong momentum in the cloud market.
Key Financial Highlights
SAP reported impressive financial results for Q1 2024. Cloud gross profit soared 27% on an IFRS basis and 28% on a non-IFRS constant currency basis to €2.85 billion. Despite higher share-based compensation expenses due to a strong share price increase, non-IFRS operating profit climbed 16% (19% at constant currencies) to €1.53 billion.
While IFRS earnings per share were -€0.71, non-IFRS EPS rose 8% to €0.81. Free cash flow jumped 28% to €2.49 billion, fueled by higher profitability, improvements in working capital management, and lower capital expenditures. These strong financials underscore SAP’s strong momentum and operational efficiency.
Transformation Program and Restructuring Provision
In 2024, SAP is intensifying its focus on key strategic growth areas, particularly business AI. To capture organizational synergies and AI-driven efficiencies and prepare for highly scalable future revenue growth, the company is executing a company-wide restructuring program expected to conclude in early 2025.
The restructuring is anticipated to affect approximately 8,000 positions, with many being covered by voluntary leave programs and internal re-skilling measures. SAP expects to exit 2024 with a headcount equivalent to the end of 2023, reflecting reinvestments into strategic growth areas.
In Q1 2024, SAP recorded a €2.2 billion restructuring provision to cover most of the program’s total restructuring expenses. This provision impacted the company’s IFRS operating profit, resulting in an operating loss of €787 million for the quarter.
“The strength of our current cloud backlog reaching a record growth rate is a testament to that momentum. Our transformation program is also well on track and will help us to capture this growth and increase efficiency,” said Christian Klein, CEO
Business Momentum
In Q1 2024, SAP continued to gain traction with its “RISE with SAP” offering, designed to help customers drive end-to-end business transformations. Notable customer wins included Brussels Regional Public Service, Clearway Energy Group, Fresenius, LyondellBasell, Sumitomo Heavy Industries, and ZF Friedrichshafen.
Several customers, such as Foodstuffs South Island and Havells India, went live on SAP S/4HANA Cloud during the quarter. SAP’s “GROW with SAP” offering, tailored for midsize customers, also gained momentum with wins from companies like Aleron Shared Resources, Churchill Downs Incorporated, and SFC Energy.
Across its broader solution portfolio, SAP secured key deals with Cintas, FrieslandCampina, LEONI, Maersk, and Schaeffler Group, among others. Geographically, the company’s cloud revenue performance was particularly strong in the Asia-Pacific and Japan, and EMEA regions, with strong growth also recorded in the Americas.
FY24 Outlook and Guidance
For the full year 2024, SAP reaffirmed its outlook, expecting cloud revenue between €17.0 billion and €17.3 billion (up 24-27% at constant currencies), cloud and software revenue between €29.0 billion and €29.5 billion (up 8-10% at constant currencies) and non-IFRS operating profit between €7.6 billion and €7.9 billion (up 17-21% at constant currencies).
The company forecasts a free cash flow of approximately €3.5 billion and an effective non-IFRS tax rate of around 32% for 2024.
SAP Stock Performance
SAP’s solid Q1 results and upbeat outlook were well-received by investors. The company closed at $178.18 on April 22, up 1.37% from the previous close. During the Tuesday, April 23 morning trading session, the stock was up 4.37% at $185.96 per share. SAP’s American depositary receipts (ADRs) have gained roughly 15% in 2024, outperforming the broader market indices.
The strong stock performance reflects growing investor confidence in SAP’s cloud transition strategy, strengthened by strong demand for AI-powered solutions and accelerating cloud revenue growth. With a healthy market outlook and promising product pipeline, SAP appears poised for continued share price appreciation.
Should You Buy SAP Stock in 2024?
SAP’s Q1 performance and FY24 outlook provide an exciting value proposition for investors in 2024. The company’s accelerating cloud revenue growth, driven by strong demand for its Cloud ERP Suite and AI solutions, bodes well for its long-term prospects. Also, SAP’s strong cloud backlog and healthy deal pipeline suggest sustained momentum.
While the ongoing restructuring may weigh on near-term profitability, it positions SAP for more efficient and scalable operations. With a solid balance sheet and commitments to shareholder returns through buybacks and dividends, SAP offers a great opportunity for those seeking exposure to the enterprise software and AI sectors. However, you should carefully evaluate the risks, including increasing competition and potential execution challenges during the transformation.
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