Even as SAP was releasing its superb Q3 results, hard-charging CEO Christian Klein was laying out future growth plans for the applications and AI company that is currently outgrowing major competitors by 2X and even 3X.
First, here’s a quick snapshot of SAP’s key Q3 results, and I’ve ranked these in what I consider to be their strategic importance:
- Cloud ERP Suite revenue up 34% (36% cc) to $4.0 billion;
- Current cloud backlog of up 25% (29% cc) to $16.9 billion;
- Large deals of $5.5 million and above were the norm in Q3 as they accounted for more than 60% of cloud order-entry.
- Total cloud revenue up 25% (27% cc) to $4.79 billion;
- Total revenue up 9% (10% cc) to $9.32 billion; and
- Raised 2024 outlook for cloud and software revenue, operating profit, and free cash flow.
During the Q3 earnings call, Klein made it clear that regardless of that impressive performance, SAP is aggressively planning for continued and perhaps even accelerated growth in Q4 and into 2025. That bullish outlook runs contrary to what the leaders of Workday and Salesforce have said in recent quarters as they’ve described a “measured buying environment” in which customers are delaying enterprise-app investments and/or reducing their commitments.
“Of course, we hear a lot about macroeconomic challenges,” Klein said in the Q&A portion of the call.
“Look at our home market in Germany — definitely the economy has its challenges. But still I would say after Q4, there’s rarely a DAX 40 company left who is not yet on the move to the cloud with SAP and RISE…. When you are in a transformation, no matter if it’s in the chemical industry or in the auto industry, actually we see no slowdown. They really see our Cloud ERP Suite as the only way to restructure their portfolio, to transform to new business models, and of course, also to drive productivity.”
More New Customers, Rapid Uptake of Business AI
On the Q3 earnings call, Klein opened his commentary with a couple of key observations that reveal SAP’s increasing appeal to net-new customers, and the rapid rate at which customers are committing to SAP’s Business AI solutions. “Our total and cloud revenue growth accelerated by winning many net-new customers,” Klein said, citing the company’s GROW “business transformation as a service” offering as a primary catalyst for those results.
A moment later, Klein said the about 30% of customer deals signed in Q3 included AI use-cases based on SAP’s Business AI offerings.
Later in the call during the Q&A, Klein revealed bullish plans for 2025 centered on increasing reliance on SAP’s ecosystem partners to meet the surging demand among mid-market customers.
Revving up the Ecosystem
“Next year, we are seeing a really good healthy pipeline. But what about in two or three years? How can we expand the channel?” said Klein.
“We have a huge mid-market, where we can massively grow —but not with direct sales. So what can we do better to enable the ecosystem? Let them sell the suite, give them territories, and give them more demand coming from marketing via our digital channels, which are way better than they were two years ago.”
On-Prem Migrations Accelerating
On top of the net-new customers coming into SAP via the GROW program, the healthy bump from Business AI, and the “huge” midmarket opportunity that the ecosystem will pursue, a growing number of SAP’s on-prem customers are making major commitments to the cloud, Klein said.
“I mean, one-fourth of the [on-prem] customers have started a transformation journey, but there’s a ramp, so even in that one-fourth of the customers who are on their journey, there is potential left.
“Plus, some customers are already deeply into their journeys to move to the public cloud suite, like Exxon and others, and they are now ramping up — ramping, ramping, ramping — and they are very satisfied with how we use this methodology to transform and then over time drive adoption and of course, high value for their companies.”
Final Thought
As I’ve noted in the past, it’s important to view those impressive Q3 numbers cited at the top of this article in the context of how SAP’s major competitors are performing. SAP’s cloud growth rate is 3X that of Salesforce, 2.5X that of Oracle’s overall software-as-a-service (SaaS) business, and about 50% higher than that of Workday and SAP.
And that means that business leaders looking for strategic software partners to take their companies into the era of AI-powered business are showing enormous confidence in SAP’s ability to deliver on that enormous promise.
