5 Insights from SAP’s Q1 FY24 Earnings that Customers Should Pay Attention To

SAP made their intentions and goals for 2024 clear at the start of the year, focusing heavily on their growth ambitions related to their cloud and innovation offerings. Based on our pulse of the market, our Chief Advisory Officer predicted what SAP customers should expect from the German-based Software & Services provider in the coming year and beyond in order prepare them for SAP’s tactics and arm them with key questions to address. Now that SAP’s first earnings of 2024 have been made public, we have already seen some of those predictions come to fruition and can provide. Here, I will cover some of the statements made during SAP’s most recent earnings call, how they support the predictions UpperEdge made at the start of the year, and some key insights from SAP’s Q1 FY24 earnings.

Insights from SAP’s Q1 Fy24 Earnings

1. SAP has Centered their Growth Strategy around their Cloud-based ERP Offerings

We Predicted: SAP RISE will be an inevitable part of customers’ journey to the cloud.

What We Learned from SAP’s Earnings Call: SAP highlighted a 32% increase in Cloud ERP revenue for Q1, which is critical to their “Land and Expand” growth strategy as their cloud-based ERP solutions, RISE and GROW, are being positioned at the spearhead of this strategy. SAP views these offerings as “only the beginning” of a customer’s journey with SAP, even if they start small with a small Agreement focused around a particular functional area (i.e., CFIN). Once they land these deals, SAP relies on customers natural expansion process into not only other ERP products, but also a journey into SAP’s Cloud line of business products, like SuccessFactors and Ariba.

In addition to Cloud ERP revenue, SAP is keeping a close eye on their remaining On-Prem maintenance base of $11B. Roughly half of this maintenance base is tied to ECC, which will be removed as a mainstream support offering after 2027, and completely removed as an extension offering after 2030. SAP is relying on their remaining ECC customer base to not only make the journey to S/4HANA in the next six years, but to do so in the form of RISE deployments. This ECC to RISE journey makes up a significant portion of SAP’s identified $700B market opportunity by 2027. The other half is tied to S/4HANA maintenance which SAP has already committed to supporting until 2040, but as UpperEdge has seen – SAP will continue to try and coerce even those customers to make the leap from S/4 On Prem to RISE.

2. SAP Touted Key Success Stories for RISE, GROW, and their Sustainability SKUs

We Predicted: SAP will leverage client success stories to influence and drive RISE adoption.

What We Learned from SAP’s Earnings Call: A consistent theme of SAP’s sales strategy is to tout RISE and GROW wins and industry flagship customers, and this earnings call was no different. SAP’s key win announcements included Lindt & Sprungli for RISE and Churchill Downs for GROW.

SAP also provided an update on the momentum they’re experiencing with their Sustainability offerings, stating that they now have over 1,100 customers utilizing these solutions, including recent wins such as Ericsson, one of the global leaders in wireless technologies. This is notable for SAP because the primary catalyst for their Sustainability product growth moving forward will be within their Premium Plus ERP packages, and SAP can position early successes and references for their regulatory ERP reporting capabilities.

3. SAP Highlighted their Monetization Strategy related to AI

We Predicted: SAP commercial models will evolve as SAP’s business practices around RISE and GROW develop.

What We Learned from SAP’s Earnings Call: In addition to SAP RISE and GROW, SAP underlined innovation as the third key growth driver for the organization and provided detailed updates around their expanding innovation capabilities.

To exemplify their momentum in AI, SAP discussed their new partnership with Nvidia, who offers an advanced AI platform and related services, and the talent they are bringing in internally to enhance their capabilities.

From an offering standpoint, SAP highlighted the fact that 30 additional AI use cases that have been developed since Q4, and they expect 100 more to be developed by the end of the year. SAP also emphasized their AI copilot, Joule, as a tool that will provide end user efficiencies across customers’ SAP portfolio and is expected to cover the “most commonly used transactions” by the end of the year.

In addition to drawing attention to their expanding capability set, SAP’s leadership team focused on ways in which they are monetizing their new innovation.  As an example, SAP customers can now purchase their ‘premium plus’ packaging which includes embedded Generative AI and Sustainability solutions or they have the option to purchase AI via a consumption based model.  Additionally, while SAP will offer a free version of Joule to customers, it contains limitations and requires additional fees to unlock the more advanced functionality.

Perhaps most notably, CEO Christian Klein took their monetization strategy one step further and even talked about rolling out their premium-based product packaging within SAP’s Cloud Line of Business solutions – not just within RISE and GROW, in the coming years.

4. SAP Itself is Undergoing a Massive Operational Transformation Initiative

We Predicted: Consultants will lean into generative AI to deliver transformation initiatives.

What We Learned from SAP’s Earnings Call: While the earnings call was focused strictly around SAP’s performance and progress as expected, we anticipate that SAP will leverage their annual Sapphire conference to showcase examples of success stories from their customers and ecosystem partners. As predicted, this will likely include testaments from system integrators detailing how they have refined their methodology to account for SAP’s enhanced AI capabilities, and efficiencies gained from SAP’s clean core / custom code minimization approach. They may even discuss how their top resources want to be assigned to RISE projects instead of On-Premise initiatives.

An area SAP did go deep on in their earnings call however, was related to their own transformational program which is centered around achieving operational efficiency through the usage of their own AI technology. In addition to their announcement in January about restructuring 8,000 jobs to better focus on key growth areas such as AI, SAP highlighted the fact that they expect a “triple digit million amount in efficiencies from embedding AI across our processes” in the recent earnings call.  Specific functional areas were highlighted where SAP is already seeing efficiencies including HR, Procurement, Sales, and Technical Development.

5. SAP Continues to Position RISE as the Silver Bullet Solution for Customers

We Predicted: Re-evaluation of the SAP ecosystem will parallel evaluations of SAP RISE.

What We Learned from SAP’s Earnings Call: As UpperEdge has stated, the RISE managed services model  requires an in-depth evaluation of the impact to customers ERP services ecosystem, among other factors, as it impact both internal operations and external partnerships. SAP continues to push RISE as a silver bullet for customer’s to master their end-to-end core process transformation, however, in an effort to expedite customers journey to RISE.

In the earnings call, SAP touted their competitive edge in the areas of data management and innovation.  Their leadership team highlighted the fact that every c-suite conversation they have now involves AI, and that SAP’s ability to link their innovation with the underlying allows customers to ensure data integrity and further enhances innovation capabilities by providing the benefit of associated data context. SAP also discussed how customers’ pursuits of a best-in-breed landscape often fail because these landscapes require customers to stitch everything together. Conversely, customers who adopt SAP’s suite of products and their clean core approach benefit from their holistic offerings, platforms and data management capabilities.

As RISE and GROW continue to be key drivers to SAP customers’ transformation programs, customers who have yet to make the leap to RISE should expect SAP to push heavily on the areas outlined above while trying to influence and simplify the evaluation cycle as they look to “land and expand.” Customers should also be aware that making the move to RISE is not as easy as understanding where to invest your innovation, as SAP RISE and GROW require critical decisions regarding hyperscaler, basis and application management relationships as well as, in some cases, internal organizations.

The Bottom Line When Considering These Insights from SAP’s Q1 FY24 Earnings

SAP will continue to position their cloud-based ERP solutions, RISE and GROW, and their AI capabilities at the forefront of their strategy for the remainder of 2024.  Just like these insights from SAP’s Q1 FY24 earnings, be on the lookout for UpperEdge to provide our insights regarding noteworthy announcements at SAP’s Sapphire Conference and throughout the remainder of 2024.

At UpperEdge, our team of dedicated SAP advisors and SAP RISE experts are available to help guide you through your SAP initiative. With over 100 years of combined experience and 1000 transactions, our team has used their experience to develop their Integrated Sourcing Strategy to help customers navigate the complexities of the journey to S/4HANA, including evaluating whether RISE is the right fit for you. Reach out today to learn more about how this integrated approach can work for your company.