SAP SE (SAP, Financial) saw its shares jump by 5% following exceptional first-quarter results, highlighted by the fastest cloud backlog growth in the company's history. This significant growth, reaching a 27% year-over-year increase, surpassed its cloud revenue's 24% growth during the same period. SAP attributes this success to its Business AI portfolio, reflecting the strong, ongoing demand for AI technologies.
The core of SAP's Q1 success was its strategic focus on AI, particularly through embedding Generative AI in its cloud products via a partnership with NVIDIA (NVDA, Financial). This move resulted in the launch of over 30 new AI scenarios across SAP's cloud offerings since the fourth quarter. The high demand for SAP's AI solutions, especially its Business AI suite, significantly contributed to a 32% year-over-year revenue growth in its Cloud ERP Suite, propelling the company's overall revenue up by 8.1% to €8.04 billion.
SAP's leadership is optimistic about maintaining this momentum, forecasting a $700 billion market opportunity for its cloud ERP suite by 2027. CEO Christian Klein emphasized the necessity for businesses across various sectors to overhaul their core processes to achieve transformation, marking the first quarter as just the beginning of this growth phase. Consequently, SAP's FY24 guidance remains steady, with expectations of €17.0-17.3 billion in cloud revenues, €29.0-29.5 billion in cloud and software revenue, and €7.6-7.9 billion in adjusted operating profit, all in constant currency.
Despite the overall positive performance in Q1, SAP faced challenges, including a significant compression in adjusted operating margins by over 600 basis points year-over-year and an EPS of €0.81, which fell short of analyst expectations. The company also noted a 26% decline in software license revenues, now representing about 5% of total sales, and highlighted a potential risk to achieving its €8.0 billion free cash flow target for 2025 due to its ongoing restructuring efforts.
Nevertheless, SAP's strong Q1 results have set a positive precedent for the tech industry, especially with IBM (IBM, Financial) scheduled to report its Q1 results soon. With the sustained interest in AI, SAP is well-positioned to benefit from what appears to be a long-lasting trend.
