SAP's AI strategy pays off, Q3 cloud revenue grows significantly

Europe's largest software company SAP (SAP.US) is shifting customers from locally run systems using artificial intelligence tools and analytics, and its cloud revenue grew 25% in the third quarter. The company reported Q3 revenue of €8.47bn, up 9.4% YoY, topping market expectations; and non-IFRS EPS of €1.23, topping market expectations.

The company's cloud revenue grew to €4.35bn (US$4.7bn) YoY, roughly in line with analysts' expectations. Its cloud backlog (reflecting sales to be booked in the next 12 months) grew 25% to €15.4bn.

Despite the stagnating German economy, which is expected to shrink for a second year in 2024, SAP is thriving. Its customers are moving to the cloud, and it has been strengthening its AI services for enterprise users. Cloud customers spend more per head than SAP's traditional on-premise software.

SAP raised some of its 2024 financial targets, including free cash flow, now expected to be between €3.5bn and €4bn, up from the previous €3.5bn. Its 2024 cloud revenue is still expected to be between €17bn and €17.3bn, up 24% to 27% YoY.

Chief executive Christian Klein is seeking to accelerate the shift to the cloud, partly due to a new AI-focused strategy announced earlier this year. About 30% of cloud deals in Q3 contained business AI use cases, Klein said in a call with reporters after the earnings release.

As part of the new strategy, about 10,000 jobs will be affected, and the cost of the restructuring in the first nine months of the new strategy is €2.8bn.

SAP's share price has risen 51% this year. The company's shares rose 3.3% after hours after the earnings release.

But SAP faces a civil investigation in its largest market, the US. The US Department of Justice is investigating whether the company illegally colluded with product distributor Carahsoft Technology Corp. to manipulate prices for nearly 100 government agencies, according to a report by ZBJ Finance App this month.