Optimistic about DeepSeek stimulating AI demand, SAP expects accelerated growth in cloud revenue this year, and may use a Chinese model if requirements are met | Financial Report Insights

In 2024, SAP, Europe's largest software company and a German software giant, concluded the year with a continued double-digit growth in cloud revenue that exceeded expectations, highlighting the demand for AI services amid the AI boom. SAP also anticipates that revenue from its cloud business will reach new heights in 2025, optimistic about the prospects driven by cost-effective models like the Chinese startup DeepSeek.

On Tuesday, January 28th, local time in Germany, SAP announced its fourth-quarter and full-year results for 2024 and provided guidance for 2025.

1) Key Financial Data:

Revenue: In the fourth quarter, total revenue under non-IFRS standards grew by 11% year-on-year to €9.38 billion, with a fixed exchange rate growth of 10%. Analysts had expected revenue of €9.1 billion, with a third-quarter growth of 9.4%. Full-year revenue grew by 10% to €34.176 billion.

EPS: In the fourth quarter, earnings per share (EPS) under non-IFRS standards were €1.40, a year-on-year increase of 24%, with a third-quarter growth of 6%. Full-year EPS grew by 22% to €4.58.

Operating Profit: In the fourth quarter, operating profit under non-IFRS standards was €2.436 billion, a year-on-year increase of 24%, with analysts expecting €2.25 billion. The third-quarter growth was 27%, and full-year operating profit grew by 25% to €8.153 billion; the operating profit margin for the fourth quarter was 26%, an increase of 2.7 percentage points year-on-year, with analysts expecting 24.5%.

2) Segment Business Data:

Cloud and Software: In the fourth quarter, revenue from cloud and software under non-IFRS standards was €8.267 billion, a year-on-year increase of 12%, with a third-quarter growth of 11%. Full-year revenue from cloud and software grew by 11% to €29.83 billion.

Cloud: In the fourth quarter, cloud revenue under non-IFRS standards was €4.708 billion, a year-on-year increase of 27%, with analysts expecting €4.67 billion. The third-quarter growth was 25%, and full-year cloud revenue grew by 25% to €17.14 billion.

Cloud Business Backlog: In the fourth quarter, the backlog for cloud business orders was €18.078 billion, a year-on-year increase of 32%, with a third-quarter growth of 25%. Full-year cloud business backlog grew by 43% to €63.29 billion.

3) Performance Guidance:

Revenue: For 2025, cloud and software revenue is expected to be between €33.1 billion and €33.6 billion, representing a growth of 11% to 13% at fixed exchange rates compared to 2024. Cloud revenue for 2025 is expected to be between €21.6 billion and €21.9 billion, with a fixed exchange rate growth of 26% to 28%, previously expected to exceed €21.5 billion.

Cloud Business Backlog: The backlog for cloud business orders in 2025 is expected to be €18.1 billion, with a fixed exchange rate growth of 29%

Operating Profit: The operating profit for 2025 is expected to be between €10.3 billion and €10.6 billion on a non-IFRS basis, representing a growth of 26% to 30% at constant exchange rates, up from the previous estimate of approximately €10.2 billion.

Free Cash Flow: The free cash flow for 2025 is expected to be around €8 billion, unchanged from previous expectations, and nearly a 90% increase from €4.22 billion in 2024.

On the day the financial report was released, SAP's stock listed in Germany turned positive during the European trading session on Tuesday, after hitting a daily low with a decline of 1.7% in the morning session, it turned positive in the afternoon and closed up nearly 0.5% at €262.6, approaching the record closing high set last Friday. Commentators noted that SAP's AI strategy has helped the company's market value continue to rise last year, surpassing the Dutch-listed lithography giant ASML in October last year to become the highest-valued technology company in Europe. The stock price rose over 60% last year.

Q4 Cloud Business Revenue Exceeds Expectations with a 27% Surge; Upgraded Full-Year Guidance Expects Growth of Up to 28%

The financial report shows that in the fourth quarter, SAP's core cloud business revenue exceeded expectations, maintaining double-digit growth for the first three quarters of 2024, with each quarter's growth rate exceeding 20% for the entire year. SAP emphasized at the beginning of the earnings announcement that it aims to meet or exceed the company's financial guidance for the entire year of 2024.

Moreover, due to faster growth in cloud computing and AI, SAP is more optimistic about this year's financial performance.

SAP has raised its operating profit guidance for the full year of 2025 and the full-year cloud revenue guidance, with the entire guidance range disclosed in this financial report being higher than previous expectations. According to the upgraded guidance, SAP currently expects operating profit growth of at least 26% and up to 30% this year, higher than last year's full-year growth rate of 25%. The company also expects cloud revenue growth of 26% to 28% this year, also exceeding last year's annual growth rate of 25%.

SAP also stated that it expects cloud backlog orders to grow slightly faster in 2025.

Half of Q4 Transactions Embedded with AI; Revenue Acceleration Expected to Continue Until 2027

While releasing the financial report, SAP's CEO Christian Klein commented that half of the cloud orders in the fourth quarter included AI. Half of SAP's transactions in the fourth quarter were embedded with AI. The company has already seen "a considerable portion" of cloud transactions include AI use cases. For the entire year of 2024, the company exceeded its cloud-related targets, accelerating the growth of cloud revenue and current cloud backlog orders on a larger base.

"Looking ahead, our strong position in data and business AI gives us more confidence that our revenue acceleration will continue until 2027."

During the earnings call following the financial report, Klein mentioned an SAP AI product named Joule, which is a virtual AI assistant that helps users manage business tasks, such as overseeing purchase orders. Klein stated, "About 20,000 SAP developers are already using Joule. We found that their coding speed has increased by 20%

The DeepSeek model will promote the popularization of AI, and if it meets cost, reliability, and other requirements, Chinese models can be used.

Last weekend, DeepSeek's model, which boasts performance comparable to OpenAI's o1 and costs significantly less than competitors, became a sensation on overseas social media almost overnight. Executives from SAP also mentioned this market hotspot after releasing their financial report.

Klein welcomed DeepSeek, stating that the prospects of AI models that are more energy-efficient and affordable will promote the popularization of AI and drive market demand for SAP AI services. "This is good news for our (SAP) AI strategy. We have always said that we will first collaborate on AI infrastructure and large language models (LLM). We believe this is increasingly becoming a commodity."

When asked whether DeepSeek would be incorporated into SAP products, Klein stated that the group would continue to provide Chinese-made technology to Chinese customers.

SAP's Chief Financial Officer Dominik Asam mentioned that if specific requirements regarding cost and reliability are met, SAP could adopt Chinese models, and AI in a business-to-business (B to B) environment should be able to solve problems and increase revenue. "From this perspective, anything that can reduce costs is helpful."

Asam also noted that AI technology needs to be reliable and responsible, as SAP must comply with data privacy-related laws. SAP needs to study how to ensure this aspect if solutions are placed on Chinese platforms, and if Chinese model developers can prove that there are no concerns and can pass due diligence, SAP could also use Chinese models.

AI Head Appointed as Chief Technology Officer

In August last year, SAP's Chief Revenue Officer Scott Russell and Chief Marketing Officer Julia White both left the company. In September, Chief Technology Officer Jürgen Müller left due to inappropriate behavior at a company event. SAP announced new personnel appointments in its management this Tuesday to fill some vacancies, effective from February 1.

Philipp Herzig, who leads SAP AI, has been appointed as Chief Technology Officer, succeeding Müller, but Müller’s board seat will not be replaced.

Former Boston Consulting Group partner and SAP Chief Strategy Officer Sebastian Steinhäuser has been promoted to an executive board member responsible for overseeing strategy and operations. SAP stated that Steinhäuser will be responsible for streamlining the company's internal operations and will work with the new Chief Marketing Officer Ada Agrait to promote a unified strategy to customers.

Additionally, Jan Gilg will be responsible for sales in SAP's largest market, the United States, while Manos Raptopoulos will oversee sales in Europe, the Middle East, and Asia. These two, along with Herzig, will report directly to CEO Klein