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SAP Q2 results reveal large orgs now firmly on the path to AI

There are not many organizations that can take a hit on net profit due to monstrous restructuring costs, yet at the same time raise their operating profit projections for 2025, but SAP is one of  them, according to its latest quarterly results released this week.

The move to an all-in AI strategy appears to be paying off, with SAP CEO Christian Klein telling financial analysts on a recent earnings call that “AI had a direct impact on our bookings. In the second quarter, almost 20% of all deals included Premium AI use cases. This is just the beginning. Customers have clear plans to expand AI consumption on their Rise and Grow transformation journeys.”

In addition, he said, the company’s new AI copilot, Joule, has “become our new user experience,” and he described it as a “productivity engine for the 300 million people worldwide using our cloud software.”

Total revenue for the quarter reached €8.29 billion (US$9 billion), with cloud revenue up 25% for the quarter. Net revenue was down due to a company-wide restructuring program expected to end next year and result in the elimination of upwards of 10,000 positions.

This year, the company said in a release, “SAP is further increasing its focus on key strategic growth areas, in particular business AI. It is transforming its operational setup to capture organizational synergies and AI-driven efficiencies.”

Reacting to the results, which followed several recent announcements by SAP on the AI front, Liz Herbert, vice president and principal analyst at Forrester Research, said today that ERP has lagged “in the cloud replacement cycle versus other categories of software, and we now are seeing a major wave of cloud modernization efforts across the board.”

Due to the magnitude and heft of ERP, she said, “these projects are typically very expensive, often costing 10s or even 100s of millions of dollars for a large enterprise. AI is critical to capturing that spend, because companies look for leading AI capabilities when selecting a modern ERP. Overt spend on AI related to ERP pales in comparison to the total spend on ERP software, though AI is a growing and increasingly important element.”

SAP, said Herbert, has done well capitalizing on this modernization wave and “has won new logos and retained many of its existing logos. While it has been a bit slower to the cloud versus some competitors, it now has more solid cloud messaging and offerings coupled with AI and other modern platform features. We expect their growth to remain strong given their dominant position in the ERP market and ongoing investments in innovation.”

As for the prospect of greater profitability fueled by AI for the company, she said, “we know that there are several ways that companies like SAP are benefiting from internal AI, ranging from customer support to software development to internal financial processes and more. All leading software companies are using AI internally as well as externally at this point.”

Scott Bickley, advisory practice lead at Info-Tech Research Group, said the restructuring initiative makes sense, as it will likely involve personnel involved in legacy offerings such as ECC R/3 product lines “transitioning away from that support as it winds down into 2025 and 2027 for the current version, and they are probably looking to rescale, repurpose people to support S/4.”

Replacing those who accept a voluntary buyout option, he said, will be data scientists, enterprise architects, and high-level engineers to support their AI development, who are extremely costly.

The embracing of AI initiatives by CIOs of large organizations, he said, “to me, this is a tale of two cities. On the Rise side of  the equation, I view the adoption as more of a forced migration rather than a voluntary movement.”

A CIO, said Bickley, typically falls into “one of a few camps if they are running Tier One ERP systems. You are an Oracle CIO, a SAP CIO or a Dynamics CIO. It’s not that often that you’re going to switch systems. A lot of CIOs default into believing they need to migrate along this path. And they’re not even giving market consideration to alternative ERP solutions. I think that’s a mistake, because these migrations for existing customers are multi-million dollar projects.”

He added that he is talking to clients doing $150 million migrations, and “they’re not going to market for alternative solutions. To me, that is a missed opportunity, both from the potential you might get from an alternative competitor, and from the ability to leverage your negotiations with SAP.”


Read More from This Article: SAP Q2 results reveal large orgs now firmly on the path to AI
Source: News

Category: NewsJuly 24, 2024
Tags: art

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