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SAP’s Klein sees $1tn market for AI business software

Enterprise software company embeds AI across product portfolio to improve efficiency in business processes

SAP has reported a 19% increase in cloud revenue to €3.3bn for the second quarter of 2023, although software licences and support revenue has declined.

S/4Hana revenue grew by 74% during the quarter to €823m, while software licence revenue dropped 3% to €2.9bn. Software licence revenue declined 6% to €323m.

The decline in support and maintenance revenue comes just six months after SAP introduced an increase of 3% in its annual support fees.

Overall, the company posted second-quarter revenue of €7.6bn, a 5% increase over the same quarter in 2022.

“This has been another strong quarter,” said SAP CEO Christian Klein. “We see significant opportunities ahead, in particular through the transformative power of AI [artificial intelligence]. We are focused on delivering SAP Business AI that’s relevant, reliable and responsible, and we see significant possibilities for market expansion through these technologies and new premium offerings.”

In his prepared comments during the earnings call posted in Seeking Alpha, he said: “Based on external forecasts and our own calculations, we see a potential doubling of our addressable market to $1tn by 2028, with AI being a key contributor.”

Klein added that AI is being embedded into every part of SAP’s product portfolio. “More than 24,000 SAP cloud customers today can already use SAP business AI across hundreds of built-in AI capabilities and partner use cases” he said.

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According to Klein, generative AI in SAP Transportation Management can save up to 55% of the processing cost of delivery notes. Another example is intelligent collections in SAP S/4Hana Finance, which Klein claimed can reduce the time between invoice and payment by up to 10%.

In a note discussing the latest SAP results, analysts at private bank Berenberg said: “The main talking points were that Q2 cloud revenue missed consensus estimates and SAP downgraded its full-year 2023 cloud revenue outlook, albeit modestly by about 1.6%.”

According to Berenberg, the shortfall in cloud revenue is a direct result of the rising pressures in enterprise IT spending. “Cloud transition projects create resilience to spending headwinds: cloud revenue came in at €3.3bn in Q2, below expectations,” analysts wrote. “We understand that demand for transactional products, such as Concur, Ariba, and Fieldglass, was soft. This is consistent with the resurgence in spending cuts observable in enterprise IT budgets.”

However, the bank pointed out that S/4 Hana, which is the primary driver of SAP’s transition to cloud, is proving resilient to spending cuts. “This reinforces our views that cloud transition projects are mission-critical for customers, and thus immune to spending cuts,” it said.

Discussing Klein’s ambition to embed AI in all SAP products, Berenberg predicted these AI capabilities will command a 30% price premium, but only be available on the cloud. “This will further incentivise customers to transition to cloud, in our opinion,” it said.

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