European software giant SAP (SAP, Financial) reported a 25% increase in cloud computing revenue for the third quarter, driven by its efforts to transition customers from on-premise systems to cloud-based solutions using AI tools and analytics.
SAP's Q3 revenue reached €8.47 billion, marking a 9.4% year-over-year growth, surpassing market expectations. Under non-GAAP standards, earnings per share stood at €1.23, also exceeding forecasts. Cloud computing revenue rose to €4.35 billion, aligning with analyst predictions, and the backlog of cloud orders, indicative of future sales, surged by 25% to €15.4 billion.
Despite challenges in Germany's economic climate, SAP continues to thrive by shifting its customer base to cloud services and enhancing AI offerings for enterprise clients. Cloud-based business yields higher average customer spending compared to traditional on-premise software.
Looking ahead, SAP has revised its 2024 financial guidance upward, now expecting free cash flow between €3.5 billion and €4 billion, up from the prior estimate of €3.5 billion. The cloud revenue forecast remains between €17 billion and €17.3 billion, indicating a projected annual growth of 24% to 27%.
CEO Christian Klein is actively accelerating the cloud transition, partly due to a new AI-focused strategy announced earlier this year. Approximately 30% of Q3 cloud deals incorporated commercial AI use cases. This strategic overhaul is expected to impact around 10,000 job positions, with restructuring costs for the first nine months of the new strategy totaling €2.8 billion.
SAP's stock has risen by 51% this year and saw a 3.3% increase in after-hours trading following the earnings release. However, SAP is facing a civil investigation in its largest market, the United States. The U.S. Department of Justice is probing whether SAP engaged in illegal price manipulation with distributor Carahsoft Technology Corp. for nearly 100 government agencies.
