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SAP plans layoffs with cloud revenue up but profit down

SAP plans layoffs with cloud revenue up but profit down

The layoffs effect around 2,800 staff.

Credit: Dreamstime

SAP’s revenue rose 11 per cent in 2022 with the cloud component of that climbing 33 per cent, but net income dropped 68 per cent, prompting restructuring and layoffs in its CRM activities.

The company is also exploring selling its majority stake in Qualtrics, the experience management platform it bought for $8 billion in 2018, to refocus on its core business.

SAP already sold a minority stake in Qualtrics in an IPO in early 2021 and CEO Christian Klein said he expected to continue to partner with Qualtrics going forward, but the sale would allow SAP to reinvest in other areas of its business.

The layoffs — effecting around 2,800 staff, or 2.5 per cent of SAP’s global workforce — are part of “a targeted restructuring,” Klein said. “It’s not performance-based.”

That’s in contrast to companies such as Google or Salesforce, which have announced across-the-board layoffs based on performance review criteria to reverse over-hiring during the pandemic period.

“We definitely didn’t over-hire,” Klein said, noting that revenue grew faster than SAP employee growth in 2022.”

SAP’s overall revenue for 2022 totalled €30.9 billion (US$33 billion as of Dec. 31, 2022), up 11 per cent year on year. Growth in Q4 was slower, however, up six per cent to €8.4 billion.

With the restructuring, SAP seems set to abandon the idea of delivering CRM as a stand-alone product, focusing instead on investing in tightly integrated industry-specific solutions in markets where it has a strong foothold with its core ERP products.

The layoffs — the first the company has announced since 2019 — will be slower to take effect than at Microsoft or Oracle since a greater proportion of SAP’s staff are in Europe, where legislation to protect workers means hiring and firing takes longer.

Up in the cloud

Cloud revenue for the year rose sharply, up 33 per cent to €12.6 billion, and now accounts for 40 per cent of all revenue. €2.1 billion of that is from S/4HANA, up 91 per cent year on year.

“SAP is now a true cloud company,” Klein said, adding that the company already has a backlog of €12 billion in contractually committed cloud revenue it expects to recognise in 2023, and a total cloud backlog of €34 billion including commitments for future years.

Net income for 2022, though, fell 68 per cent to €1.7 billion, with the decline accelerating in Q4 to 77 per cent year on year.

Klein attributed some €410 million of that decline to SAP’s decision to wind down its business in Russia and Belarus following Russia’s invasion of Ukraine.

Inflation was another factor affecting profit, he said. Although SAP increased prices by around three per cent mid-year, this wasn’t enough to offset the increased costs the company faced, he said.

For the year ahead, SAP forecast cloud revenue will continue to grow at between 22 and 25 per cent at constant currencies, with a longer-term ambition of passing €22 billion in cloud revenue and €36 billion in total revenue by 2025.

SAP also sees its share of more predictable revenue (cloud and software support revenue as a percentage of total revenue) rising from 79 per cent in 2022 to 83 per cent in 2023, and 85 per cent by 2025, Klein said.

No extension for ECC

One thing that definitely won’t grow in 2023 is how much time users of SAP’s legacy ECC 6.0 and Business Suite 7 ERP applications have left to migrate to something more modern.

SAP announced in 2020 it will only provide mainstream maintenance for its legacy software until the end of 2027, with extended maintenance available for an additional fee until the end of 2030.

“We will not extend [the deadline],” Klein said. “Customers are asking us to put a lot of RD dollars into new innovations […] and for us it is very important we convince our customers to move with us, with value and good business cases.”

Although the company is now focused on the cloud with the new generation of its core ERP application, S/4HANA, customers can choose where they run it. “SAP is the only software vendor in the ERP space that still gives a commitment for on-premises until 2040. That also costs us money,” Klein said.

An eye on AI

SAP will continue to invest in developing artificial intelligence (AI) as part of its products, Klein said, including in areas such as predictive maintenance.

It’s also experimenting with the new wave of generative AI tools such as OpenAI’s ChatGPT to see how they can augment its operations internally.

Other companies are considering using ChatGPT for tasks including coding, with the AI taking on one of the roles in a pair-programming team, report writing, or targeted marketing.

Klein is wary of giving ChatGPT too much freedom, but sees potential for it in automating responses to common support requests or in translating documentation and user interfaces. “I don’t believe such technology can code a new logistics app by itself,” he said.

On the other hand: “We get millions of tickets about how-to questions, and we are definitely going to see that AI is able to automate a lot and drive efficiency,” he added. SAP translates its software into over 100 languages, and is looking at using AI to accelerate the translation process, he said.

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