Shares of German software provider SAP SE (DE:SAP) gained over 6%, as of writing, after the company announced its Q2 FY24 results and exceeded estimates on the back of strong demand for its Cloud offerings. For the quarter that ended on June 30, SAP reported adjusted earnings of €1.10 per share and revenue of €8.29 billion, surpassing estimates of €1.09 per share and €8.26 billion in revenue. Additionally, Q2 revenue marked a growth of 10% year-over-year on a constant currency basis.
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SAP holds a dominant position in the enterprise solutions industry, offering a wide range of services.
SAP’s Ongoing Cloud Momentum
SAP’s solid growth was mainly fuelled by its Cloud business. The company’s Cloud revenue surged by 25% year-over-year to €4.15 billion on a constant currency basis. This, in turn, was driven by its Cloud ERP (enterprise resource planning) suite revenue, which grew by 33% compared to Q2 FY23.
Furthermore, SAP’s Cloud backlog, representing committed revenue for the next 12 months, rose 28% year-over-year to €14.81 billion.
In terms of profitability, SAP maintained robust margins, with a cloud gross margin of 73%, a cloud and software gross margin of 80%, and an overall gross margin of 72.6%. The total Q2 gross profit for SAP grew by 11% year-over-year to €6.02 billion.
However, the company’s IFRS operating profit declined by 11%, hit by restructuring expenses of €600 million.
SAP’s Restructuring Efforts
As part of its 2024 transformation program, SAP is intensifying its restructuring efforts to leverage AI-driven efficiencies. This transformation is supported by a company-wide restructuring program set to end by early 2025. The restructuring is expected to impact 9,000 to 10,000 positions, mainly through voluntary leave programs and internal re-skilling initiatives. Despite these adjustments, SAP expects to maintain a headcount comparable to that at the end of 2023.
The total costs associated with the program are now estimated to be around €3 billion, with a mid-triple-digit million amount expected to occur in 2025. The company remains committed to implementing its transformation plan to meet its 2025 free cash flow goals.
Is SAP a Good Stock to Buy Now?
Overall, analysts have a highly bullish stance on SAP stock. Following the Q2 results, SAP stock has received Buy ratings from seven analysts.
On TipRanks, SAP stock has a Strong Buy rating based on 18 recommendations, including 14 Buys and four Holds. The SAP share price target is €197.07, which is similar to the current trading level.
