- SAP seemed to have a good Q3 earnings report, with strong cloud revenue growth and AI-related orders
- One analyst says the company's backlog reflects the overall market shift to AI-enabling tools
- Another analyst said the AI momentum could be a little overblown
Software-as-a-service giant SAP is smack-dab in the middle of the cloud business thanks to partnerships with all the major players, including Google, Microsoft and Amazon Web Services (AWS). Bookings from its large entrenched enterprise base reflect demand for both artificial intelligence (AI) and cloud solutions. But how significant are these AI-demand signals, really?
On the surface, it might look like SAP’s cloud business just had a monster quarter, but analysts told Fierce there’s more to its earnings report than meets the eye, especially when it comes to AI-related orders.
According to Q3 earnings, SAP's cloud revenue growth jumped 27% in Q3 2024 to 4.4 billion euros ($4.75 billion), led by contributions from its cloud ERP Suite and bookings related to artificial intelligence (AI) use cases. And its cloud order backlog climbed 29% to 15.4 billion euros ($16.6 billion).
Synergy Research Group Chief Analyst John Dinsdale said when it comes to SAP’s report, context is key. And in context, SAP’s headline bullet points look a bit more like small potatoes.
Sure, Dinsdale said, 15.4 billion euros is an objectively high number. But “relative to the cloud market that number doesn't move the needle too much.”
“In Q2, the total quarterly revenues from cloud infrastructure services were $79 billion and enterprise SaaS revenues were $71 billion. So, in aggregate the cloud and SaaS market is now running at around $150 billion per quarter, or a run rate of around $600 billion per year,’ Dinsdale explained. “In that context, a total order backlog of EUR 15.4 billion is substantial but not a game changer.”
Dinsdale also pointed out that SAP’s revenue primarily comes from cloud software and platform sales. While it does play in the cloud infrastructure market, its worldwide market share is only around 1%. “So, for the bulk of its business, it is not going head-to-head with Amazon, Microsoft Azure or Google,” he explained.
AI skepticism indicator
Futurum Group Research Director Keith Kirkpatrick said SAP’s strong backlog reflects “the overall market shift to tools that will enable AI in all of its forms, including predictive, analytics and generative, to be utilized across a single platform.”
Indeed, SAP CEO Christian Klein highlighted the fact that about 30% of its cloud orders in the quarter were “deals that included AI use cases.”
Jack Gold, founder of J. Gold Associates, said he's not surprised at 30% of companies wanting to deploy AI. The bigger question, he said, is "How many have actually deployed in volume production?"
"The majority of companies, I’d say 85%+ are still in the trial or POC stage with AI. I have no doubt more companies will embrace production AI systems, but I expect it to be 1-2 years at least before the majority of companies have large scale AI solutions in place," Gold stated.
So while SAP has to have AI solutions to "remain competitive," Gold noted "it's just not clear how soon and in what form those solutions will be deployed at scale by its customer base."
Next Curve's Leonard Lee had a similar take.
"The bigger question regarding AI is what is included in the definition of 'AI,'" he said. In particular, what is the contribution of GenAI-driven revenue and profit versus more traditional AI applications and use cases for business analytics and intelligent workflow automation. What is the net new?"
That's a great question to keep in mind as earnings reports from the hyperscalers, AI companies and other software players roll in. AI may be awesome and driving major cloud growth, but take the hype with a mountain of salt...at least for now.