SAP, the German software giant, experienced a notable surge in its stock value, climbing by as much as 8% on Wednesday. This surge was propelled by SAP's announcement of a strategic plan that involves job cuts alongside an optimistic boost to its profit outlook.
As part of its plan, SAP disclosed intentions to reduce its workforce by 8,000 jobs throughout the current year. The majority of these reductions are expected to be achieved through voluntary leave programs and internal re-skilling initiatives. Despite these workforce changes, SAP emphasized that its headcount will remain at levels similar to 2023, maintaining the workforce at 107,602 employees. This decision is grounded in reinvestments targeted at strategic growth areas. The restructuring program is projected to incur costs of approximately €2 billion ($2.2 billion), with the anticipated cost benefits being described as "minor."
Christian Klein, CEO of SAP, elaborated on the rationale behind the program during a call with analysts, stating, "With this program, we are planning to intensify the shift of investments to strategic growth areas, above all, business AI, and to drive new efficiencies powered by AI across the business." He emphasized the significance of artificial intelligence (AI), particularly generative AI, characterizing it as the greatest opportunity since the emergence of cloud computing, especially for SAP. Klein drew on discussions at the World Economic Forum in Davos, noting that AI was a prevalent topic in conversations with customers and global leaders.
SAP reported robust financial results for the fourth quarter, with earnings from continuing operations surging by 94% to €1.17 billion, and revenue increasing by 5% to €8.47 billion. Analysts, according to Visible Alpha's polls, had anticipated earnings of €1.37 billion on revenue of €8.33 billion. A notable highlight in SAP's performance was the 25% rise in its cloud backlog, reaching €13.7 billion, a figure described as "remarkable" by analysts at UBS.
While SAP provided an outlook for 2024, the more significant focus was on its vision for 2025. The company adjusted its operating profit view for 2025 to incorporate €2 billion of share-based compensation expenses. However, it also raised its profit target by €500 million, citing anticipated incremental efficiency gains from the ongoing transformation program. Additionally, SAP increased its free cash flow guidance by €500 million.
The positive developments in SAP's strategic plan and financial outlook have had a substantial impact on its stock performance. As of the new year, SAP stock has surged by 15%, and over the past 52 weeks, it has witnessed an impressive 51% increase. These indicators reflect investor confidence in SAP's strategic direction, financial performance, and its positioning in key growth areas, particularly in the realm of artificial intelligence.
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