SAP to Launch Restructuring Program Affecting 8,000 Jobs in AI Push -- 2nd Update

By Mauro Orru and Dean Seal

SAP plans to undertake a restructuring program this year that will affect some 8,000 jobs, ratcheting up its focus on artificial intelligence.

The German business-software company said late Tuesday that most of the roughly 8,000 positions affected should be covered by voluntary leave programs and internal re-skilling, when workers are trained to fill other roles within the group. SAP expects to end 2024 with a headcount similar to current levels. The company had a workforce of 107,602 at the end of 2023.

Most of the costs related to the restructuring, currently estimated at about 2 billion euros ($2.17 billion), should be recognized in the first half of the year. Excluding restructuring expenses, the overhaul is expected to convey only a minor cost benefit this year.

The announcement comes a year after SAP said it was shedding about 3,000 jobs as part of a separate restructuring as the group leans on AI to streamline some processes and make work more efficient.

"With the planned transformation program, we are intensifying the shift of investments to strategic growth areas, above all business AI," Chief Executive Christian Klein said. Klein last year told The Wall Street Journal that SAP was open to more investments in AI and acquisitions to streamline its operations.

Last year, SAP made investments in three generative AI companies--Aleph Alpha, Anthropic and Cohere--and appointed Microsoft's Walter Sun as its global head of artificial intelligence, underscoring its commitment to the technology.

Recent advancements in generative AI--illustrated by the popularity of OpenAI's ChatGPT, Microsoft's Bing and Google's Bard chatbots--sparked a wave of investments from tech companies jockeying for position in a rapidly evolving market that looks set to revolutionize the future of business and human labor.

SAP joins a growing number of companies in the tech industry that are slashing headcount. Google laid off hundreds of employees in January in divisions including hardware and internal-software tools.

Chief Executive Sundar Pichai told employees in a Jan. 17 memo that the company would have to make tough choices as it funded investments in areas like artificial intelligence. Duolingo, the language-learning software company cut 10% of its contractors and said it would use artificial intelligence to handle some content creation.

Despite the challenges that companies face in their shift to AI, investors are once again pouring money into tech shares. SAP shares jumped more than 7% in Frankfurt early Wednesday.

On Tuesday, SAP posted revenue and operating profit ahead of analysts' expectations for the fourth quarter, led by growth at its core cloud business.

Reporting on a non-IFRS basis, the Walldorf, Germany-based company said total revenue climbed to EUR8.47 billion from EUR8.06 billion in the fourth quarter of 2022. Revenue from SAP's cloud business jumped to EUR3.70 billion from EUR3.08 billion, while software-licenses revenue slipped to EUR841 million from EUR907 million.

SAP has been moving away from software-licenses sales to subscription-based cloud services, banking on a more profitable and predictable model based on recurring revenue. The company said Brazil, Germany, France, India, and South Korea had enjoyed outstanding cloud revenue growth in the quarter.

"We met or exceeded our outlook for 2023 in all key metrics. Based on a stellar order entry, our current cloud backlog expanded by 27%--an all-time high," Klein said.

Operating profit for the fourth quarter fell to EUR2.51 billion from EUR2.56 billion, with SAP's operating margin falling to 29.6% from 31.7%.

Analysts had forecast total revenue of EUR8.32 billion and cloud revenue of EUR3.72 billion on operating profit of EUR2.47 billion and a 29.9% operating margin, according to a company-provided consensus on a non-IFRS basis.

SAP, like other European software companies, presents its figures as two sets of numbers. One set is based on the International Financial Reporting Standards--an international accounting method that seeks to provide a global reporting standard--though analysts and investors tend to follow SAP's non-IFRS numbers.

Those figures had so far excluded share-based compensation, restructuring expenses and acquisition-related charges. However, SAP began including share-based compensation expenses in its non-IFRS results from Jan. 1 of this year. While its 2023 figures don't reflect the change, guidance for the new year and 2025 does.

For 2024, SAP expects non-IFRS operating profit at constant currencies between EUR7.6 billion and EUR7.9 billion, cloud revenue at constant currencies between EUR17 billion and EUR17.3 billion and free cash flow of roughly EUR3.5 billion.

By 2025, SAP expects non-IFRS operating profit of approximately EUR10 billion, including share-based compensation expenses of roughly EUR2 billion, and free cash flow of about EUR8 billion.

Write to Mauro Orru at [e-mail] and Dean Seal at [e-mail]

(END) Dow Jones Newswires

January 24, 2024 04:21 ET (09:21 GMT)

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