SAP SE (SAP) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the SAP Q1 2021 Earnings Conference Call. Today's conference is being recorded. And at this time, I will turn the conference over to Mr. Stefan Gruber, Head of Investor Relations. Please go ahead, sir. Stefan Gruber: Thank you. Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations, SAP. Thank you for joining us for our earnings call to discuss our first quarter results, 2021. I'm joined by our CEO, Christian Klein; and our CFO, Luka Mucic, who will make opening remarks on the call today. And also joining us today for Q&A, from Australia, is Scott Russell, who leads our Customer Success organization. Christian Klein: Yes, thank you, Stefan, and welcome everyone also from my side. Before going into the details, let me say this. I couldn't be more proud of what our teams have achieved this quarter. This was just an amazing start into 2021, and our performance clearly confirms our strategy to drive business transformation in the cloud. We saw competitive strengths in our entire cloud business, clearly winning in a growing market with strong order entry growth across our portfolio. All on top of our rapidly-growing platform serving as key foundation for a modular, integrated, and innovative application landscape for our customers and partners. RISE is already a game-changer. Only two months after market introduction, the best offering in the market for business transformation. Altogether, on the back of strong new cloud business and an uptick on renewals, current cloud backlog close reaccelerated sharply. Looking at the bottom line, we achieved the highest Q1 operating profit in our history. So, this quarter was one of the strongest quarters in the history of SAP. Luka Mucic: Yes, thanks a lot, Christian. Hello everybody from my side as well. Yes, indeed, as Christian has said we had a unique start to the year in many ways. We had the highest order entry growth across cloud and software in five years, while posting the strongest increase in non-IFRS operating profit and margin in a decade. Let me now provide you with some background on the key drivers behind this exceptional quarter. In the first quarter, our total current cloud backlog reaccelerated to €7.6 billion up 19%. This was driven by a sharp acceleration in new cloud business across our portfolio, as well as a strong start for RISE with SAP. S/4HANA current cloud backlog exceeded €1 billion up 43%. This was propelled by a triple-digit growth in new cloud bookings for S/4HANA. Looking forward, this strong new cloud business performance is expected to reaccelerate cloud revenue growth. In the quarter, Cloud revenue was resilient and increased by 13% to more than €2.1 billion despite the continued impact of global travel restrictions on Concur's business. In fact, we grew our SaaS/PaaS revenue outside our intelligent spend business by 24% in the first quarter. S/4HANA cloud revenue contributed €227 million up 43% year-on-year, and it's approaching a €1 billion annual run rate already. This cloud revenue growth together with our steady software support revenue stream is increasing the resilience and sustainability of our business model, our more predictable revenue share expanded by approximately two percentage points to a record high of 78%. Software licenses revenue also saw the fastest growth in five years and was up by 11% reflecting significant competitive wins in both ERP and digital supply chain. For the first three months, our cloud and software revenue grew strongly by 6%. Our services revenue was down 14% year-on-year. But this includes the effect of the divestiture of our SAP Digital Interconnect business in November 2020. Consulting projects continue to be efficiently delivered remotely and SAP's premium services in particular remain in high demand. Stefan Gruber: Thank you. Operator you can start the Q&A session now. Operator: Thank you. We will now take our first question from Kirk Materne from Evercore ISI. Please go ahead. Kirk Materne: Yes. Thanks very much and congrats on the quarter. Christian, I was wondering if you could just talk a little bit about the Americas region. I realized revenue is a bit of a lagging indicator, but that was obviously a little bit weaker. Obviously Qualtrics had an amazing quarter last night. So, I was just kind of like -- can you just parse out sort of what you're seeing, I guess from a bookings perspective, and then maybe some of the dynamics on more of a product-specific dynamic, meaning, is a lot of that just sort of the intelligence sides are weighing on the Americas. I was just wondering if you got some color there or Luka if you have any thoughts too. Thanks. Christian Klein: Thanks a lot for the question. Christian here, and then, Scott, you did one of your very first successful quarter. I would also like to hand it over to you. Look, I mean, yes, as you are rightfully saying, cloud revenue is a lagging indicator. And I don't want to here now highlight one particular region, but I have to say what Tony and his team really delivered this quarter was just fantastic from an order entry perspective, both cloud and also in our own premise business. So, we are very happy how the business developed, and especially with RISE with SAP also in conjunction with the hyperscaler, we already closed some very significant deals. The pipeline is strong, it's very strong. And also we are now ramping up further industry cloud capabilities, which also resonates in the market like public sector extremely well. Scott, would you like to add some color to that? Scott Russell: Yes. Sure, Christian. And thank you for your comments. Look, I think you said it well. They had a very strong quarter obviously in terms of bookings. I think there's a couple of other factors just to bear in mind, the first is, the comparison on a year-on-year basis was obviously a bit stronger. We had other regions that were impacted, Asia and parts of Europe with COVID in the first quarter, whereas actually in our Q1 last year it was actually very strong for North America. But more importantly, our bookings together with the acceleration and the strong sentiment, the customers in North America telling us directly that the RISE with SAP is a clear requirement in how they run their businesses going forward, together with a really strong performance across the cloud portfolio that was mentioned at the beginning of the call, and that should reaccelerate the Americas cloud revenue going forward together with obviously the research , and travel restrictions start to , and businesses are able to move around more going forward. Kirk Materne: That's really helpful. Maybe one follow-up -- Go ahead. Yes, if I could just one last for Luka. Apologies. Luka, if we think about sort of the bouncing out of obviously license going down, but obviously some potential efficiency gains on OpEx as we go to a more sort of hybrid world, how do you think about that, meaning, when we get through the other side of COVID, what are some of the learnings you've had from an operational efficiency perspective? And is that sort of factored in, or do you think there's some upside as we come out of the back-end of this in terms of sales and marketing, basically just others or real estate costs, things like that? Thanks. Luka Mucic: Now, first of all, I would argue that we have really been extremely disciplined when it comes to avoidable costs. We have not sacrificed the future of the company. We have continued to invest it in particular innovation and R&D. I mean, we have essentially hired over the course of the last two years, including inorganic growth round about 2,000 additional employees. And virtually all of them are actually R&D engineers. So, in this respect, we continue to invest. And you see also that therefore rightfully the R&D ratio goes up. But as far as the rest is concerned, of course, we take advantage of the natural savings on the travel front, and we're also running a tight ship in other discretionary expenses. And that was the key reason for the significant increase in profitability. As COVID slowly gets behind us, I'm absolutely certain that we will not return to a full past normal, so to say, because we have seen that many things can be done very efficiently in a virtual and remote environment. Nevertheless, there will be a certain move towards more physical meetings. I think a hybrid model is a reality, and that we will see you. And you're rightfully mentioning as well that on the software front, Q1 was obviously very positive with the growing adoption of RISE and certainly we continue to expect a downward pressure on software licenses. Having said this, the main factor that contributes to our profitability is really the revenue mix that we expect. And the beauty of this is that once this mix-shift effect has taken full hold, which we expect by the end of next year, we fully anticipate that this will make room to outsize growth in profits, and therefore also profitability. Actually we expect that we will see size of the double-digit growth already starting in 2023, and then a further acceleration in the years to come. So, the model shift that we are pursuing and that we're acting upon is actually in SAP's best interest. Stefan Gruber: Okay, thank you. Let's take the next question please. Operator: We will now take our next question from Mark Moerdler from Bernstein Research. Please go ahead. Mark Moerdler: Thank you very much, and thanks for taking my question. I also want to congratulate you on the additional information disclosures you're giving on S/4HANA cloud. I think it will be extremely helpful. I'd like to ask a question that I've had recently from quite a number of clients. Can you give us some color on the renewal rates of on-premise ERP? Are you seeing any meaningful change in revenue over time? And then I have a quick follow-up. Luka Mucic: Perhaps I can take the question on the support of revenues and renewal rates. The underlying performance is actually quite resilient. I know that we now have the second quarter of flat support revenue growth, but that is obviously due to the quite negative softer revenue performance. And then of course we have a proportion of support revenues that is actually that is converted into a cloud subscription as part of cloud extension cases. But there we also have a very stable development in the past few years. Now we are always comfortably beyond and above a conversion factor of two. And actually Q1 was not an exception to this. Actually we had an even higher conversion factor. So, all-in-all, the main factor that is dictating the support revenue development is really the development of licenses. On the rest, we have actually a very robust and resilient performance with continued high renewal rates. Mark Moerdler: Beautiful. And then a quick follow-up, as clients are looking at RISE with SAP, are you seeing increased cross-sell demand for the other cloud offerings? Christian Klein: Yes, indeed. That's a very good question. And actually also directly also alludes to our new strategy. I mean, now that we have finalized, I would work on the equation, sharing one data model, sharing the same security layer, sharing the same extension layer, obviously RISE with SAP will also help our other lines of businesses big time, because when you are, for example, today an ECC customer, you move to the new platform, you move to a modular landscape. Obviously now we have much better cost opportunities. My equation is much smoother. You again get all the benefits of wanting the enterprise in a really integrated way, in a modular, but integrated way. And you will also watch out for SAPPHIRE. We don't stop with RISE. So, there will be new offerings coming, because we listen to our customer, we will see some industry flavor to that, we will also extend a little bit of our core. But again, it's all about the customer choosing the wide modules for his business requirement. Mark Moerdler: Thank you, I appreciate it. Stefan Gruber: Let's take next question please. Operator: We will now take our next question from Stefan Slowinski from BNP Paribas. Please go ahead. Stefan Slowinski: Yes, thank you and good afternoon. Thanks for taking my question. I guess just to start, I'm just wondering if the S/4HANA revenue and backlog, if you're seeing any maintenance migration towards subscription contracting. You just mentioned maintenance of course was flat in the quarter, should we now expect that to start declining? And will you break out that conversion if it is happening? Luka Mucic: Yes. Stefan, so let me quickly answer this. So far we have not really seen a pronounced migration of maintenance revenues. It was in Q1 actually a negligible some -- couple of millions of maintenance revenues. I mean, as we move to larger engagements on the RISE that certainly should start to increase a bit, but that is factored actually into our planning and our guidance already in Q1. Certainly, we had a much more modest impact from this then we had originally planned for. So it looks actually very healthy and very incremental what we were able to drive with RISE. Let's see how that plays out over the coming quarters. But for now, as I said, also on Mark's earlier question if business as usual, and the cloud extension multipliers are actually even etching up in Q1 over the last few years. Stefan Slowinski: Okay, great. Luka Mucic: And maybe touch a bit on that. Stefan Slowinski: Yes. Christian Klein: I'll touch a bit on that very quickly. I mean, you also have heard of now thing that we have close to 5,000 net new customers. So that clearly also signals it's not only about the installed base, and even for RISE, it's a higher net new customers there, because when we are replacing and we are really replacing competitive ERP system. Then of course RISE, the ideal offer to make it a smooth migration for the data models, building consisting, consistent data layer, and of course also we designing the business processes to truly transform the business. And so it's installed base, but it's also a large share of net new customers. Luka Mucic: Yes, now, Christian is absolutely right. I mean, to just give a number to this, I mean, as we disclosed, we have more than 400 S/4HANA additional customers in Q1, and we add more than 100 RISE deals. For the first time actually in this Q1, our share of S/4HANA cloud customers exceeded the one of S/4HANA on premise customers, but that tells you as better that actually more than half of the S/4HANA cloud customers were not coming through RISE, but we're actually net new ones. Stefan Slowinski: Okay, great. Thank you very much. Stefan Gruber: Thank you, Stefan. Let's take the next question please. Operator: We will now take our next question from Michael Briest from UBS. Please go ahead. Michael Briest: Thanks. Good afternoon. Sort of following on from that, I guess, I mean, Christian, I think you said that you expect the licenses to turn more negative as the year progresses. Can you talk a bit about the pipeline mix between RISE and on-premise for S/4? And I think Luka you've said over 60% of licenses two years ago was that score on digital supply chain. So I'm assuming it's still the majority and it's good that customers want to adopt it any which way. But just from a margin point of view, if you continue to see license outperformance. Will you just let that flow through to the bottom-line? Or would you perhaps accelerate your investments? And related to that, just on the hiring, it looks if I exclude Signavio, you only ended up 300 people in the quarter, which seems odd, given the margin guidance for the year. Can you maybe just elaborate on how we should expect headcounts to grow through the balance of the year? Thanks. Christian Klein: Yes, I can get started, Michael, and then for the pipeline question, Scott also please feel free to chime in. I mean, look why it was launched two months ago? And obviously in many, many conversations with CEOs across all industries, they are completely getting it that they now need to move also with the core business processes, to the cloud, to get better visibility across the supply chain, to get more resilient, to react faster, to change in market conditions, to adapt to new more digital business models, et cetera, et cetera. And so this is what we see now of course for, especially for the large transactions, it takes some time, but all the customers are really now willing to do this move. And so with that, obviously we see definitely a shift now, especially in the next quarters to come, a shift from the on-premise to RISE with SAP pipeline. Scott, anything to add from your side? Scott Russell: Yes, just to give it a little bit more color. Thanks, Christian. So the pipeline growth for RISE, it's been accelerating every week since we launched. So as we've been able to share, interact and talk to the customers, the pipeline growth has continued to expand reflecting the interest in the cloud-based flexible architecture and the transformation as a service where, and clearly the dialogue with the customers who are regard existing ECC or SAP ERP landscapes are the invalidating their strategy, but the sentiment is a fast, much wide faster acceleration into the cloud, which is represented into the pipeline as compared to the on premise. And we expect that to continue. Christian Klein: And then last but not least certainly on the hiring the organic hiring of roundabout 300 people in Q1. You're right on that. It's certainly not representative of what we expect to see for the entirety of the years or hiring volumes will certainly go up in the quarters to come. And so I will certainly not talk about 300, but perhaps rather something like 3,000 of additional hires pull out across of the year. Michael Briest: Thank you. And then you could talk on the tax rate. Is that sustainable or is that just a one year effect? Luka Mucic: The cash flow, no, I mean, on the cash flow side, I must say the tax rate, sorry. Well I think two points on that the one time effect is certainly not sustainable just to give some flavor to it. When we acquired Qualtrics we recognized a share of deferred tax liabilities in anticipation of illegal entity integration of the Qualtrics subsidiaries into SAP, which would have given RISE to additional tax charges. Now that Qualtrics has gone IPO and obviously those plans are not valid anymore. That's why we did recognize these DTLs and that is certainly a one-time effect. The other one around the tax exempt income. That mainly depends on the contribution of Sapphire Ventures to our overall results, because their value appreciations and corresponding gains are to a large extent Texas exempt income. And so as they are success kind of proceeds and they contribute more in a given quarter that part would certainly also be sustainable going forward. Michael Briest: Thank you. Stefan Gruber: Okay. Thank you. Let's take the next question please. Operator: We will now take our next question from Johannes Schaller from Deutsche Bank. Please go ahead. Johannes Schaller: Yes, thanks, and also congratulations on the good quarter from my side. Maybe for my first question, just coming back to the point on the U.S. and the relatively slower growth in cloud revenues here, I mean, I guess, what you're saying in terms of the backlog and the order entry. But can you maybe give us a bit more color here for the S/4HANA cloud backlog, maybe how much of that you see coming from the Americas? Is there a decent size in there and also maybe for the overall cloud backlog? So to give us a bit more comfort that the cloud revenues in the U.S. or in the America start to reaccelerate growth as well. And then look at the second question. You mentioned that the conversion rates in Q1 was a bit higher than the normal more than two times that I think you have alluded to before. I understand the numbers are quite small and probably quite volatile, but do you see that there is any kind of structural reason for that, or is that just really quarterly volatility you would see here? Thank you. Luka Mucic: Yes, perhaps I can try to cover all of those questions as they are more technical in nature. So, first of all on the backlog composition, clearly the total current cloud backlog is to a quite significant extent still influence and fueled by the Americas in particular North America. That's just simply due to the fact that a large share of our renewal volume of our existing contracts is there. And therefore, of course it has also significant impact on the current cloud backlog and as Scott and Christian has said North America had an absolute blowout quarter in new cloud bookings and also have quite resilient renewals performance. So, you will see that number. That's a technical reality; move up again from a growth perspective. And then I think this discussion will quickly be behind us on the S4 current cloud backlog it's slightly different because that business was established a few years ago at a point in time where the cloud was already quickly becoming a preferred deployment model for customers on a global basis, whereas it originally started very much in North America and therefore the current cloud backlog in S/4 is more evenly distributed across the different regions, but still of course with a quite significant contribution from North America as well. And so, what was the last question again? Johannes Schaller: Just on the conversion rate that you see within S/4 being a bit higher in Q1 if there was anything kind of a structural trend maybe you're observing or if that is more quarterly volatility? Luka Mucic: I think it's mainly quarterly volatility. As you have seen, we had a slightly higher share of net new customers in Q1 this year then for the most part in the last few years quarter we were edging up from 40% to 50%. And by definition, if you have a net new customer and there is also no conversion chart so to say happening and that probably was the main contributing factor, but again, it's a rounding error and with the numbers in Q1 really does not play such a significant role. I'm confident though that the general trend that we have seen in the past few years will hold and that we will certainly continue to see healthy conversion rates from maintenance to cloud. Johannes Schaller: So, that's very reassuring. Thank you. Stefan Gruber: Thank you. Let's take the next question please. Operator: We will now take our next question from Adam Wood from Morgan Stanley. Please go ahead. Adam Wood: Hi, good afternoon. Thanks for taking the questions and congrats from me on the strong start to the year as well. Can I ask two please? First on RISE, with the feedback we get from customers so far is there's obviously lots of interest in, and we can see that in the backlogs, but there is some confusion given the complexity of the offering. Could you maybe talk a little bit about the educational side of this, how long it takes to get customers over those hurdles, where the sales force is on achieving that? And then secondly, one of the other big debates, I think we have losses around the public cloud offering that SAP has. Could you just give us a quick update on where do you see that in terms of functionality versus competitors and against the on-premise offering? And could you talk a little bit about adoption? Is that now in the market able to be adopted going well? And how would that be different from a mid-market customer versus large enterprise in terms of how they think about going public or private cloud? Thank you. Christian Klein: So, Adam, thanks a lot first of all, and I will start and then Scott, you can build on the enablement side of the house. Look, I mean - and again, it's an offer, which is now two months out. I actually get very positive feedback and also about the simplicity of it there, because when you see what happened in the past, a lot of our customers really already did the move to the cloud. They moved and did a technical migration to hyperscale. Then they had an ERP provider then they had an operations provider. So that sweet part is to talk to, which is not very healthy. When one an issue is coming up, now we take that, put it into one offer and we reach up to more than only a business case on TCO. We are actually moving to the cloud, but we also driving a business transformation. And we do that by taking the hyperscalers with our friend, with our partner, and we also of course taking the existing operations part of our customers with us, we leave the migration part of obviously up to the customer to decide because the migration is really depending on the size of the customer. And again, there, we also go with an ecosystem first support, of course, we also keep a strong focus on the qualification and then enablement of these sources. And that's actually, you know, we're performing extremely well as you have seen already in the backlog. And with regard to the internal enablement, Scott, can you just share some comments please? Scott Russell: Yes, sure, I'm happy to. So, as we mentioned at the beginning in the last earnings, we were about to embark upon the learning and enablement of all of the sales and field facing force nearly 40,000 people. What I can say is we successfully launch that and have completed that for all employees, not only the sales force, but also our services, customer success, and in engagement teams. Since the launch, we've then done a second iteration because as you could expect, as the feedback comes from the customers and we've then working through the questions that they have, we've further refined and then iterated again, and we're launching the next release of the internal enablement to be able to further expand. I would also add as a point of note that we have had extensive learning and engagement with all of our strategic partners, the systems integration and business partners who've enabled their service teams, their business transformation teams and working in collaboration on the capability of RISE with SAP. So you can expect going forward our continued capability with SAP and its partners to be able to answer the vital questions customers ask about the capability of your RISE, and then the ability to be able to move with speed and agility to be able to adopt and consume the platform. Christian Klein: And then with regard to the question around S/4HANA public cloud, I mean we have customers like PwC, over 100,000, end users of the system, completely running in S/4HANA public cloud because the customer can adhere to the standard template we're having. And we have many more of those customers, especially in the professional services industry. Now, let's talk about manufacturing. When you're wanting 100 production sites, the customer is not always be able to go first, why the way to the public cloud, but again there kicks in, we're giving choices that okay, for procure to pay, you're ready, go to cash, you're ready. Okay, let's go there to the public cloud. And we move the production side at the later point, when we have done the homework also on standardizing the business process on standardizing the data models. So we see this, also according to different industry, and of course, also the size of the customer matters because it's always also question, how serious is the customer about a Greenfield approach is their willingness on the top to standardized business processes. So very often, it's about the customer, because the technology as we have some very large ones already, technology is there. And also the best practices are there, it's all about the customer and the willingness of cost and also to standardize and move forward. Luka Mucic: And Christian, if I can just add, because I think there was a question about the move of with RISE with SAP, it is important to note, as we've announced with the over 100 customers moving to RISE with SAP, even within a two month window. So despite between the period of launch to when we close the quarter, we've had fast acceleration, and adoption and move to RISE with SAP, which does show that particularly for customers in that small and medium markets they're able to move quickly, they're doing so clearly the large and very complex customers may take more discussions given their landscapes. But we're very confident that we can help them navigate that. Stefan Gruber: Okay, thank you. The next question please. Operator: We'll now take our next question from James Goodman from Barclays. Please go ahead. James Goodman: Okay, good afternoon. Thank you. Yes, on the cloud revenue growth, encouraging to see the cloud growth hold the Q4 level and the backlog step-up materially. I think given all the comments on this call around the success of RISE so far and the transactional revenues coming back in H2, Qualtrics is outperforming its standalone guidance. I mean, you notched up the low-end of the cloud guidance, but I'm wondering if you can talk to your confidence in exiting the year at a growth rate above the guidance range or maybe talk to what it would take in terms of RISE adoption to push to the top end of the range for the current year. And secondly, on the cloud gross margin, which held up across all three segments in the quarter. I was under the impression that the proportion of the investment that you spoke to back in October to accelerate the migration of customers off legacy, infrastructures would weigh somewhat on the cloud gross margin, Luka you mentioned, I think some effect of that this quarter on the OpEx. But I was wondering if you could clarify that. And the extent to which you anticipate cloud gross margin to be weighed down at all over the coming quarters by those investments? Thank you. Luka Mucic: Yes, thanks a lot, James. I'll take both questions, if I may. So first of all, on the cloud revenue guidance, look after Q1 is now out of our way with a great performance on new cloud bookings, there are actually only two very variables left for us. And I think on both of them, we will have a much better view after Q2, one is obviously our Q2, new cloud bookings performance, because frankly, everything that comes afterwards will not significantly move the needle on the cloud revenue side anymore. And the second one is obviously the transactional revenues. I think on both of those, we'll have a quite a good handle after Q2. For now, it obviously feels very good on the momentum side in terms of new cloud bookings, again transactional revenue is a little bit depending on the external circumstances, but we'll certainly be in a position and have a very precise view on where we'll end in Q2 and for now it looks very positive. On the gross margin side in the cloud, I think I said this already when we talked about our Q4 earnings. Despite the investments that we take in our harmonization of our cloud infrastructure, we still expect that the Cloud margins in the different business models will continue to edge-up, it will be slightly of course brought down by the investments that we're taking, but not to the point that it would completely overshadow the efficiency increases, that we're continuing to drive. Actually, for us in the short-term, it's more the combination of this element with the revenue mix shift effect, the Intelligent Spend Solutions, as you know, have the highest gross margin and under normal circumstances, if they had been a say normal to be anticipated proportion of the entirety of our cloud business, that would have been driving our Cloud gross margins already today, up to a more material level with the transactional revenue is bottoming out. And then coming back, as of next year, there is certainly potential also in 2022 even though we'll step up the additional investments in the cloud harmonization in 2022 to continue to see the cloud margin expanding slightly, because all of the other components continue to grow. So it's really mainly a factor of the mix between the three business models. And then as of 2023, when we have these harmonization investments behind us, then for sure, we'll see a much more significant step-up similar to the levels of increases that we have seen when we were finalizing the migration of third-party databases success factors, for example. James Goodman: Very clear. Thank you, Luka. Luka Mucic: Thank you. Stefan Gruber: Thank you. The next question please. Operator: We'll now take our next question from Neil Steer from Redburn. Please go ahead. Neil Steer: Hi, thanks very much for taking the question. Just a quick sort of technical question and digging into the successive RISE S/4HANA, I think Luka, you mentioned that you've had 100 RISE deals go through in the quarter, my understanding is as the customers embark on the RISE program, the first thing they need to do is sort of assess the code base that they've got. And at that point, make a decision as to whether they can either go immediately via the public cloud route, or then go to the private cloud path, which is effectively moving to the subscription model. But using the underlying On-Premise technology, of the 100 you signed in the first couple of months, is it fair to assume that the vast majority have gone down the second path? Luka Mucic: No, we have actually, I mean, it depends on what you're talking about. From a number of transactions perspective, it's actually quite balanced. From a revenue contribution perspective, certainly the private cloud-related portions would be contributing more just because of the volume that the customers bring. Christian Klein: And just to build on that, I mean, you have to realize that RISE with SAP, there's always the business technology platform embedded. And with that, we also been moving our customers to a new platform, because all the application analysis from the business technology platform, so also the expansions will not any way be done, NetWeaver, On-Prem and modifying the core ERP, they're getting built now on the platform, we actually saw a massive up tick on the B2B adoption in Q1, because now also the ecosystem moves. And of course, the customers want to keep the standard now clean. This is why we're not only shifting our workloads to the cloud, also the ecosystem is with us. And again, for some customers, it will take time until they get fully standardized system forces and make the move to the public cloud. If they can, they're doing it already now, but for some of the largest, it will take time. But also already there, the expansions will be built more and more on our cloud platform, and less and less as modifications in the On-Premise world. Neil Steer: Okay, thank you. And just a quick follow-on from that, so as we look out to your strategy and the margin and the profit improvements expected to come through '23 through '25. Do you have in mind what level of your customer workloads need to be on specifically public cloud platforms as we go into '24 and '25? Luka Mucic: Yes, so I can take that as well. When you look at the TCO calculation, you also have a single instance or multi tenancy instance of what you have to see, the customer at a certain size and there you cannot go to our competitors like Salesforce and Workday. At certain sites, you also -- it doesn't really matter because you don't put more customers on one tenant because it's just scale. So, the whole hardware scale, the platform scale, the whole technical landscape scale. Of course, for a customer with smaller ticket sizes with less data, actually there we, of course, apply the Multi-tenant. They are doing today and they are already today the bulk of the customers that are actually going through the public cloud. So, already today we hit the ratio. And there is no doubt that we are going to hit the ratio also going forward. Neil Steer: Okay, thanks very much. Stefan Gruber: Thank you. We have time for two final questions please. Operator: So, we will now take our next question from Mohammed Moawalla from Goldman Sachs. Please go ahead. Mohammed Moawalla: Great, thank you, and good afternoon and congratulations on the quarter. I had two quick ones. One, you talked a lot about your new bookings momentum. I was wondering if you could give us some sort of quantitative color around that? I know you don't give that out any more, but just to give a sense of how fast that is running relative to the overall cloud backlog. And then secondly, just in terms of the RISE, can you give us a sense of the split today because a lot of the log name seem to be mid market customers. But of either the 100 that you have already signed up or the pipeline, what is the mix between your kind of more enterprise scale customers versus mid market? And related to that, as you move customers what is the sort of up-sell in terms of additional product that you are getting in those discussions? Thank you. Luka Mucic: I will take the first one as I am the hobby historian here on the table. And then on the RISE one, I will refer to Scott and then Christian. Yes, you are right. I mean we are not disclosing new cloud booking separately anymore. But we have said that this was the highest growth that we have seen in new cloud business in the last five years. And as a reference, in the last five years the second best quarter that we had where we still disclosed new cloud bookings was in Q3 2019 where we had 39% constant currency growth. The best quarter in 2015, so more than five years ago, in Q4 2015 was actually at 63% constant currency growth. So, that tells you that our growth in Q1 2021. Will end up in somewhere in between. And I would hint that it was not too far from the gold middle. Christian Klein: And with regard to the order entry mix between large enterprises and our SME business, actually for RISE, it's not any different than for the rest of our business. We also see, of course, with the terms to bookings, dollars, there we see a higher share coming out of the large enterprises. When you look at the number of transactions, the bulk of the transactions, of course, comes out of the SME business. Actually I project that even the -- also that one will now move a bit more -- a bit more to the large enterprise segment because also with regard to number of transactions, Scott already allude to that, this takes a bit more time. The deal cycles are bit longer and that is why we actually expect that also on the number of transaction, the shift will a bit more then also lean towards the large enterprise segment. And there was one more with regard to the cross sell. I mean that's actually now also the big competitive advantage of finally having our business technology platform there. And again when our applications are using the same application logic, the same data model, first of all they become more sticky, which is very good product in and the years to come. And second, obviously customers are forgiving. When there is a best of suite vendor with maybe two or three more cool feature but don't share the same data model, doesn't share the same security model especially for very mission critical application with sensitive data, have the reason to then go with SAP. It's, of course, much higher going forward than when you are just competing best of suite. And this why we definitely also expect a higher share of cross sell opportunities going forward. And we will also launch a few more bundles for RISE, where we also definitely also now expose the core because we can now also deliver it out of the box. Mohammed Moawalla: Great, thank you. Stefan Gruber: Now the final question. Operator: We will now take our final question from Knut Woller from Baader Bank. Please go ahead. Knut Woller: Yes, thanks very much. Just a quick one, we talked a lot about the Americas, and I think it was quite remarkable to see the rebound of EMEA despite the ongoing headwind of the pandemic in the first quarter. So, can you give us some ideas, what were the drivers here from a product perspective and that drove the acceleration of growth? And also, do you see here an increasing willingness of customers again, looking through the pandemic to return to do transformational projects? Thank you. Christian Klein: Scott, would you like to take that question? Scott Russell: Yes, sure. So I think as you saw in the Europe region and also in the Americas, as well as APJ, we saw a couple of consistent things, which definitely came about. The first is the cloud portfolio across all of the different areas, human experience management, customer experience. Christian mentioned before the business technology platform with incredible growth are our Qualtrics portfolio. So we saw a significant lift in terms of their net new order entry in the EMEA and other regions across the portfolio, notwithstanding also the commentary that we've made about RISE and also with S/4HANA. The second is there is a clear indication in the feedback that we're getting from the customers that the prioritization of digitizing their businesses as they start to look and coming out of the pandemic and looking at the future of their business means the digitization to be able to transform having an agile platform to run their business is now at the very top of the agenda. And as they look at the opportunity cost and the competing investments that they are looking at the digitization, being able to run their agile business to run flexible and resilient supply chain, to be able to make sure that they can compete with new business models, that's driving some much of that demand. So, we do expect, and a lot of the initiatives that have been kicked off in Q1 are there to transform their businesses, whether it'd be around hiring and retaining the best talent or to operationalize their mission, critical ERP processes in the cloud going forward, or in many other areas such as customer experience. So I guess the answer is yes, we see that the indicators and we expect that to continue going forward. Christian Klein: And also let's not forget the verticals. I mean, when I see SAP as it's best about last week a CEO councilor, where we talked about the automotive line and when I see them the SAP industry people talking on around supply chain traceability around making the carbon footprint around how can we really optimize the inventory across the OEM, the supplier, really down to the raw material. This is going to where I feel, who else can do that in the software industry. And this is also for us the key strength to not only play on the hotly foam layer, but go from there, use the data, use the platform and build some world-class vertical industry solutions. And this is where also our expertise is and we have a way to win it. Knut Woller: Thank you. Stefan Gruber: Great. Thank you, Knut. This concludes our Q1 earnings call for today. Thank you very much for joining, and we look forward to seeing you at our SAPPHIRE NOW Conference in June. Thank you very much. Christian Klein: Take care, everyone. Thank you. Bye-bye. Luka Mucic: Thank you. Bye-bye. Christian Klein: Bye-bye. Thank you.SAP Ratings Summary
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SAP’s Analysts Day Review
Oppenheimer shared its key takeaways from SAP SE (NYSE:SAP) Financial Analyst Day, where management provided an upbeat strategy and financials presentation, consistent messaging around process automation, and an AI-focused innovation path.
Highlights included (1) revising the 2025 financial targets which removed a potential reset overhang, (2) deepening partnerships with Microsoft, Google and IBM on generative AI, and (3) announcing a €5 billion share repurchase program.
The analysts found that the information shared during the analyst day was more of a small step forward rather than significant, but they still feel optimistic about the company's strategy, the roadmap for generative AI, and the development of their product lineup.
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