SAP SE (SAP) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the SAP Q2 2021 Earnings Conference Call. Today's conference is being recorded. 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. Thank you for joining us for our earnings call to discuss our second quarter results. I'm joined by our CEO, Christian Klein; and our CFO, Luka Mucic, who will both make opening remarks on the call today; also joining us for Q&A from Australia, Scott Russell, who leads our Customer Success Organization. Christian Klein: Thanks to all of you for joining today. I hope you're doing well as the pandemic seems to be endowing a new phase despite the positive progress in vaccinations. I also want to extend our deepest sympathies to all those affected by the catastrophic floods in parts of Western Europe and China. We are working closely with the affected communities to support our rescue and relief efforts. Let's now turn to our earnings update. For SAP, Q2 has been another fantastic quarter. It shows that we are executing well against the strategy we introduced last year. This strategy is playing out against the backdrop of every industry transforming digitally and with more urgency than ever before. Our customers are partnering with us as they transform their businesses while at the same time, modernizing the IT landscape with a move to the cloud. This is reflected in the strong quarterly results we announced today. Luka Mucic: Yes. Thank you very much, Christian, and hello from my side as well. I have to say I completely agree with Christian that customers continue to see SAP as their trusted partner in their business transformation. The strong customer momentum and adoption that we saw in the quarter is very encouraging, which is also clearly reflected in our numbers. After an excellent first quarter, our cloud transition gained even more momentum in the second quarter with growth accelerating across our cloud portfolio. Let's now take a look at some of the key drivers behind the performance in this quarter. Our total current cloud backlog continued its growth trend at accelerated sequentially to 20% growth, approaching €8 billion. This was backed by a strong performance in Business Technology Platform, Business Process Intelligence, Qualtrics as well as customer experience. As S/4HANA current cloud backlog grew by 48% to more than €1.1 billion, propelled in particular by our U.S. business. With this strong backlog, we expect S/4HANA cloud revenue growth to significantly accelerate in the second half of the year. For the quarter, S/4HANA Cloud revenue was up 39%. Only five months after the launch of RISE with SAP, it was, again, an important driver of the S/4HANA cloud performance. Total cloud revenue showed a strong sequential uptick by 4 percentage points, resulting in 17% growth. Our Travel and Expense business showed first signs of recovery as global travel restrictions eased, which led to a sequential stabilization for the first time since the pandemic began. We are also pleased to see our Intelligent Spend category returning to growth. The Intelligent Spend cloud revenue growth rate was up 9 percentage points quarter-over-quarter, even though it continues to be impacted more than other SaaS/PaaS solutions. Our share of more predictable revenue expanded by 3 percentage points to 76%. Stefan Gruber: Thank you. Operator, we can now start the Q&A session. Operator: Our first question comes from Stefan Slowinski from BNP Paribas. Please go ahead. Stefan Slowinski: Yes. I just wanted to follow up on the cross-selling topic that you mentioned in your prepared remarks, it seems like an increasing number of projects have multiple SAP apps as customers upgrade to S/4. Yet the current cloud backlog growth ex-Qualtrics and ex-S/4HANA was probably flat sequentially, maybe even slightly down. So just wondering why despite the acceleration we're seeing in the S/4HANA backlog growth, we're not seeing that yet feed into other lines of business areas? And when do you expect that to become more visible in the current backlog growth? Luka Mucic: Yes. This is a more technical question around the current cloud backlog. Perhaps let me start off and then perhaps Christian and Scott can add some of the -- kind of their views around the momentum that we are seeing in the market. First of all, it's very important to note that actually, our current cloud backlog, both in Q1 as well as in Q2 was ahead of our internal planning. So we are seeing an excellent momentum actually ahead of our expectations. It's also important to note that the number in itself is, obviously, significant. And when you take a look at how it is composed in a business that is scaling fast and is adding, therefore, a bigger impact from new cloud bookings versus already established renewals, such as S/4HANA cloud, you can actually make a much more significant impact quarter-over-quarter in terms of the increase that you're seeing. It's actually from an overall perspective, usually the case that you have the highest increase in current cloud backlog in Q4 of any year because that's where you have the highest number of absolute new cloud bookings that you can add to the funnel. And then under normal conditions, the outside of the very fast growth that we are seeing today, you would have a more, kind of, even distribution without a big increase during the year in the other quarters. You can see this also when you compare our quarter-over-quarter sequential growth in -- from Q1 to Q2 last year versus Q1 to Q2 this year. Last year, we increased sequentially by 1.2 percentage points on a revenue basis. This year, it's actually double that rate at 2.4 percentage points. So there is actually acceleration happening. And we expect this to absolutely steady continue into the future, in particular, given the growth assets that you are highlighting here. So, we are extremely pleased with our momentum and are ahead of what we expected to be at this point in time. And perhaps on the cross-selling opportunities, Christian and Scott. Christian Klein: Thanks, Stefan. So first of all, as Luka outlined, I guess it's also very important to consider that we have in half year one, we saw the highest order entry in CloudCo since many years. And of course, when you put this then on top of your existing cloud revenue of the upcoming renewals, obviously, this has not yet seen this high increase of sequential growth what maybe you have expected. But again, it's a large number, and we have seen high order entry growth, which then will lead to a further acceleration now in cloud revenue in half year two. And it's safe to say already a further salvation of cloud revenue in 2022. So the backlog is very strong. And then with regard to the cross-sell opportunities, I mean it's very important to mention with RISE and I see -- I guess you see how big now the impact is, is already on S/4HANA cloud with the current cloud backlog now up 48% year-over-year. But it's also a move to our next-generation platform, the BTP. And there is now the same data model for all of our solutions. There is one security model. And of course, a customer, an ECC customer, who wants today HR on prem and procurement says, okay, I do the move to this new platform. I do this move to S/4HANA cloud. But I still also want to hire to retire end-to-end. I still want to -- want procure to pay end-to-end, and then its logic that the next buying decision is then, okay, I go for Ariba, I go for Fieldglass, I go for SuccessFactors. And that's actually also a rational behind RISE what we should not forget about. Stefan Gruber: Okay, thank you. Let's take the next question, please. Operator: Our next question comes from Adam Wood from Morgan Stanley. Please go ahead. Adam Wood: Hi, good afternoon. Thanks for taking the question, Christian and Luka. So, maybe it's kind of a related to Stefan's question, but I mean, obviously, market's a little disappointed with that acceleration in the cloud subscription growth. We obviously see it's improved, but maybe not as much as investors were hoping for. Could you maybe just talk a little bit in more detail around the dynamics of how this plays out in terms of -- are you happy with where renewal rates are on the business when these new bookings come in? How long should we be thinking about in terms of delays from the actual signing and then the ability to recognize revenue? And maybe on that, that new bookings side, are there any more metrics you can give us? I mean, for example, should we be looking at the number of cloud orders and the mix of bigger and smaller deals and that to give us a feel what's happening on that new order momentum? Any metrics you can give us to kind of reassure that what you're seeing is better than what's implied by that growth? And then maybe just secondly, around Intelligent Spend, I guess, as markets open, I'm thinking particularly around Concur, I guess, the U.S. is probably one of the furthest along. Other big differences, how quickly is the pickup that you see in those markets as customers get back to spending on travel and expense? Christian Klein: Yes. Let me start, and then please, colleagues chime in here. So first of all, in terms of the improvement I mean both new cloud bookings as well as renewals are significantly up year-over-year. That's the first statement I want to make. And clearly, we have given additional color commentary around the new cloud bookings performance across various parts of the portfolio. Ultimately, it's all coming together in the CCP. And again, the movement's there, of course, due to the higher renewal base that we have built already are not as significant as actually the new order pickup, where I can only assure you that both what we saw in Q1 as well as what we saw in Q2 for every quarter alone is significantly ahead of the CAGR that we need to hit our midterm objectives. So that's why I also -- on the revenue side, we are ahead of our internal plan. We have cited some of those areas like the fast growth in BTP that we have seen the fact -- that we have seen triple-digit bookings growth in S/4HANA, perhaps is an additional aspect that we can mention on top. And in Intelligent Spend, not only did Ariba and Fieldglass come back to double-digit growth on the revenue line, but it's actually important to note that in terms of new cloud bookings, so not the transactional piece and the ongoing revenue run rate, but in terms of new cloud bookings also concur returned to double-digit growth, which I think was a very strong showing. So we start to see that this business is gearing up. As I said, it went from negative growth to 7% in Q2, and it will further accelerate in the second half year and support also the kind of targets that we have set for 2021. But more importantly, this business, in particular, through the transactional revenues will start to significantly contribute to the growth that we expect for next year. So that's for Intelligent Spend. And the pickup there, I would say, is really broad-based. It's not confined to a specific region, even though, as I said before, North America certainly had based on the size of its business, a very strong performance in terms of new cloud business that they contracted. Luka Mucic: Yes. And for my side, Adam, look, I mean when you take the CCP and you just have a look at the net new business we are closing. So the new order entry as well as, of course, successfully closing the upcoming renewals. We had the highest growth since many years in half year one. So we are clearly ahead of the plan, which also allows us to be already now very confident about the cloud revenue, which is a lagging indicator for half year two and 2022. So this is very important. And then, of course, we have other metrics like, for example, the customer satisfaction, that's on an all-time high now in our recent survey. So all the indicators also showing strong signals that we are not only closing a lot of new business but also that we are building a lot of healthy business, which is equally important for the quarters and years to come. Scott? Scott Russell: Yes. I guess you've covered most of it, Christian and Luka, but there'll be two additional comments that I guess I would share. The first is, back to the earlier question about the cross-sell, what is really pleasing when you look across the order entry in the first half in Q1 and in Q2? Yes, it was underpinned by amazing momentum with RISE, but all the categories, the major categories that we talked about before, our technology platform, customer experience, our Qualtrics Business Process Intelligence, all growing significantly in bookings in an order entry. So it's a portfolio that is proving that strength rather than being underpinned on only one dimension. And I did want to just secondly reiterate what Luka mentioned, which was our North America business, particularly showed strength and above what we're doing across the group in terms of order entry, in our cloud business with sequential growth and that gives us confidence not only in terms of the revenue implication that it will come in the second half that Christian mentioned, but also the outlook when I look at our pipeline going forward as well that gives us confidence, notwithstanding what is a very dynamic market situation with COVID amongst other things. Stefan Gruber: Okay. Thank you. We take the next question, please. Operator: Our next question comes from Kirk Materne from Evercore. Please go ahead. Kirk Materne: Just two questions really on S/4HANA cloud. I was wondering if you all believe some of the acceleration or how much of the acceleration might be more around the broader cycle and investment in back-office software after perhaps a retrenchment last year. I'm just trying to get a sense on -- you all are, obviously, doing well, but is there some momentum really in rethinking or replatforming back-office, some of the legacy back-office software. And then just on the S/4HANA Cloud competitive dynamics, just maybe who are you all seeing there? And why are you winning? Just a little bit more granularity on that would be great. Thanks. Christian Klein: Yes, let me go first and then Luka, Scott, please add your perspective. I mean, first, the momentum with S/4HANA cloud. I -- let me pick one customer example. And I mentioned corp, it's a large this retailer, a large SAP customer. And they actually did the move now with RISE for some reason. First, they want to move to a new platform. They want to move to the cloud. They want to get better cybersecurity capabilities. They want to move back to the standard, receive regular innovations, regular upgrades on the fly. And they also see this why they now need to do this now is because we're also offering them new ways of license models. We're also offering them a significant automation in traditional process, which require today a lot of manual workloads. We're also offering them, then, with the business technology platform new ways of doing certain industry-specific capabilities for replenishment, for connecting the supply chain to commerce to deliver really a personalized experience to their consumers. So, there are a lot of reasons to move the core to the cloud to also redesign the way how these business processes will run in the digital age. And then, of course, also making sure that you have an IT landscape where you can be way more agile and we act much faster to new business requirements coming up. And this is one customer. And there, we have now hundreds of customers. And with RISE, as this is not a new product, but it's actually an offering to benefit from our expertise across 25 industries and take the customers by the hand and really doing the business transformation, because from a -- with a shift to the cloud alone, you are not going to reinvent any business. And this is actually what is selling very well, what is resonating really well. And this is also, of course, to the benefit of S/4HANA Cloud, the platform and our line of business applications. Scott Russell: Yes. Maybe I'll add to that if I can just pick up on your last point there, Christian, because I think it's a really important one, the customers that we speak to and the momentum that we're making comes from the customer feedback that moving workloads in the cloud to take cost out is not enough. They need to transform. They need to digitize. They need the agility and the flexibility in an uncertain market and be able to innovate and capitalize on opportunities with speed and agility, which means it's not so much of our back office. It's about a platform that gives that transformation capability, which is what RISE with SAP brings, which is why you see the growth in S/4, but also in the other portfolio in all the different cloud businesses that we offer. So that would be the first. And then the second I would highlight is that customers -- we've got a significant addition of net new customers with RISE in our new order entry that shows the Company's not only existing SAP clients, but net new companies that want that digital transformation, want to do it with speed coming to us, and that's facilitating and driving growth as well. So with that, the pipeline continues to look promising in the second half. Stefan Gruber: Thank you. The next question, please. Operator: We will now take our next question from Julian Serafini from Jefferies. Please go ahead. Julian Serafini: So my one question I'm going to ask away is just on the license revenue specifically. If we look at the license revenue this quarter, it's down 13% or so year-over-year, right, and over 30% versus 2019. Are you able to quantify or give some color how much of that decline is due to customers opting for cloud solutions? And how much may you see the market environment still today. So could you help give us some color on that, please? Christian Klein: Yes. So perhaps I can take this. I mean, it's -- clearly, it's broadly correlated with the move to the cloud. To give you an example, the 13% decline that you have seen for the total software license portfolio is exactly what we are seeing for S/4 as well. And as you know, S/4 as for the longest time being, growing in on-prem and the fact that it's declining as a direct consequence of the massive pickup that we see in the cloud is actually really true across the entire portfolio that the shifts are happening digital supply chain. It's happening now as well, and we have a very strong offering there in the cloud with IBP, which is seeing strong growth as well. The rest of the portfolio, quite frankly, as anyway already moved for quite some time to the cloud, and there you see just a continuation of those trends. We have across both cloud as well as on-prem had a very strong quarter in our SME business, in particular. That's perhaps something to note. And there, we have been still growing also in on-premise. That's also one of the reasons why you have seen across both on-premise as well as cloud quite significant uptick in the number of transactions that we have posted. A lot is coming from the mid-market. And this is actually positive news for us as well. We're clearly expanding our share also into smaller and nimbler companies that, hopefully, many of them will translate into very large enterprises in the future, like we have seen it with some of the biotech companies who have chosen SAP in recent quarters, they have now become massive companies in their own right. Luka Mucic: Yes. And on top, I mean, you also see based on the decent performance of our support revenues that we are not buying ourselves the way to the cloud. I mean our conversion rates from support to cloud revenue are much more healthier as initially planned. And then second, it's a move of our installed base to the cloud, which is massive. But also, let's not forget, we also had a net new customer share of 50% this quarter. So, it's not only a move of the installed base, we are also winning market share. We are actually entering new territories. We can attract new customers with our industry cloud road maps and with new innovations coming also on the platform. Stefan Gruber: Okay. Thank you. Take the next question, please. Operator: Our next question comes from Johannes Schaller from Deutsche Bank. Please go ahead. Johannes Schaller: Congratulations on the good progress you're making. I have two, if I could. First one, maybe for Luka. If we look at the conversion factor of support revenues to cloud subscription revenues, we have the target of 2 times or more. Look, I think in Q1, you said you're actually trending a little bit better than that 2 times factor. Could you maybe give us a sense where we stand now in the second quarter? And is that positive trend has continued? And then given we talked a lot about cross-selling already, Scott, I wanted to come back to a comment from you from Sapphire, we basically said you see about $3 of upsell potential for every $1 in ERP cloud revenue you're seeing. So maybe Christian and everyone, can you only little bit more color kind of how you get to that number? And now you should have seen some evidence since you launched RISE. And also maybe you could break the $3 a little bit down for us by application, give us a sense on the timing kind of when we should see that unsold, that theoretic potential of $3. Luka Mucic: Let me take the first one very quickly. Actually, the conversion factors, as Christian already indicated, have even further improved and increased in Q2 over Q1. We're actually much closer to a conversion factor of three and to two for now. So this is extremely healthy. And it also shows in the very resilient support revenue that we are posting. I mean we were up by 1% in Q2. Obviously, that was a factor of the strong license result in Q1, but also goes to show that our churn is extremely limited and the little churn that we have is extremely healthy one because it translates into a much higher number of cloud revenues. On the cross-selling, perhaps I can hand over. Scott Russell: I can cover the first question and then you can please add on top. So as you say, and I guess we've covered this already in the discussion today. When we look at RISE with SAP and the capabilities to be able to transform, it is obviously underpinned by S/4HANA and its capability, but there are also broader capabilities that are required for a business to truly transform in the cloud. So with RISE, the business technology platform, which has seen significant growth in order entry as a part of that uplift that we talked about that gives our customers the innovation capability to be able to extend and orchestrate both across SAP and non-SAP hybrid scenarios to be able to innovate vertically and her partner applications built on top. Secondly, Christian mentioned in his opening about the significant growth of our network -- on our network, 350,000 trading partners added by and trading on the business network, again, facilitating that network activity through RISE with SAP, so every company that comes on board, bringing that network capability and then driving the growth. And so I guess my short answer is, we're already seeing the impact of that uplift that we talked about during Sapphire for every dollar arise to the extended to the one to three, and we expect that, that would continue. Christian, if you want to add? Christian Klein: Yes. Thanks a lot, Scott. And then last but not least, I mean, with regard to cross-sell, I mean imagine there's now an ECC customer. And oftentimes, these customers don't not only want finance or logistics, they also want HR. They also want procurement. And this is highly integrated. And now in the cloud when they make this move, I mean, think about it. Now you move to a new platform. There is certainly, and we did our homework on integration the same data model for all of our applications, the same security model. And when you are now wanting finance and you're wanting HR, you better make sure that for example your vacation accruals are one to one booked in a compliant way in your P&L or when you are changing your business model, and you have to change your compensation models. Again, it's very important. We had that, for example, with a very large customer that everything is also then, at the end, book compliant in your P&L and finally in the balance sheet. And this is why so many customers now consider not only to modernize their finance system, but do at the same time, also modernize their HR core system, the whole HXM suite or, for example, also moving to our one procurement platform because it also doesn't make so much sense that you do direct procurement or indirect procurement completely decoupled from your finance or production system. And this is why this makes a ton of sense to expand your SAP footprint again because the landscape looks much different. It's not so monolithic anymore. It's much more agile, but we offer now the same kind of integration capabilities as our customers were used to in on cloud. Stefan Gruber: Okay. Thank you. The next question, please. Operator: The next question comes from Frederic Boulan from Bank of America. Please go ahead. Frederic Boulan: If I can come back on the comments earlier on the current cloud backlog after the small incremental acceleration in Q2, should we read from your comments a bit earlier that we should expect further acceleration in that metric considering RISE industry cloud, et cetera. And can you just articulate the comment you made that the CCP growth you're seeing is actually enough to get to your 2025 cloud revenue CAGR, which is, obviously, higher. So do you expect that CCP to stabilize at a structurally higher level? Or is it driven by outperformance of the transactional part that contrary by, et cetera, which is not captured in CCP? Christian Klein: Yes. Let me try to dissect this. So, first of all, we absolutely assume that our CCP growth will further accelerate but it will accelerate in a steady and gentle way during the year. And then in Q4, you should expect a more significant step-up. That's just due to the nature of how the CCP is built up and the fact that moving the needle on the absolute amount of new cloud bookings obviously demands a high absolute volume, and you see that typically in Q4 and not so much in the previous quarters to move the needle. But absolutely, we believe that growth should further come up. But again, as you said as well, CCP is not the only source of growth that we are looking at. There are two more that are very important. One is obviously the transactional revenues, which are currently sitting at a very low level. We are glad that they have started to stabilize. And certainly, we prudently don't expect for the remainder of this year a significant step up. If it happens, then great, and that's upside, but of course, we absolutely are very confident based on the momentum that we see and that as we enter the new year and then the coming years that we will see increases there again, which will add to the pure growth that we are seeing from the CCP. The other topic is what we are focusing on today in organic innovation in different areas, just think about industry cloud solutions that we are now starting to bring to market. We see a massive revenue opportunity for those. The new solutions that we have just launched around sustainability, the new solutions around the business network, this is all having a great total addressable market and a great potential for SAP in the years to come of purely organic net new growth opportunities, which will come on top of the current growth that we are seeing from the existing portfolio, which is already accelerating as you see in the CCP. So that is giving us a lot of confidence. As I said, we are actually ahead of our expectations of where we wanted to be at this point in time in 2021. Frederic Boulan: And if I can ask just a quick follow-up on the point you made on industry cloud. If you can discuss -- I know it's very fresh, but if you can share with us any data points on reception we've seen of those industry cloud offers. Talk a bit about your pricing to the extent you can talk about that? And what kind of pipeline should we expect for industry cloud offers. Christian Klein: Yes. Good question. And look, oftentimes, we also sell our industry cloud solutions also in conjunction with S/4HANA cloud. As oftentimes, the transformation on the customer side works, I digitize my core processes and then I went into the verticals. For example, we also now released at Sapphire, our industry packages for RISE. And then, for example, in retail, it's just logic. When you are moving to S/4HANA cloud that you also think about new ways of doing replenishment, optimizing supply and demand with our industry cloud capabilities, which naturally integrate back into the core or there are new ways of doing claims management, which is another great solution, you can actually save millions, sometimes hundreds of millions of money with our intelligent claims management solution and customer loyalty, and we have that for retail, for utilities, for automotive. And then, of course, we have a lot of partner solutions that are also sitting on the platform already. And again, we are selling those stand-alone, Scott, but we oftentimes also just sell it also as a bundle as again, it's a natural expansion of the core processes we are running in the core. Luka Mucic: Yes. It reinforces the cross-sell opportunity and the value our customers gain through the orchestration of the industry cloud with the broader RISE offering. Stefan Gruber: Now we take the next question. Operator: The next question comes from Michael Briest from UBS. Please go ahead. Michael Briest: Two from me as well. First one, I guess, Scott or Christian, could you sort of talk a little bit about the 250 RISE customers, 350 as we talk about H1, in comparison to the 600 to 1,000 S/4 customers, probably half of whom were net new. I appreciate sales cycles take a while. So a lot of these S/4 wins would have started discussions before RISE. But what was the RISE customers profiles? How many of them came within those net new S/4 customers? How many maybe came from old S/4 migrations? And when would you expect RISE customers to exceed sort of the net add of S/4? And then secondly, Luka, just going back on support, it was a very strong performance again. I think just doing the math on your guidance, it implies -- support is down a couple of percent for the year to get to the 75% recurring, so minus 4% in H2. What do you see today that gives you the confidence that that's going to be the outcome and that we don't see support continuing to stabilize or even grow for the year? Thank you. Christian Klein: Scott, would you like to go first on the RISE question? Scott Russell: I'm happy to, Christian, so please add on any comments. So look, let me try to break it down. First of all, as we had mentioned, the growth in RISE that we've seen in Q1 at over 100 customers and in Q2 over 250, of which over half of net new. So we're seeing a significant -- I see it in two parts. The first of all, Luka mentioned this earlier that we've seen a significant momentum in that net new and in the bid market. So companies that are looking to transform quickly in the cloud with SAP, and that's providing a large portion, but we're also seeing bigger customers. Christian mentioned Coop, AMD, Etihad Airways, amongst others, that are large organizations that have got their work in complex markets so they work globally, but they are also looking for the simplicity that RISE brings that, obviously, is underpinned by S/4. We expect that to continue. So the pipeline for the second half and the outlook with RISE continues to reflect both value and volume, large as well as small and medium organizations. Notwithstanding, as I say, the market conditions and the ever-changing market conditions with COVID. But notwithstanding that, we see a continued resonance with our customers both net new and existing installed base to drive towards that. And that gives confidence that with the outlook that we have that will not only underpin the S/4 growth being a larger and larger share through RISE, but also the cross-sell opportunity that, that brings as well. Christian Klein: Yes. And quickly on the support revenue, I mean, I will openly concede that kind of implied outlook is probably on the prudent side of things. But nevertheless, there are two things that you need to keep in mind while for half year one, our support revenue was essentially flat. That was obviously supported, first of all, in the last year by the best performance that we had in Q4 as well as the fact that we had positive software license growth in Q1. We don't expect this for the remainder of the year and actually Q2, as you have seen, has already turned negative in the double digits, and that will inevitably bring also the growth profile of the support revenue down. The second reason is that we are now starting to see larger RISE opportunities of larger installed base customers, and therefore, also the conversion of support revenues to cloud, again, a very healthy conversion factors, but it will move up. And to what extent this will be distributed across Q3 versus Q4, and therefore, will impact already this year support revenues versus starting to impact them more in 2022. That's a little bit like looking into the crystal ball to a certain extent. It also then depends on the ramp of the corresponding cloud agreements, which, in particular, with the very complex ones, can take a while until the full ramp is reached. And therefore, also the software support decrease will be spread out a bit. So I would say, taking all of that into consideration, the implied guidance is certainly one that we feel extremely comfortable with probably risks rather a little bit filter to the upside and the downside. But given that we are going through a substantial business model transformation, I think it makes sense to kind of err on the side of caution here a bit. Stefan Gruber: Okay. Thank you. Let's move to the next question, please. Operator: The next question comes from Mark Moerdler from Bernstein Research. Please go ahead. Mark Moerdler: Congratulations on the quarter, especially that strong S/4HANA cloud booking -- current cloud bookings. We saw this nice acceleration Q-over-Q in the S/4HANA cloud bookings. Two related questions, if you don't mind. The first is how much of the backlog at this point is coming from RISE SAP? Obviously, a number would be nice, but even a cent would be appreciated. And then the second is -- are you seeing RISE with SAP deals that are made up of so many smaller cloud transitions that basically happened one after another over time that it ends up impacting the current S/4HANA cloud bookings? In other words, do you have these signed deals in which excluding any upsell you get an increase, you get this dollar number that comes in or zero number that comes into the backlog this year and then it generates additional backlog next year and potentially the year after? Christian Klein: I mean let me take the first question, Mark. And look, with regard to the correlation between RISE and S/4HANA cloud. Obviously, there's a strong correlation as many customers also choose to do their transformation on the business technology platform. They also choose for our BPI offering to do a redesign of their business model to come back to the standard. So that resonates actually really well. In Q2, it was -- you can say roughly 50% of the S/4HANA cloud deals were also correlated to RISE. But I also would say, for the upcoming quarters, this share will definitely increase because we also have to consider, I mean, RISE is around since January. So we are still in the very early days. And it's actually for me actually quite remarkable that we already closed the first larger deals because you have to work a lot with the customer, not only on the business case for the transformation on the business side, but also on the IT side. So we are actually very confident that we even see much more larger transaction also in half year two also by looking at the pipeline. Luka? Luka Mucic: Yes, I agree. And for now, I mean, I can't really give you an exact number of the RISE contribution to CCP, but it's not insignificant. So we are talking already now about a double-digit percent share of the total CCP for S/4HANA, which is coming through RISE. I hope that helps. Stefan Gruber: Okay. Thank you. I think we have time for... Mark Moerdler: In terms of second question -- in terms of the -- I'm sorry, go on. Stefan Gruber: No, Mark, please go ahead. Mark Moerdler: I was just saying on the second question. In other words, these big deals that are made up of lots of smaller projects that are moving to RISE with SAP. Does it all end up creating an increase in the cloud -- the current cloud bookings? Or does it end up creating some increase this year and some next year and the year after, potentially, as these deals start to convert over? Scott Russell: Yes. Maybe I can pick that one up, Christian and Luka. So Mark, the answer is both. So we've seen with the customers so far with Verizon. And as Christian said, since the launch at the beginning -- at the end of January, we've seen amazing response, but customers are on different transformation journeys. There are a number and quite a number that look to use and leverage RISE with the simplicity of the offering to be able to bring that transformation and do it quickly in a holistic way. But particularly when you get to the larger organizations that have got multi-geo, multi-industry different landscapes they look at rise as being the platform. And then as you indicate, we do expect that it would then continue and they do. There are the opportunity to have phased or roll out over a period of time as they embed different parts of their business into the singular offering that RISE brings. What I would say is this -- is that when they choose RISE, they really look at it from an overall transformation of their business even if the transformation journey will differ between organizations, and that's what makes it so compelling whether you're a small, medium or large organization. Christian Klein: Absolutely, right. And Mark, look, also with regard to what Scott said is with regard to the phasing, I mean, we have very small customers who actually live sometimes within one or two months, so it's one project done and they move to the new platform, they adhere to the standard. So that's actually also even in a remote way, we see a lot of these volume projects. And then second, of course, with the large customers, as Scott mentioned, they, of course, do this in a step-by-step to also not overall the organization. So they start with a division, they start with a certain business process. But also there, I have to say, compared to our internal business case, Luka, I see also that we actually assumed a longer duration. Now, we see actually that the phasing goes much more towards year one and year two as initially planned also for the large deals we are closing. Stefan Gruber: Okay. Thank you. We have time for two final brief questions, please. Operator: Our next question comes from Mohammed Moawalla from Goldman Sachs. Please go ahead. Mohammed Moawalla: Just a clarification, Luka, on a comment you made around the progression of the cloud backlog. Are you saying that we should see a sort of a significant reacceleration in the sequential growth as we get to Q4? Or is there an element of sort of pull forward in some of the better-than-expected cloud bookings that you saw? Thank you very much. Christian Klein: Yes. To just clarify this very briefly, what I was saying is that under normal conditions, the growth and expansion of current cloud backlog across Q1 to Q3 should be relatively steady and moderate. And then you would see a more significant step-up in Q4. It's actually quite remarkable that we have seen a significant, and for us, also unexpected acceleration in Q1 and Q2. That's underpinned by the very strong growth in new cloud bookings that we had. Otherwise, the growth rate sequentially would have been expected to be less pronounced than that. And so, therefore, what I would expect is for Q3 also a further steady progress and then in Q4 a more significant one. Stefan Gruber: Okay. Now the last question also brief one, I assume. Operator: The last question comes from Knut Woller from Baader Bank. Please go ahead. Knut Woller: Yes. Just briefly on the regions. The growth in Asia-Pacific slowed a bit sequentially. Is that simply due to the dynamics we saw last year on the back of the pandemic with APAC coming out of the lockdown faster than Europe and North America? Or are there any other drivers behind the development? And also some color on the development in China, which you didn't mention in your highlights within the quarter for cloud revenue? Thank you. Luka Mucic: Yes. So first of all, China actually, obviously, had at the outset of the pandemic pretty difficult conditions, including for us. Actually in 2021, they have returned to a very substantial growth, and that will, in the future, also translate into higher cloud revenue growth. What we are seeing today in China is basically an outcome and output of the performance that they had in the first half of the year predominantly going into Q3. But in general, in Asia, I think we have a pretty strong momentum in a number of markets in particular, when I take a look at the largest market in Asia, Japan, it's for me a little bit a Siamese twin to Germany, very large, very solid, very mature markets, but with great teams that have a lot of customer intimacy and strong trust in the market and therefore are driving very steady and quite significant growth overall for SAP. And then you have really absolutely stunning performances in some markets where you would expect significant difficulties I think India in terms of the order entry performance that for me comes to mind. It was just amazing what the team has done there in the darkest days of the pandemic to post the kind of stellar growth rates that they were able to do, I think that's a testament to how relevant those solutions are to the wider market and others that we have mentioned, like Australia and South Korea are in a similar camp. But I would say, nevertheless, when I take a look at the new order entry that I wouldn't really pick out a specific region as being superior. Again, from a revenue perspective, you see the story of the past. When you take a look at the present, I mean, MEE, North America, as we mentioned before, all had a stellar performance in terms of new cloud bookings. And from that perspective, it's really hard to differentiate across the different regions because there would just be some that we won't do appropriate justice because they all have been doing very well. Scott, anything that you would like to add? Scott Russell: I think you summarized it really well. Luka, I think the bookings performance. It's great because we're not relying on any particular region to underpin the growth and their business performance, it really is consistent across the world, including some amazing performances in markets like India, as you mentioned. But also it reinforces the strength of some of our bigger markets like in Germany and in the United States and others, which obviously have a large customer base but are also driving huge momentum into the cloud, which is, obviously, very heartening for us as we move forward. Stefan Gruber: Thank you very much. This concludes the Q2 earnings call. Thank you so much for joining. The replay will be available very soon in our Investor Relations website. Thank you very much, and goodbye. Christian Klein: Yes. Thanks, everyone, for joining. Luka Mucic: Thank you everybody. Christian Klein: Take care. Bye-bye.SAP Ratings Summary
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However, SAP's Cloud and software revenue was reported at €6.51 billion, falling short of the average analyst expectations. Similarly, cloud-only revenue came in at €3.32 billion, also below analysts' expectations. Despite this, the cloud revenue showed a year-over-year increase of 22% at constant currency rates.
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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.
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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